Does Wall Street Want the Sun toset on Local Phone Competition?

Posted: 2/2003

special report

Does Wall Street Want the Sun to
set on Local Phone Competition?

FINANCIAL ANALYSTS AND THE
INSTITUTIONS that support them are staunchly in favor of removing the UNE-P in
order to create business opportunities with the Bells and establish certainty in
the marketplace, some observers say. Critics who support the UNE-P say such an
outcome could eliminate local telephone competition and hurt the economy.

"I find it very upsetting that
many stock analysts from the big investment firms and clearly the investment
bankers from those firms … have been … supporters of the Bells and have been
advocating a gutting of the UNE-P, which is clearly in their interest,"
says James Glassman, resident fellow at the American Enterprise Institute for
Public Policy Research.

"What investment firms want
more than anything is to deal with monopolies [that] makes their lives
easier," he says. "I think that’s bad for the economy and bad for
consumers."

At a meeting last fall with the FCC,
financial analysts articulated such a view, says Glassman, who declined to name
specific firms.

"As to what Wall Street wants,
people with money in the Bells want UNE-P killed and people with money in the
CLECs want it preserved and people with money in both are all over the
map," says Blair Levin, an analyst at Legg Mason. "I know a lot about
what individual investors think, but I would be reluctant to characterize it
beyond saying that they favor their pocketbook, and since most of the capital is
with the Bells, more of the capital markets favor the Bell position."

Analysts at Goldman Sachs and
Merrill Lynch did not return requests via e-mail for comment. One analyst
hailing from another investment and research firm, who spoke on background, says
he could not paint Wall Street with only one stripe in the UNE-P debate.

"I can’t say that [Wall Street
wants to eliminate the resale platform]," the analyst says. "Wall
Street again has many sides, many facets. From a research perspective, we just
want to know what will happen."

Vik Grover, the chief wireline
telecom analyst at Kaufman Bros. LP, says, "Major institutions want to get
rid of UNE-P because Wall Street fired all emerging telco analysts but me, and
the remaining RBOC analysts are spreading RBOC propaganda to fuel the collection
of fees from their RBOC clients."

Adam Thierer, director of
telecommunications studies at the Cato Institute
says he agrees Wall Street is concerned about investment opportunities if the
FCC upholds the current regulations.

"I do think it’s fair to say
that Wall Street and the investment community is skeptical about the expansion
… or even continuation of the UNE-platform as currently construed by the FCC.
They very much are concerned about the implication of the UNE-platform on
long-term investment if things weren’t to change," says Thierer, who is
himself a critic of current regulations. "Most people on the street …
want to see significant revisions to the UNE system."

With little opportunity left in the
CLEC sector, Wall Street is turning to the Bells, Thierer says. "There’s
not much of an investment opportunity left in the CLECs," he says.
"They just do not present much of an investment opportunity at this
time."

Grover, of Kaufman Bros., says,
"The CLECs are investable, but their debt has more market value than their
equity." The analyst pointed to the largest CLECs, AT&T Corp. and
WorldCom Inc., the No. 1 and No. 2 long-distance carriers. Both companies
recently have made significant inroads in the local residential phone market
through the UNE-P.

They are "ready to rock in
2003," the analyst says.

However, they also could stumble if
the FCC removes the resale platform. Donna Sorgi, vice president of federal
regulatory advocacy for WorldCom, says the removal of the platform would
threaten local residential phone competition.

With the Bells swiftly gaining
federal authorization to provide services outside their local territories, Sorgi
says deregulation could eliminate competition in the very sector AT&T and
WorldCom now lead. "Not only will local competition die … but residential
competition in both local and long distance will die" if UNE-P is
eliminated, she says.