Margin magic

My dad was one for playing tricks on us kids. He would hide the car when it was time to go for a Sunday drive or drop off me or one of my siblings in front of the Laundromat, tell us he was going to park the car and promptly disappear. Less than 10 minutes later, he'd be back, beaming, with ice cream sundaes for all.

But every once in a while, Dad would play more than just a trick. He'd do real magic. I remember a time when my sister asked him for 50cents to go to the movies. He handed her a dollar and then held his hand up to her nose and squeezed. I thought he was being mean, until I saw two quarters fall out of my sister's nose.

"I was just getting my change," he said. It was nothing less than magic.

That's kind of how I'm feeling about the fate of the big telecom companies these days. They are multigazillion dollar giants - and getting bigger - but they can't seem to break out and make any really huge progress on the profits front.

In fact, it's starting to look as if quite the opposite is happening. The more money BellSouth, Bell Atlantic, Qwest Communications, MCI WorldCom or AT&T pour into the business - whether it's into technologies, mergers or cabling into the ground - the less likely they'll get a return back any time soon.

A few months ago, I mentioned the apparent "race to the bottom" for long-distance prices as 5cents a minute rates started to creep from off-peak into prime-time calling hours.

The low-cost boon to consumers was driven by basic two factors: 1) more bandwidth and 2) the long-distance carriers' increased desire to seduce customers - and perhaps capture these customers for good, before local telcos get into the long-distance business.

The financial plan might look good on paper. But it is adding up to a true disadvantage in the real world for the many companies that are still primarily in the voice telecommunications business. It's not hard to see why these big telecom companies - with deep pockets - would be willing to sacrifice short-term profits for longer-term customers.

But it doesn't take a business school graduate to figure out that when your core business turns out to be a loss leader - and that it happened because CEOs and chief financial officers planned it that way - there could be trouble ahead.

And now the picture is getting murkier.

FCC Chairman William Kennard is questioning the merger of long-distance titans MCI WorldCom and Sprint.

But the same week he lamented the idea that MCI WorldCom and Sprint were using a merger to stop competition, he approved the more than $60 billion buyout of Ameri-tech by SBC Communications.

Kennard calls the resulting creation of the largest U.S. local phone company - which will control more than one-third of all U.S. phone lines - "a victory for consumers."

During this boon of the late 1990s, economic logic is being turned on its head. This is especially true in the high-tech telecommunications industry. Big seems to be bad for the business - but not for consumers.

In the old days of big business, life was simpler. Big business was bad for small consumers. After all, that's why we broke up AT&T 15 years ago, isn't it?

In today's economy, pricing seems to be a slave to gravity. No matter how much big telecommunications companies invest, merge or build, they always seem destined to spend money with little guarantee of getting it back.

Is this an illusion? I'm not sure. I'm not so naive to think that the big companies won't get it back. They always seem to, and there's no reason to think they won't recoup their mega-investments this time.

But I can't help but think these telecom executives with such big spending plans might need a little help before their grand plans kick in.

I'm not saying that AT&T will need to pull a rabbit out of its hat to survive in this new economic environment. But if my dad were still around, maybe he could teach them a few valuable tricks about squeezing quarters out of their noses while they're waiting.

That's real magic.