How The Bells Stole America's Digital Future

Part II
Bell Company Profits Are Outrageous

In Part I, we discussed how the Bells in many instances convinced regulators to abandon traditional regulation, which limited monopoly profits, in exchange for their promises to build advanced networks. In Part II, we will show how the Bells' failure to build the promised networks, combined with reduced regulatory oversight, led to excess profits.

The Bells' Profits Are Neither "Just" Nor "Reasonable"

The purpose of the Communications Act of 1934 (as amended in 1996) was:

"...to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio-communications service with adequate facilities at reasonable charges..."[55] [Emphasis added.]

The Act also specifically assigned to the FCC responsibility to investigate and report any overcharges or unreasonable price increases:

"The Commission ... shall report to the Congress whether any such transactions... may result in any undue or unreasonable increase in charges or in the maintenance of undue or unreasonable charges for such service..."[56]

And the more recently enacted Telecommunications Act of 1996 clearly states:

"...Consumer Protection: The Commission and the States should ensure that universal service is available at rates that are just, reasonable, and affordable."[57]

The "just" and "reasonable" standard has also been imposed on state regulators. For example, in a 1993 decision regarding New Jersey Bell's application for an alternative form of regulation, the New Jersey Board of Public Utilities wrote:

"[T]he Legislature declared that it is the policy of the State to, among other things, 'ensure that customers pay only reasonable charges for local exchange telecommunications service...' N.J.S.A.48:2-21.16(a)(2). To this end the Act permits the board to approve a plan for an alternate form of regulation if it finds that the plan, among other things, 'will produce just and reasonable rates for telecommunications services.'"[58] [Emphasis added.]

While the terms "just" and "reasonable" are admittedly imbued with some measure of ambiguity, the sheer magnitude of Bell profits and the tactics employed to garner those profits are unjustifiable.

The Bells are among the richest companies in America. It is clear from all business indicators, including standard measurements of profit margins and return-on-equity (ROE), that the Bells are making double or triple the profits made by companies facing competition. The exhibit below shows the combined average earnings of the Bells and GTE for 1998 and 1999[59] and compares it to the Business Week ScoreBoard for Utilities. In 1998, net margin for the Bells was 110% higher than the net income of the ScoreBoard for Utilities, and ROE was 214% higher than for the utilities. In 1999, the difference was 86% and 154% respectively.

Business Week's Industry Ranking:
Bells/GTE Compared to ScoreBoard for Utilities

19981999[60]
Net MarginReturn-on-EquityNet MarginReturn-on-Equity
Bells13.65%28%12.03%28%
ScoreBoard for Utilities6.3%9%6.9%11%
DifferenceDifferenceDifferenceDifference
Bells Compared to Utilities110%214%86%154%

Source: Business Week, March 29,1998 and March 27, 1999.

The Bells' profits are also excessive when compared to competitive telecommunications companies. Business Week's Standard&Poor's 500 Annual Report for 1999 shows that the Bells' ROE is much higher than that of the three largest competitive long distance companies and of the "Telecommunications Industry Average." As detailed in the following exhibit, the combined average ROE for AT&T, MCI and Sprint was 163% above that of the three big long distance companies and 130% above that of S&P's telecommunications index.[61]

Bell Return-on-Equity Compared to Long Distance Companies
and to the S&P 500 Telecommunications Industry Average

Return-on-Equity
AT&T7.3%
MCI8.1%
Sprint16.6%
Combined Long Distance10.67%
S&P 500 Telecommunications Industry Average12.2%
Bells28.1%
Difference
Bells Compared to Combined Long Distance163%
Bells Compared to Telecommunications Industry Average130%

Source: Business Week's Performance Ranking of the S&P 500, March 27, 2000

To further put the Bells' profits into perspective, we looked at five icons of American business: McDonalds, the worlds largest restaurant chain; Nike, the largest footwear supplier; Exxon/Mobil, the largest oil company; Disney, one of the largest entertainment companies; and Dow Jones, a major finance company.

The exhibit below compares Bell and GTE profit margins with that of the five identified above. Most businesses are happy if they achieve a 10-20% profit margin. The combined average profit margin for the companies we looked at was only 16%. In contrast, the Bells' profit margin from all services was 42.9%, which is 167% higher than the average for the five businesses combined.

Bell Profit Margins Compared to Selected Major American Companies

Profit Margin
Business Group: McDonalds, Nike, Exxon/Mobil, Disney, Dow Jones16.1%
Bells42.9%
Difference Bells Compared to Business Group167%

Source: 4th Quarter Year-End 1999 Results, from SEC filings.

Next: Some Bell Products Have Profit Margins Approaching 50,000% | Table of Contents