How The Bells Stole America's Digital Future

Prices Should Have Declined, Yet They Haven't

Determining Bell profits is challenging, since the financial information provided by the Bells is presented in such a way that it is difficult to get a handle on expenses or revenues. But there should be no doubt that prices should have declined significantly. One of the least talked about aspects of the holding company consolidation of the Bells is the massive staff cuts that have effected all service offerings. Since the Bells were created in 1984, over 275,000 workers and managers have been laid off or retired. This has had a significant impact on the companies' abilities to keep up with new orders, and new competitors. Here is one example:

"Employees-per-line" is a standard measurement used to indicate staffing levels in the telephone industry. Between 1984 and 1999, Bell Atlantic (including NYNEX) has cut employees-per-line by 53%. On average, staffing in departments associated with customer phone service have been cut by more than 50%, as indicated in the following exhibit.[67]

Bell Staffing Reductions Since Divestiture

Employees-per-line19841999Percent Reduced
Bell Atlantic/NYNEX61.028.853%
Pacific Telesis63.027.057%*
US West61.027.354%

Source: Bell Annual Reports and Fact Books.

The staffing cuts have resulted in huge financial savings for the companies. NYNEX, which is now part of Bell Atlantic, cut nearly 16,200 positions between 1994 and 1997 and anticipated annual savings of a whopping $1.7 billion once the restructuring was completed.[68] The quote below, from the NYNEX 10Q, 3rd Quarter Report, 1996, clearly shows the savings and staff cuts during 1996. It should also be noted that these savings were not applied to deductions in the price of services to customers:

"Since the inception of process re-engineering and the special pension enhancement program in 1994, approximately 11,900 employees (to date) have accepted the retirement incentives. On an annualized basis, this will equate to an average reduction in wages and benefits of approximately $650 million.
...
It is anticipated that the restructuring will result in reduced costs during the period of restructuring and reduced annual operating expenses of approximately $1.7 billion beginning in 1997. These savings include approximately $1.1 billion in reduced wage and benefit expenses due to lower work force levels, and approximately $600 million in non-wage savings including reduced rent expense for fewer work locations and lower purchasing costs. Partially offsetting these savings are higher costs due to inflation and growth in the business."[69] [Emphasis added.]

As a result of these staff cuts, there have been definite and documented drops in the quality of service. US West, Ameritech, Bell Atlantic and Pacific Bell have all been investigated and ordered to pay penalties by state regulators. There are also hundreds of complaints from competitors. With fewer people to handle more work, this isn't surprising.

chart showing rising from 0 to 150% in 15 years, while employees per line decreased by 50%

Source: Bell Annual Reports and Fact Books, 1984-1999, New Networks Institute, 2000.

Excess Profits Result From the Bells' Failure to Deliver on Their Promises

Much of the Bells' excess profits are a result of having mislead the public into believing that the companies needed financial incentives to deploy advanced networks. In Massachusetts, for example, Bell Atlantic specifically stated that it would be deploying 330,000 lines of full motion video, 800-channel services to the public by 1995, if only state laws were changed to give the company more money to be used for new construction. Similar promises were made to regulators in other New England states, such as Rhode Island, which subsequently came under Bell Atlantic's control. The state laws were changed, but the advanced networks were never built.

The result, as detailed in the companies' annual earnings reports to the FCC,[70] was that Bell Atlantic greatly benefited from alternative regulation throughout New England. Dividends paid to Bell Atlantic shareholders doubled from $424 million in 1994 to a whopping $845 million in 1998. Moreover, Bell Atlantic (New England Telephone) vastly increased its deductions based on the depreciation of its copper wire network, garnering nearly $90 million more by 1998 in the states formerly served by New England Telephone, including Massachusetts. All of these states were subject to some form of alternative regulation. (Note: The FCC's earnings reports for 1999 have not yet been released.)

Bell Atlantic-New England Telephone
Dividends and Depreciation Expenses, 1994 and 1998

19941998Change
Bell Atlantic Dividends$424 million$845 millionDoubled
Depreciation Expenses$862 million$952 million$90 million increase

Source: Statistics of Common Carriers, FCC: 1994, 1995, 1996, 1997, 1998.

According to the Massachusetts Alternate Regulation Plan, depreciation expenses of $100 million per year for five years were supposed to be related to NYNEX's installation and deployment of the fiber optic network. But NYNEX didn't spend the $500 million, as promised, to deploy fiber. So while revenues increased 15% between 1994 and 1998, expenses only increased by 6%. As a result, Operating Income (revenues minus expenses) rose 56%.

Bell Atlantic-New England Telephone
Revenues, Expenses, and Income, 1994 Through 1998

19941995199619971998Increase
Total Revenues (in billions)$4.1$4.2$4.6$4.5$4.715%
Operating Expenses (in billions)$3.3$3.3$3.3$3.4$3.56%
Operating Income (in millions)$790$905$1,299$1,096$1,23056%

Source: Statistics of Common Carriers, FCC: 1994, 1995, 1996, 1997, 1998.

Since the 1980s, the Bells have been working to convince regulators to "cap" the price that the companies can charge for regulated services. Referred to as "price caps" in many states, this type of alternate regulation was touted as a good deal for customers, because it would limit price increases. But it was actually a ruse. Costs have been declining steadily in the telephone industry, so the real effect of "price caps" was to keep prices up while the network costs declined. "Price caps" were also supposed to give the Bells more freedom to invest extra profits in building advanced networks.

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