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SBC Takes Pronto Out Of DSL Buildout Pace

10/28/2001 7:00 PM Eastern

SBC Communications Inc.'s Project Pronto might well be renamed Project Lento — that is, slow — these days. The Baby Bell, which has led the pack in digital subscriber line deployments, has said it would slow its two-year-old broadband-data initiative. It plans to cut capital expenditures by 20 percent, slash jobs and pass on upgrades in secondary markets.

When announced in fall 1999, Project Pronto's aim was to make DSL available to about 80 percent of SBC's customer base within three years. That percentage now stands at 58 percent.

Though the sluggish economy contributed to the cutbacks, SBC is mainly pointing the finger of blame squarely at the regulatory environment. The company believes that until the playing field is leveled in the contest with cable, aggressive DSL rollouts won't be profitable.

At the same time, the regional Bell operating company added a respectable 150,000 new DSL subscribers in the third quarter for a total of 1.2 million in its 13-state territory.

During a quarterly earnings call last week, SBC CEO Edward Whitacre said the San Antonio-based RBOC is in one of the toughest economic climates seen in years, but it was the regulatory environment that sounded the sour note.

"I cannot overstate the impact this has had on our ability to grow the business," he said. Though the 1996 Telecommunications Act was intended to deregulate the telephone industry, "Today, in many ways, SBC is more heavily regulated than ever, particularly in the broadband and advanced services market."

The company has a lengthy list of run-ins with regulators over DSL alone. This year, SBC suspended its Project Pronto buildout in Illinois after a squabble erupted with state regulators. The Baby Bell also faces a battle with independent California ISPs at the state public utilities commission over access to DSL remote terminals and the quality of its provisioning service.

On the federal level, SBC has been forced to create a separate subsidiary for its in-house ISP services, and agreed last month to pay some $2.4 million in fines for not meeting goals to provide rivals with access to its networks.

"No responsible company could justify fully deployed broadband advanced services capabilities given this climate," he added. "Accordingly, the company will reduce its workforce by several thousand employees in the coming months, and we will also reduce our 2002 capital expenditures by about 20 percent."

Meanwhile, the company will ramp up its lobbying efforts. Whitacre was optimistic that "we can do something and get some of this regulation off of us," he said.

SBC is still evaluating how to make the Project Pronto cuts, but they would likely involve delays in the scheduled buildout in tier-two cities, or those towns with lower population density.

"As Ed articulated, we are taking a hard look before we go any further," said SBC senior executive vice president and chief financial officer Randall Stephenson. "There will be some significant cuts in terms of the finalization of Pronto and where we invest that capital."

TeleChoice Inc. DSL analyst Adam Guglielmo thinks the decision to scale back Project Pronto — and Whitacre's comments — are the result of politics fueled by economics.

"If it is not showing a profit, with the regulatory impacts functioned in, then that makes it a little less attractive," he said. "They realize they have to do this [DSL] for the future, but it could also be some political grandstanding on his part. They've been known to do that the past."

The move conveniently comes at a time when the U.S. Supreme Court will take up at least three telecommunications-related regulatory issues this session, Guglielmo noted. The docket includes setting the rates for unbundling network elements, including DSL; whether states or federal regulators should set aspects of telecommunications policy; and a cable pole-attachment case that includes the question of whether data-over-cable services should be regulated.

Whitacre "could be laying the groundwork for further lawmaking pushes by his lobby," Guglielmo said. "He could be saying, 'If we are not going to get our way we are going to take our pieces off the chess board and there is not going to be broadband services for everyone.' And that's a threat they can make now: Who's left? Covad [Communications Inc.]?"

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