EDWARD WHITACRE, SBC COMMUNICATIONS

Edward Whitacre, chairman and CEO of SBC Communications, knows the direction in which he wants to move the country's most profitable ILEC. He's just not sure how to go about it given current conditions, which he said are still “mucked up” by a lurching economy and nonsensical regulatory policies.

Though outward appearances indicate that SBC continues to be incredibly healthy — the carrier posted net income of $5 billion in the first quarter of 2003 — Whitacre insisted the company is still struggling. And while acknowledging that $5 billion is a big number, Whitacre suggested that it loses some of its luster when one considers that about half of that profit is attributed to one-time items, including the cumulative effects of accounting changes and the sell-off of its stake in the French wireless carrier Cegetel.

More worrisome from Whitacre's perspective is that SBC continues to experience an accelerated deterioration of its core business. The carrier's total wireline revenues were off 5.6% in the first quarter year over year, with voice revenues dipping 9.3%, as total switched access lines fell 4% during the quarter from the previous year.

That's not a good development when your fiscal strategy dictates that free cash flow will finance your capital expenditure activities. “As our core business declines, it's going to affect our ability to build out broadband,” Whitacre said.

Broadband ranks high on Whitacre's to-do list. The company is rather proud of its heritage in DSL services. SBC added 270,000 DSL subscribers in the first quarter, bringing its total to 2.5 million, the best in the industry and 60% more than it had at the same point last year. It also was the first ILEC to enter into a partnership with a Web portal — Yahoo — and the first to cut its basic price for purposes other than an introductory offer.

There's a lot more to do. According to Whitacre, SBC wants to increase its DSL penetration rate from the current 60% to about 80% and accelerate its deployment of fiber to the home. But that's not going to happen unless regulators ease up. While encouraged by the broadband relief promised by the FCC in its triennial review order, Whitacre said it won't have the intended impact without corollary UNE relief. Without it, access line losses and revenue decline will continue unabated.

“If they don't do something about UNE-P, you tell me where I'm going to get the money to fund broadband buildouts,” Whitacre said. “We need a regulatory mechanism that is rational and fair and will let us get on with things.”

Whitacre defines rational and fair as the elimination of UNE-P and the TELRIC pricing formula used to set wholesale rates in each state, which are creations of the FCC and not the Telecom Act. However, he said he recognizes that's not likely to happen — at least not on a national basis — and would settle for a revamping of the TELRIC formula so that wholesale prices are based on real, not hypothetical, costs.

The FCC is expected to open a proceeding on TELRIC this summer. As encouraging as that might be, it is tempered by the pace at which the FCC and state commissions work, according to Whitacre. “They move incredibly slowly,” he said. “They had the triennial review press conference on Feb. 20, and we're still waiting for the order. In the meantime, everything is on hold. We don't know what's going to change, so everyone is afraid to act. We're sitting here frozen in time.”

That frustration is a motivating factor behind SBC's intensive lobbying effort that prompted the Illinois General Assembly to pass a law that granted the ILEC a huge wholesale rate increase, sidestepping the authority of the Illinois Commerce Commission in the process. The bottom line is that SBC got tired of waiting for the ICC to see the light.

“The wholesale rate in Illinois is $12, which will buy you a pizza and not much else,” Whitacre said. “Common sense should tell you that number can't be right.”

Despite the challenges put forth by an economy that seems to take two steps backward for every step forward and a core business that continues to slide down a slippery slope, Whitacre said he's more encouraged than discouraged. He said he even thinks regulators will come around.

“Eventually, they're going to have to stop listening to the voices in the bleachers and start doing something that works. Because what they've been doing hasn't been working.”