Erasing the U S West legacy

When Qwest Communications swallowed incumbent carrier U S West last year, many industry observers were skeptical about the combination. How could next generation carrier Qwest absorb a huge local service customer base with many poorly serviced, far-flung rural exchanges and remain on the cutting edge of data services?

So far, it looks as if Qwest is beating the post-merger odds. Barring a major surprise, the carrier's fourth quarter is on target in terms of earnings and revenue growth, in contrast to the downward revisions by AT&T, SBC Communications, WorldCom and Sprint. Additionally, according to a report by Lehman Brothers analyst Blake Bath, Qwest is expected to gain 42,000 net subscriber adds in DSL for the fourth quarter, representing 20% sequential growth and giving it 255,000 subscribers for the year. That's 5000 more than its stated goal for the year.

“While Qwest's proportion of potential DSL-qualified lines is the smallest of the RBOCs, due to its geographic nature, its performance within the addressable market is strong,” Bath said.

Even the stock market is beginning to take notice. On Dec. 20, 2000, Qwest's stock closed down $5.25, or 14%, at $32.38, marking a new 52-week low. That was the day SBC cut its earnings and revenue numbers for 2001, citing a slowing economy, regulatory delays and hiccups in rolling out DSLs to consumers and small businesses. Since then, however, Qwest shares have been on a tear, up 44% as of January 12.

“They're doing really well,” said Bill Klein, data communications analyst for Wasserstein Perella Securities, who has a “strong buy” rating on the stock. “I've got no complaints operationally or with the integration of U S West.”

One area Qwest seems to be attacking with abandon is U S West's reputation for shoddy customer service. Last week, Qwest released metrics detailing the improvements that have occurred in 2000.

According to Qwest, it met nearly 98% of 18 million installation commitments promised to customers; performed 95% of total repair commitments on time as promised; reduced repeat repairs by more than 2% from 1999; and repaired more than 80% of service outages in less than 24 hours, up from 63% one year ago.

State regulatory commissions may count delayed orders for customer service in different ways, said Afshin Mohebbi, Qwest's president of worldwide operations, but by any measure, Qwest service has improved significantly regionwide. Figures show that Qwest reduced delayed service orders by more than 50% last year throughout its 14-state region, he said.

But not everyone is so confident that substantial progress has been made. Service complaints against Qwest to the Arizona Corporation Commission are down this year but still totaled 3746, 32% of which were concerning a delay in fulfillment of an order, said a spokeswoman for the commission. In 1999, the commission recorded 4014 complaints, 30% of which covered held orders. “There has been a modest decline over last year in terms of number of complaints and held orders, but [1999] was an exceptionally high year,” she said.

Of course, many of the service improvements Qwest is undertaking were conditions of winning approval for the merger. As part of Arizona's OK of the U S West deal, Qwest agreed to spend $402 million in each of the two years following the merger to modernize and maintain its communications infrastructure in the state. Twelve percent of that—or $48.2 million annually—is earmarked for rural exchanges of 50,000 lines or less.

And Qwest now has to spend more money getting Arizona out of the telecom dark ages. When Qwest applied to sell 38 rural wire centers to Citizens Utilities, the Arizona commission wrangled another few million in upgrades. Specifically, the deal calls for Qwest to reinvest $56 million of the sale proceeds on service improvements, with 37%, or $20.2 million, going toward rural areas of 15,000 access lines or less. According to the commission, among other improvements to service, Qwest will spend the money on upgrading terminal boxes and replacing defective feeder or distribution cables.

Of course, Qwest has an interest in gaining a reputation as a respectable local service provider. This year and next, the company will be moving toward applying for the FCC's imprimatur to sell long-distance services in U S West's 14-state region. Approval is important not just for voice services but to sell inter-LATA data services as well.

“[Section] 271 approval is not life or death—but there are customers that would love to get Qwest service but can't,” Klein said. “Bundling is not going to go away anytime soon.”

To help curry favor with regulators, Qwest already has dropped 17 lawsuits filed by U S West that had challenged state decisions on issues related to granting rivals access to its network. Qwest also recently made permanent line-sharing agreements with Contact Communications, New Edge Networks and NorthPoint Communications, a move that other RBOCs have been slow to take action on.

“The fact that they're making the [line-sharing] agreements voluntarily speaks well with the regulatory bodies,” said Adam Guglielmo, DSL analyst for TeleChoice.

But Qwest still has a way to go to climb out of U S West's shadow. Still pending are lawsuits filed by seven states against U S West claiming that hundreds of thousands of customers experienced delays in phone installation. The lawsuits claim this occurred because U S West redirected its resources from local service in order to grow its cable and wireless ventures. The courts are expected to begin reviewing proposed settlements in the cases in April.

“Is [Qwest] service absolutely best in class? No. But look where U S West has come from,” Klein said. “The fact that they've been able to meet those service metrics speaks volumes about the Qwest management team.”