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BellSouth is changing its conservative ways; cable rivals prompt a new approach

Wed, 09/15/2004 - 8:00pm
Ken Belson

Copyright 2004 International Herald Tribune

The International Herald Tribune

September 15, 2004 Wednesday

The executives at BellSouth, the third-largest regional U.S. phone company, are not known for hyperbole. Blue suits and button-down shirts are de rigueur at the company's unassuming headquarters.

While rivals often make grandiose claims about their expansion plans, BellSouth's brass prefers phrases like "three yards and a pile of dust," a reference to American football teams that methodically plow their way down the field.

That expression about sums up the BellSouth approach to business: stable, disciplined, anything but flashy. Though its decidedly stodgy style was ridiculed during the technology boom of the late 1990s, BellSouth managed to endure while messy mergers and spending sprees consumed competitors like AT&T and Qwest Communications.

But BellSouth's cozy, lucrative franchise in its nine-state region in the Southeast is slowly coming undone. It is in a battle with Comcast, Cox, Time Warner Cable and other cable providers that are offering competing phone and broadband Internet services along with their television programming — all on BellSouth's turf.

The chairman and chief executive, F. Duane Ackerman, says he knows that BellSouth's dominant role in the Southeast is fading, and that simply counting on traditional phone subscribers will not ensure the company's future.

"I don't take what's happening lightly," said Ackerman, who has spent his entire 40-year career at the company. "We've been painted out of the picture many times before. But we understand where the challenges are."

With the phone business becoming more competitive and chaotic, BellSouth — the only Baby Bell that has not acquired or been acquired by another Bell company since the breakup of AT&T in 1984 — is slowly shedding its conservative approach.

Ackerman has been able to keep BellSouth independent, industry analysts say, because the company could rely on the Southeast's strong economy to keep its business growing. That growth, though, has slowed, forcing it to look at buying one or more competitors in the contest against cable, analysts said.

In February, Cingular, the cellphone company owned by BellSouth and SBC Communications, bought AT&T Wireless for $41 billion, to form the nation's largest cellphone company.

BellSouth may also take another look at AT&T, which approached BellSouth last year in the hope of merging. Acquiring AT&T, the largest long-distance company, would give BellSouth a big presence in the corporate phone services market, and a national footprint it lacks.

Meanwhile, to compete with cable, BellSouth has already invested $40 billion over the last decade to upgrade its networks, allowing it to nearly double its broadband subscribers in the last two years and begin testing an Internet-based phone service. It leans heavily on Cingular to generate revenue growth and provide the wireless services that cable providers do not offer. And it has made a loose alliance with the satellite provider, DirecTV, to sell television programming.

Despite competitive and financial challenges, it is hard to dismiss BellSouth. Like its bigger brethren, Verizon Communications and SBC, BellSouth controls the copper wires that go into millions of homes, making it possible to sell local, long-distance and Internet services along with wireless services in one package.

BellSouth's conservative management has helped it generate the highest profit margins and revenue per fixed phone in the industry.

While it continues to lose traditional phone subscribers, the rate of decline is slowing. BellSouth also earned a better-than-expected $996 million profit in the second quarter, a 4.7 percent increase from a year earlier, while sales rose 0.1 percent, to $5.08 billion

"They are quiet and steady," said Scott Cleland, an analyst at the Precursor Group. "That's not sexy, but they tend to deliver on what they promise."

Profit margins may improve next year, mostly because of a crucial regulatory victory: the reversal of government rules that forced the Bell companies to connect local calls for other phone carriers at subsidized rates. BellSouth is likely to raise the connection fees next year by about 15 percent, analysts said.

Cable companies, of course, can deliver television programming to living rooms, a huge franchise. And that remains the biggest challenge to BellSouth and other regional phone carriers. So far, BellSouth has had to settle for a marketing alliance with DirecTV, the country's largest satellite television provider. Ultimately, though, BellSouth and the other Bells want to deliver their own video product. To do this, Verizon, SBC and BellSouth are spending billions of dollars to lay fiber-optic cable to millions of homes.

Characteristically, Verizon and SBC have made splashy announcements about their plans.

BellSouth, by contrast, has been quiet about how much it plans to spend. Without fanfare, BellSouth has built a fiber network that passes 1.1 million homes, 800,000 of which now use the network. Verizon has started building a fiber network that will reach 1 million homes this year.

This deliberate approach is a hallmark of Ackerman's six-year tenure as chief executive. A soft-spoken and unassuming career telephone man, Ackerman fielded complaints in his first job at BellSouth, and even now he reads the loudest criticisms from customers aloud at internal meetings.

"He's not one of those imperial CEOs," said Benn Konsynski, a professor at the Goizueta Business Library at Emory University in Atlanta. "It's never been about Duane."

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