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Wednesday, October 11, 2006

Verizon: Monopoly Not All It’s Cracked Up to Be

By William Trent, CFA of Stock Market Beat

Everybody likes to complain about the phone company, and to a large extent they deserve what they get. For years they have been more concerned with keeping the competition out than with serving their customers, and over decades they were able to erect numerous regulatory barriers to keep out the unwashed. The problem with that strategy is that now the bells are caught in a weird world somewhere between regulated utility and free competition, never quite being able to fully compete but also not able to maintain monopoly power.

For example, the New York Post recently reported that Verizon has been forced to put prospective DSL customers on a waiting list, as their “series of tubes” is getting a little too full for comfort. Of course those waiting for the service are apt to complain about it, and when they are the editors of popular tabloids they can complain loudly.

To address these complaints over the long term, Verizon is spending billions of dollars to spread fiber optic cable far and wide across its markets. Naturally, it is starting in places like New York where capacity is limited. Even so, the massive investment is leading some market watchers to register their own complaints. Still, balancing future growth with current shareholder dividend demands is part and parcel of any company’s capital budgeting plan.

But here’s where it doesn’t pay to be the biggest kid on the block. While unregulated companies merely have to decide between paying off shareholders or spending more on their capacity, regulated monopolies have to deal with a third layer of complexity - namely the regulators.

Verizon Communications Inc. is spending tens of billions of dollars on a state-of-the-art fiber-optic network serving states like New York, Florida and Texas. Meanwhile, over the past five years it has cut its budget for maintaining West Virginia’s phone system by almost $100 million.
Is Verizon shortchanging West Virginia in order to pay for expansions in more lucrative markets? That’s what the consumer advocate’s office says is happening.

One thing is clear: No matter what they end up doing, somebody is going to be unhappy and complain. And believe us, Verizon hears them now.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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