Katrina and BellSouth

Katrina Packed A Powerful Punch: Too Much For Any Phone System


Hurricanes, even a Katrina, eventually blow over.

BellSouth (BLS) has a lot of work to do to recover from Katrina. The Atlanta-based phone company also faces long-term challenges that are here to stay. One is the rise of Internet-based phone services called voice over Internet protocol, or VoIP. Another is wireless competition, even though BellSouth owns 40% of the nation's No. 1 wireless carrier, Cingular, while SBC owns the rest. Wireless growth reduces the need for wirelines, which can be more profitable.

And BellSouth risks being dominated by the two bigger local Bells. SBC (SBC) is buying AT&T (T)and Verizon (VZ) is buying MCI. (MCIP) Those deals are expected to close soon.

BellSouth Chief Executive Duane Ackerman recently spoke with IBD about all that's on his busy plate nowadays. Here are some excerpts from that interview:

IBD: How well-prepared is the telecom industry to handle a national emergency such as Katrina?

Ackerman: I don't know of a hardened architecture capable of withstanding a Category 4 or Cat 5 hurricane. There's going to be structural damage.

Those are tornadic-force winds. That's going to twist towers, break bridges, knock down highways, put the lights out and damage communications.

I don't think we can build an expectation in the public's mind that somehow that (damage) is not supposed to happen. That would be dangerous. We shouldn't expect that there'll be no infrastructure (damage). We've got to do the best we can to prepare and recover.

Being in the Southeast, there's a great deal of preparation we always undertake. Last year we had four hurricanes. This year Katrina hit us twice, in Florida as a Category 1 and then again as a Cat 4 on the Gulf Coast. Year after year, we're involved in (natural disasters).

I've been in this business 42 years. There's been something like

53 hurricanes that have hit the Southeast during that time. What's important is the ability to recover networks as fast as you can.

IBD: Some BellSouth executives have talked about using a rebuilt New Orleans as a showcase for new technology. What's the business case for doing that?

Ackerman: Everyone says (the city is) going to be rebuilt and I certainly wouldn't argue with that. I think whatever they do, and the way they do it, and the sequence in which they do it, is going to have an impact on our engineering.

If you look at the network switching fabric, when Betsy hit New Orleans in '65, we had water but not to the extent of this time around. We learned from that. All of our switching fabric (this time) was on the second floor (of buildings) or higher. The switching fabric is in good shape; it's dry. From a switching point of view, the network looks recoverable. (Switches are devices used to route voice and data traffic.)

Then, there are our interoffice links. We lost some 17% to 20% of interoffice facilities. But we believe that, too, is recoverable.

If you look at the central business district of New Orleans, the French Quarter, a large part of Jefferson Parish, and the Garden District, a lot of it is in pretty good shape.

But a lot of the city has been underwater. Will we replace everything in New Orleans? No. We'll fix what is fixable.

In some cases, where the outside plant (wiring) is damaged or not recoverable, then surely our facility of choice would be fiber (optics, which transmits much faster than normal copper phone wiring).

We will be looking at it from an economic point-of-view. When we do put in new (equipment), how can we further our agenda as it relates to building a broadband platform. It has to be done pragmatically and reasonably -- and it will be.

IBD: Does eBay's (EBAY) purchase of Internet phone service provider Skype say anything about the long-term threat VoIP poses to phone companies?

Ackerman: My sense of VoIP today is that I don't think the stand-alone VoIP provider -- and by that I mean the nonfacilities-based VoIP provider (companies such as Skype and Vonage that don't own DSL or cable modem broadband lines) -- is (going to destroy) the landline phone business.

I think there are places where VoIP can help the eBay, Yahoo, (YHOO) Google (GOOG) search business.

The cable companies are different because they have landline facilities. They're able to add it to their video package. When I look at competition, the first and most effective competitor I see is wireless. Second, I would say cable with VoIP. I would put stand-alone VoIP providers today at a fairly distant third.

IBD: How will the competitive landscape change for BellSouth after SBC buys AT&T and Verizon buys MCI?

Ackerman: I think about that. When I sit down today for a competitive bid, or RFP (request for proposals), from a business user, we have SBC at the table, Sprint's there, AT&T, BellSouth is there, MCI, and usually one of the third-party integrators. I suspect that at least two of those players won't be there the next time we sit down.

We've been competing against AT&T and MCI for a long time in our territory. I believe they carry the specialized talents that address the high end of the market. I wouldn't expect that to change.

Will we see more competition? I don't think so. We'll continue to bring what we have to offer to the table.

Large businesses in our territory represents about 8% or 9% of our revenue. The high-high end of (the business market) is probably another half of that. We don't control (have) those accounts today. But we provide services to many of the state governments, hospitals, regional banks. There are portions of the market where we're well-positioned.

IBD: Some analysts say that SBC's acquisition of AT&T will create a business conflict with BellSouth. They say SBC will try to sell Cingular's wireless services along with AT&T's products to business customers in BellSouth's region. Are you concerned about that?

Ackerman: Let's talk about the wireless joint venture. Cingular is a big business. It has 53 million customers. If it were a stand-alone business, it would probably be in the Fortune 30, Fortune

  1. That's too big a business for me to let fail. Given that scale, it's too big for SBC to want to fail.

We're committed to making sure it succeeds. The governance of Cingular is 50-50. What we (SBC and BellSouth) have to say about how it's run is equal. We both have a significant interest in seeing to it that Cingular continues to grow and improve its margins.

I don't see anything that would create an environment where we would let Cingular fail. That's not going to happen. Will there be conflicts at the enterprise (corporate) table? There are conflicts there today. SBC has been in our territory a couple a years now (competing for business customers). So has Verizon. In some cases, we work with other carriers or partner with them, depending on the customer. I think the industry is mature enough to realize there are places where you compete, and you compete like crazy, and there are places where it makes sense to partner. You do what makes sense and you don't go around getting mad.

IBD: Lawmakers in Congress are introducing new telecom legislation. It's unclear what will pass or when. What would BellSouth like to see in telecom reform?

Ackerman: We'd like to see less regulation. When I look at where we'd like to go -- whether it's video franchises or any aspect of this business -- if it doesn't need to be regulated, forbear. We've got cable out there competing. We've got the VoIP providers in this game. We've got all kinds of competition. We're losing (customer) lines to competition. Why in the world do we need to continue all these rules and regulations?

Will it get done in 2006? I don't know. Based on what I've seen (in proposed bills), we've got a lot of work to do.

IBD: There's plenty of talk about wireless broadband. BellSouth has some radio spectrum it could use for that. What are your plans?

Ackerman: We're testing a version of wireless broadband in Athens, Ga. We're going to test it in a few more places, mostly rural, where you may not have (DSL, the phone companies' wireline broadband) available.

I'm inclined to believe that if the costs are right, we could get a very effective (wireless broadband) capability in areas that don't have other forms of broadband.

Whether it'll compete effectively with a DSL, a cable-modem (broadband) product or fiber connectivity is less clear to me. We'll have to see how the technology does in the marketplace in these tests.

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