The Wall Street Journal

November 15, 2001

Callers Cut Off Second Phone Lines For Cellphones and Cable Modems

By SHAWN YOUNG
Staff Reporter of THE WALL STREET JOURNAL

John Jenkins of Birmingham, Ala., is the kind of customer who could
cause a lot of anxiety these days among executives at his local phone
company, BellSouth Corp.

Mr. Jenkins runs his own marketing and promotion business from home,
which should make him a big buyer of BellSouth phone services such as
additional phone lines, voice mail and a fast digital subscriber line
Internet connection. But Mr. Jenkins got rid of his second phone line a
month ago and now runs his business completely without a conventional
phone -- relying instead on a cellphone and a cable modem high-speed
Internet connection.

Mr. Jenkins says he isn't trying to be a trend-setter. The second line
he used for his business just became redundant. "I let it go on longer
than I really needed it," he says. "This serves my needs; and why have
both? It just complicates things." Plus, he saves because his cellphone
plan doesn't charge extra for long distance.

Between people like Mr. Jenkins who are disconnecting second lines for
convenience and a sagging economy, local phone companies are seeing one
of their biggest cash cows -- second phone lines -- dry up. For the
first time in recent years, both consumers and businesses have been
cutting off lines in significant numbers, pulling the plug on nearly 2.5
million total lines in the second and third quarters of 2001 alone,
according to Andrew Hammerling, a telecommunications analyst at Banc of
America Securities.

The erosion could bode ill for revenue and profit growth at the regional
Bells and Sprint Corp., which has about eight million local phone
customers in 18 states. "These companies have largely used second lines
as a way to grow," says Mr. Hammerling. Without second lines, which
account for most of the recent line loss, revenue growth at the big
local carriers may continue to weaken. The prospect, he says, "gives me
the willies."

Throughout the 1990's extra lines were the rage as more homes added
Internet access, fax machines and separate phones for work or individual
family members. According to the Federal Communications Commission,
about 29% of households had second phone lines in 1999, compared to only
about 3% in 1988.

Now, cellphones and high-speed Internet connections known as broadband,
are making those lines less important to many people. Desi Miller, a
secretary at a sign shop in Portland, Ore., has decided that
conventional phones are a thing of the past. She stays in touch at home
by way of a cellphone from the Sprint PCS unit of Sprint. She spends
perhaps 10 hours of personal time a week online, and her computer was
connected to a traditional phone line until a few weeks ago, when she
replaced the old line with a Sprint wireless modem that she says is
comparable in speed and cost.

"I'm really excited about not having a phone line," Ms. Miller says.
"This is forward technology, and I'd like to be a part of it." As for
getting rid of her traditional line altogether, she says, "I'm kind of
proud of it."

On the surface, this might not look all bad for the local carriers.
After all, the nation's two largest wireless companies -- Verizon
Wireless and Cingular -- are owned by the Bells, which also utterly
dominate the digital subscriber line market. Cellphone and DSL service
-- which lets customers use a single phone line for both talking and
Internet connection -- both cost the average consumer about $50 a month,
compared with $20 or $30 a month for a second phone line. "Wireless
substitution is now a fact," says BellSouth Chairman and Chief Executive
Duane Ackerman. "That's okay," he adds. "We tend to own both."

The catch is that second lines are highly profitable for the Bells, and
add-on services that come with them, such as call waiting or voice mail,
are almost pure profit. By contrast, no company has yet to make profit
on selling DSL, which is still in the nascent stage of development and
hasn't yet reached critical mass with customers. And for much the same
reason, wireless margins are tighter than those for conventional phone
services.

In the Bells' defense, Randall Stephenson, chief financial officer of
SBC Communications Inc., based in San Antonio, Texas, says he'd rather
have a wireless customer than a customer with a second phone line
because consumers generally don't order profitable extra services like
call waiting for second lines, which makes those lines less profitable
than primary lines. While DSL is not a profitable service now, Mr.
Stephenson adds, "I'm very confident it will be a profitable product."

But it doesn't help that the local phone giants face much more powerful
competitors in wireless and broadband than they do in their traditional
business, where would-be rivals -- most of which only serve businesses
anyway -- are faltering. Consumers who only have one choice when buying
a second phone line typically can choose among at least four wireless
carriers if they live in or near most cities.

And cable companies, which have emerged as the Bells' big rivals in
deploying high-speed Internet services, are far ahead of the Bells in
signing up customers. Many consumers find cable modem service easier to
get and less expensive than DSL. Yankee Group estimates that by year end
there will be about seven million cable modem customers and 3.3 million
DSL subscribers.

Cable companies may also pose a threat to the Bells' basic phone
business as they get more serious about offering phone service via cable
lines. In some areas, cable providers are taking advantage of their
upgraded networks to offer customers phone lines for as little as $10 a
month, which includes extras such as Caller ID for which the Bells
charge an additional fee.

The Bells must promote broadband to stake their claim on the future.
"They can market the service aggressively and lose money or they can not
market aggressively and they lose to cable," says Brian Adamik,
president of the Boston-based Yankee Group.

But that creates a dilemma for the present by cannibalizing services
such as second lines. In fact, about half the second line owners in a
recent Yankee Group survey said they'd be willing to hang up on the
second line when they get high-speed Internet access. BellSouth, based
in Atlanta, says one in three of its digital subscriber line customers
ends up disconnecting their second line. Adding to the lure of dropping
the second line is getting rid of additional fees and taxes, which can
add at least $7 to monthly bills for a second line.

Write to Shawn Young at [log in to unmask]


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