Stock performance analysis and trends

Financial Performance:

Southern New England Telephone, a subsidiary of SBC Communications, Inc.

The difficulties in evaluating the relative success or failure of a company in the telecommunications industry, or any government-regulated service, such as telephone service, are numerous. How does one evaluate the overall success of the company, in relation to financial and legal difficulties, even to outright failures of its subsidiaries on a local level? Also, how does one unravel the legal snarls that plague the communications industry in a climate that often fluctuates from state to local ordinances? "Pity the Regulator," wrote The Economist in 1997, when the Internet and communications snarl was just beginning to grip the nation and the world. However, when writing the recent history of Southern New England Telephone, one might want to extend pity to this subsidiary of SBC as well.

Over the course of the last several financial quarters, there has been a steady downturn in the growth of Southern New England Telephone. Its parent company's stock, SBC, has also fallen in the last several quarters. Yet, according to the SBC's most recently issued third quarterly financial statement to its investors and shareholders, the company has reported its seventh straight quarter of DSL growth. (SBC Investor Report, October 2003). Furthermore, SBC still ranks as one of Fortune Magazine's top thirty companies because of its status as America's leading provider of high-speed DSL Internet Access Transport services and one of the nation's leading Internet Service Providers. Why have Southern New England Telephone and SBC declined, despite the fact that SBC companies currently serve 55 million access lines nationwide? SBC has great name recognition as well. After all, SBC companies own 60% of America's second-largest wireless company, Cingular Wireless. Cingular, besides being a buzzword brand name in the industry, serves more than 24 million wireless customers. Internationally, SBC companies have telecommunications investments in 26 countries. (Investor Report, 2003)

The history of SBC and SNET is a complex one. SBC "caught" SNET, according to the industry analyst Hoover's, in its "lobster claws." (Hamerly, 2003) Or as another Internet analyst stated more calmly "SBC merged with Southern New England Telecommunications Corp. In 1998, in a $4.4 billion deal that would combine both companies' traditional telephone, wireless, long distance, Internet and data service capabilities." (Rockwell, 1998) SNET served and currently services Connecticut, Rhode Island and western Massachusetts. SBC had telephone operations in the west, as well as cellular operations in Boston, upstate New York and the Washington D.C./Baltimore corridor. The acquisition of SNET gave SBC an extending grasp into New England. The deal was accepted by SNET because it gave the company a much-needed cash infusion, but allowed it to keep its well-recognized name and New Haven headquarters. In 1997 SBC had teamed with Pacific Bell in one of the first big telecommunications mergers. Its merger with SNET was seen as the next logical step for the company on the east coast. (Rockwell, 1998)

However, despite the initial successes of SBC, Southern New England Telephone is currently still reeling from a legal snafu. Hurled into its path of otherwise expected financial success, Gemini Networks petitioned that "certain hybrid fiber coaxial facilities owned by the Southern New England Telephone Company constituted unbundled network elements" As such, according to Connecticut law, they must be subject to a tariff and offered on an element by element basis for lease to Gemini "at total service long run incremental cost pricing." (The Connecticut Triennial Review Reporter, November 13, 2003) SNET argued that the Department of Public Utility Control lacked the authority to compel unbundling beyond that was required by the FCC. But the Department of Public Utility Control argued successfully that the Telecommunications Act provides states with the independent authority to require unbundling beyond the list approved by the FCC. SNET maintained that the purpose of the I-SNET Technology Plan was to provide "a full suite of voice, data and video services and that it never actually provided telecommunications services. But the Department stated that although the HFC facilities were not currently being utilized, they were constructed in part and intended by SNET to provide a full complement of voice data and video services and should be unbundled." (The Connecticut Triennial Review Reporter, November 13, 2003) This meant that SNET lost control over these elements of its services, resulting to a specific financial blow to this Connecticut based-service.

Compliance with the ruling was due by February of this year. But even more than this specific case, the legal ambiguities that plague the telecommunications industry make investment in SBC and SNET controversial amongst investment analysts. It is true that SBC has not met only with legal 'misses.' The company made much in a recent press release that the Federal Communications Commission's recent proposal to establish a nationwide policy framework was advantageous to the company in its minimalist regulation position, regarding voice-over IP and other IP platform services. "Keeping them free from old rules designed for legacy services and networks will help bring advanced IP-based communications to Americans faster and more efficiently. The roadmap SBC established in its filing will assist the commission in creating the bottoms-up regulatory approach - adding rules only as needed - that will bring untold benefits to consumers." (Press Release, 2004)

However, such successes have also been met by many industry-wide failures. Specifically, the ease of provider switching allowed to consumers who can now 'keep' their phone numbers even if they bounce from provider to provider has hit SBC quite hard, and these effects have been felt by SNET. Furthermore, SBC is known as a union-friendly company, but this status has also meant that strikes have plagued the local Connecticut subsidiary companies. The court's unwillingness to protect SNET, and the state court's additions to the regulations of the FCC make Southern New England a questionable investment prospect, in addition to the chanciness of investing in the industry as a whole.