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May 21, 2004
SBC Will Win This Strike
Posted by Dana Blankenhorn
But in the end it will do them no good.
SBC is taking this strike to reduce its labor costs. It thinks that will save it.
But the problem at SBC isn't labor costs. It's that the value of its installed plant, its capital, is depreciating in line with Moore's Law, while much of it was bought on 30-year assumptions.
The impact of Moore's Law accelerates with time. It doesn't decelerate.
Labor costs can only decline arithmetically, in other words, while the impact of what's happening is growing geometrically -- downward.
Right now you can replace the entire SBC network for a fraction of its current cost. That fraction will decline over time.
Any piece of that network can already be replaced for less than the customer is now paying SBC, when seen from a three-year perspective. Right now it takes a fairly sizable business to do the work. But that is also changing. The size of a business needed to provide service to a defined geographic area is declining, as are its capital requirements.
SBC can't keep up with that, not through mere cuts in its labor costs.
What it needs is a bankruptcy, one that will force bondholders to take a huge haircut -- as much as 90% -- and will leave everyone else with nothing.
This sort of thing happened a lot in previous eras, and a lot of people were hurt. Partly as a result, protections and circuit breakers were installed to minimize the pain. But the last several years have seen the systematic destruction of those circuit breakers.
When this reality hits home there will be hell to pay.
Comments (1)
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Dana Blankenhorn has been a business journalist for over 25 years and has covered the online world professionally since 1985. He founded the "Interactive Age Daily" for CMP Media, and has written for the Chicago Tribune, Advertising Age, and dozens of other publications over the years.
1. Brad Hutchings on May 21, 2004 02:58 PM writes...
Dana,
There are a few things working against a Baby Bell collapsing.
State regulation ensures that book value of all these sunk assets is reflected somewhere. I once wrote a pricing system for a sales group at a Baby Bell. The system automated a 5 week manual process to a 5 minute point and click process and had to account for various cost categories that went into determining the "regulated cost" of delivering a service to a particular customer. One very significant category of cost was something called "pole". Turns out, those were the telephone poles, which in reality were being phased out in favor of underground facilities and conduit. But for regulated accounting, they were valued very significantly. This had the effect of supporting price considerably. So long as the local phone providers are heavily regulated at the state level, there will be mechanisms like the pole category that ensure "a level playing field". The current debate over VOIP regulation is less about 911 and local telecom taxes and much more a battle over local phone franchizing.
Second, the phone companies have become efficient enough to offer all-you-can-eat service at prices that most consumers and businesses will just eat rather than shop. For
While waiting for all-you-can-eat fixed line pricing, a lot of us shifted to cell phones for awhile to save money. Problem is that the quality of cell phones is acceptable for mobile use but kinda annoying for fixed location use. When a friend calls me from home on a cell phone, I usually offer to call back on a land line. SBC and the like still have a huge advantage over cell, VOIP, etc. in quality, and some portion of the population will pay for that occasionally.
Just as SBC is beginning to push DirectTV, I see them getting into XM radio, etc. so that they become more of a communications marketing and services company and less of a network company, slowly bringing the book value of its underground assets to replacement value, bit leveraging it to provide complete end-user communications and entertainment packages. I would still want my grandparents owning SBC stock for the long haul.
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