The Unpredictable Certainty White Papers (1997) / Chapter Skim
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Building the NII: Will the Shareholders Come? (And if They Don't, Will Anyone Really Care?)
Building the NII: Will the Shareholders Come? (And if They Don't, Will Anyone Really Care?)
Pages 44-56
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From page 44... ...
Have shareholders been rewarded or penalized by Bell company decisions- given the prevailing regulatory environment-to upgrade their respective wren telephone networks In recent years? On balance, do shareholder returns matter much to anyone over Man the shareholder and telephone company managers, and if so, to whom, how, and why?
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From page 45... ...
. The balance of this paper analyzes relationships between shareholder returns, network investment, and the deployment of the types of advanced network technologies that will make up the NIl.
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From page 46... ...
Network investment is expressed as the percentage of Bell telephone company operating cash flow used to acquire wirel~ne network plant and equipment. Unlike reported earnings, which are subject to the vagaries of different financial and regulatory accounting practices, operating cash flow provides an accurate measure of cash that a business generates after it pays its outof-pocket operating expenses, taxes, and interest on its debt.4 Besides financing the acquisition of new plant and equipment for their regulated w~reline networks, local Bell telephone companies principally use their operating cash flow in one of two ways: to pay dividends to their regional holding company shareholders, or to finance investment opportunities outside local networks.
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From page 47... ...
Percent of Bell Telephone Company operating cashflow reinvested in local wireline networks between 1988 and 1994. (Bottom)
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From page 48... ...
TABLE 1 Network Investment, Technology Penetration Rates, and Shareholder Returns Digital Stored Program Control Switches Digital SPC Access Lines SS7-317 Access Lines ISDN Capable Switches ISDN Access Line Capacity Fiber Sheath-Kilometers Fiber Links Digital Links Fiber Equipment Channels Fiber Working Channels . Network Investment as % of Operating Cash Flow _ Cumulative Shareholder Return .
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From page 49... ...
This has been true even though the RBCs' local telephone operations accounted for roughly 86 percent of their total revenues between 19SX and 1994, 89 percent of their combined operating cash flow, 95 percent of their total earnings before extraordinary charges (e.g., write-offs of obsolete telephone plant and equipment) , and 94 percent of their net income.
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From page 50... ...
. Total Revenue Operating Cash Flow Earnings Before Extraordinary Expenses Net Income 50 Implications for Upgrading the NII In view of the Bell telephone company contributions to the regional holding companies' overall earnings, why do shareholders seem at all concerned about using internally generated fiends from local telephone operations to upgrade their Reline networks?
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From page 51... ...
In light of prospects for increased competition, low earnings growth, and increased business risk, it is understandable why shareholders appear to have rewarded the Bell companies for minimizing discretionary capital spending on advanced network technologies In recent years. Overall, Bell company investment opportunities outside their regulated wireline networks have simply been more attractive in recent years primarily because these investments offer better earnings potential, often with less risk.
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From page 52... ...
The Internet Community's Stake in Local Network Investment According to the Internet Business Center, demand for access to the World Wide Web (WWW) increased at annual rates of 443,931 percent in 1993 and 1,713 percent In 1994, bringing the total number of WWW users in the United States to an estimated 4 million.
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From page 53... ...
Immediately Replace All Legal and Regulatory Barriers to Market Entry with User-Friendly Interconnection Requirements Given the less-~an-favorable relationships between network investment and shareholder returns, coupled with substantial increases in bandwidth that the deployment of fiber optics, ISDN, ADSL, and other digital network technologies could bring about, it is imperative Mat federal and state officials immediately abandon any and all regulations that restrict how the PSTN is used. Notwithstanding the value of abundant bandwidth to the Internet community, other users, and growing numbers of information intensive industry groups that rely on
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From page 54... ...
First, like telecommunications legislation, price regulation would eliminate a considerable amount of regulatory uncertainty that has discouraged network investment In recent years. Price regulation would accomplish this by eliminating any need for regulators to concern themselves with We types of capital expenditures regulated telephone companies are allowed to undertake, how local network costs are allocated between different services for rate-making purposes, or how rapidly new network plant and equipment is depreciated.
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From page 55... ...
8. Because there are time lags between capital expenditures on various technologies depicted in Table 1 and their actual deployment, and additional lags between the deployment of those technologies and incremental sales/earnings growth that should result from their availability, it was appropriate to compare network investment/shareholder returns for
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From page 56... ...
1995. "The Regional Holding Companies Are More Than Plain Old Telephone Companies," Telecommunications Services, Oppenheimer & Company Inc., January 26, p.
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