TELECOM INDUSTRY COURTS INVESTORS AT CONFERENCE

Ackerman ducked Reingold’s questions about chances of BellSouth consolidating with other telco such as SBC but said he did expect some industry consolidation in both wireless and wireline. In wireless business, consolidation may be only easy way to get more spectrum right now, he said. “Obviously this is an industry that has too much capacity so you have to believe the industry is poised for some consolidation, wireline or wireless,” Ackerman said. Reingold had asked Verizon Co-CEO Ivan Seidenberg about consolidation Mon. and was told flatly that Verizon wasn’t interested right now although, like Ackerman, Seidenberg said he wouldn’t be surprised to some consolidation by other companies. Reingold said he planned to ask same question of SBC CEO Edward Whitacre, who was scheduled to speak late Tues. “Once one of these companies moves, it will change this industry,” Reingold told audience.

Ackerman told investors that by sticking to basics, BellSouth was able to navigate through difficult “white water” of current economic situation. DSL and business data services are top priorities, he said, attributing growth in consumer DSL business to upgraded platform of remote terminals that had pushed fiber closer to customers’ homes. Ackerman said that once BellSouth entered long distance business it would concentrate on 2 things: (1) InterLATA data services that business used to connect to customers, to divisions in other parts of country and to Internet. (2) Packages of services. “The real power of long distance is in packages,” Ackerman said. “Packages helped us drive revenue growth in voice for a number of years.”

BellSouth’s wireless business, in partnership with SBC, was very strategic move, Ackerman said: “We saw substitution coming for a long time. People ask our strategy for substitution [by customers of wireline facilities with wireless]. Our strategy is to own both.” Asked about his commitment to BellSouth’s rural service, he said company had no plans to sell off exchanges in those areas: “Maybe in the future, but not in the near term.” Asked whether universal service funding was obsolescent, he said there ought to be more “crystal clear” understanding of how rural properties should be funded but said there were “political considerations” since most state legislatures had “heaving presence” of rural legislators.

While noting that factors such as devaluation of peso in Latin America could have some impact on BellSouth’s bottom line, Ackerman said he wanted to remind audience of “what BellSouth offers investors in this turbulent era,” including “strong balance sheet and disciplined long-term approach to investment” that balanced short-term and long-term growth. BellSouth has Latin American holdings.

Reingold introduced Qwest’s Mohebbi, saying it had been “difficult” for company, faced with “accounting, operational, financial” questions and “now considered a possible consolidation target.” Mohebbi responded that whole sector was going through “radical repositioning” as result of economy, with demand for products reduced and “wariness in investment.” Downturn in telecom market had been somewhat expected, he said, because “too many were jumping into the market, creating confusion.” Mohebbi defended Qwest’s recent decision to draw on bank facilities to ease cash crunch. “It was the right thing to do” in light of increasing costs of commercial paper, he said. Qwest has been criticized for tapping bank credit line, which some consider last resort, rather than selling commercial paper. “We had other options,” Mohebbi said. There has been much overreaction in market about that. “We believe it was the right thing to do in light of the frenzy in the market.”

Mohebbi said Qwest was seeing “some rays of hope in terms of enterprise demand,” some of it from large customers that had been delaying purchases. Qwest is on track to be cash flow positive in 2nd quarter, will be fully funded through 2003 and still expects to report $19.4 billion in sales for full year, he said.

Mohebbi said his company took different view of industry, eschewing old-fashioned local-vs.-long distance categories. Qwest’s business is divided between more logical regional consumer and “global enterprise” categories, he said. Local-long distance categories were created artificially in 1984 AT&T divestiture, he said. As result, Qwest is well positioned once economy turns around, Mohebbi said. For example, cyclical global business is balanced by “more stable consumer business.” Company expects to be in long distance business by end of year in most states in its region, which will add to both sides of Qwest’s business, he said. As for wireless, for Qwest it’s just “consumer and small business” activity, “mainly there to deal with wireless substitution.” Qwest “if nothing else is a unique company that has made bold moves,” Mohebbi said, “not a pure-play LEC, not a long distance company.”

AT&T Chmn. Michael Armstrong told attendees late Mon. that company’s long distance business was “viable” because packet -based services and other “next-generation” offerings were replacing fading voice services. On business side, more revenue now is coming from nonvoice than voice for first time, he said. He acknowledged, however, that consumer side was being hit both by competition, as Bells entered long distance service, and substitution, as consumers turned to other services such as e-mail to make long distance calls. He predicted more cable industry consolidation, saying cable companies that could offer nationwide communications services could provide great value to advertisers. There’s not been that kind of “national communications company” since 1984 breakup of AT&T, he said.

Nextel CFO Paul Saleh gave upbeat picture of company as having “best and most profitable customer base in the industry” with strong growth potential, greater emphasis on cost reduction, good spectrum position that will be enhanced if FCC accepts its proposed spectrum swap with public service industry. Monthly churn is 2.2%, lowest in industry, he said, explaining that Nextel specialized in business customers who actively sought its products. “A lot of you are quite nervous about the market,” he told investors. “But it’s not a bad market, not a bad industry.” There’s still a lot of potential for growth in mobile, he said, when U.S. is compared to 60-80% penetration in Japan and parts of Europe, Saleh said. He said Nextel also had potential for significant cost savings through centralization because it’s very decentralized, having grown up in piece parts. “I think we have a strong company,” he said. “The industry is not as sick as you read in the press.”

Deutsche Telecom CEO Ron Sommer offered similar prediction on potential for growth in mobile, saying there was 85% penetration rate in western Europe while in U.S. rate is in 40s, indicating “at least a couple years of growth.” Sommer predicted strong subscriber growth for VoiceStream this year, with further churn reduction a priority.