The Two Faces of Verizon

Washington Post columnist Steven Pearlstein was online to talk about Verizon Communications and how the mid-Atlantic region's dominant telephone company seems to want it both ways on the issue of telecom deregulation. On the one hand, Verizon wants its local phone monopoly protected from competition. On the other, it wants to ensure that other communications businesses are deregulated.

Read the full column: "Verizon Needs To Duke It Out In the Market."

A transcript follows.

About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Fairfax, VA: One example of how Verizon operates as a monopoly seems to be its residential DSL service. When you attempt to order DSL there is no attempt to provide information about plans for DSL roll-out. Since there is no competition, there is no incentive to meet customer demand outside of the company's secret (or possibly nonexistent) "plan." Do you have any insight into whether true competition for local phone service is possible and whether it could improve service for customers?

Steven Pearlstein: Lots of good issues there. But we have to start with a correction: there is finally competition for local phone service, not only from MCI and ATT (as long as Verizon doesn't prevail finally in the courts), but from cable and cell phone companies. As a result, Verizon is losing line customers left and right and there is downward pressure, finally, on local rates which, up to this point, had been rising faster than most other prices. As I understand it, DSL service is available from Verizon. But what isn't available is the higher-capacity broadband that is now offered by cable companies. Verizon has been saying to legislators and regulators and newspaper editorial boards that it needed regulatory relief so it could generate the income necessary to invest in running "fiber to the home." But it is only this year that they have rolled out this service in one area (Texas, I believe), with promises of getting to one million homes by the end of this year and two million by the end of next. I think it is fair to say they have been slow to make good on this unwritten promise, although it is true that many analyses find this isn't yet a good investment on their part. The economics aren't there yet.

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New York, NY: Mr. Pearlstein,

Your article is riddled with false accusations - but I'll just ask you about one of them - VZ's push to deny Nextel billions of dollars of free spectrum (which by the way VZ offered to pay the federal government $5 Billion for - you carefully fail to mention that factoid). Why do you support this government give away when VZ offered to start the bidding on this spectrum for $5 billion and the problems associated with the police and safety wireless network were primarily caused by Nextel? Given the half trillion dollar deficit our government has rung up don't you think fixing accountability for the problem and getting some money for the government in an asset sale is much preferable to a government give away? By the way here is some accurate information you ought to use - if VZ had not put up the arguments against this taxpayer bailout Nextel would have reaped billions of dollars of benefits and the ability to increase their customer base by 20 to 30 million subscribers all at the taxpayers cost. This runs contrary to the history of auctioned spectrum that all carriers have had to deal with in order to increase their service.

Steven Pearlstein: In case you're wondering folks, this is probably somebody at Verizon's cellular arm, which they own 55 percent of. First, let me say that in some respects, this is none of Verizon's business and I take with a grain of salt the suggestion that we need Verizon to protect the interest of taxpayers. That's why we pay regulators and politicians. And on the first go-around, the regulators thought they had put together a package that balanced various public policy interests, the first of which was getting Nextel to pay for getting lots of public safety people clustered on the right channels and giving them the equipment necessary to do that. In addition, Nextel was to pay the government something for the spectrum. Perhaps the total cost to Nextel did not equal the auction price, but the FCC didn't just pull a number out of the air. They consulted experts and past auction prices and came up with a number they thought reasonable. Maybe, after concerns were raised, they could have raised the amount. But you'll note that where we've got to is not an argument over the value of the spectrum, but basically offering Nextel another slice of spectrum that is very unattractive, for all sorts of technical reasons. Verizon's motive here is simple: deny one of its strongest competitors the spectrum it needs to grow, and do so at all cost. Whatever it takes.

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Hampton, Va.: Interesting topic. Here's a slant you probably will not hear from the general public. I have recently had dealings with Verizon on an industrial level. I work with a rigging-heavy hauling company and we needed some lines raised. I received a bill for $11,000 for about $1100 worth of work (I work for a union contractor - 26 years - and have a pretty good feel for costs). When I asked for backup and justification, their response was "it was a fair invoice" and that I could not see their time sheets for verification ("proprietary information"). So I asked for this response in writing and again was denied. So I asked who else I could use in the future besides Verizon, and as you might expect, no one is allowed to handle their lines but them.

PS I had to pay $10,000 up front ...... now you know why.

Steven Pearlstein: One of the fictions Verizon likes to throw around is that it is no longer a monopoly. That is partly true. But as you have recently discovered, it is partly false.

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Alexandria, Va.: Aren't you being a little unfair in singling out Verizon? Aren't all the Baby Bells guilty of this anticompetitive behavior?

Steven Pearlstein: Yes, the other Baby Bells are sometimes just as obstreperous. And until a few years ago, SBC had really taken the lead on that. But lately, SBC has reportedly turned a bit reasonable, and Verizon has stepped forward as the hard bar. Qwest, which also used to play hardball, has been wounded by allegations of accounting fraud, so they are relatively quiet on other fronts.

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Herndon, Va.: Steven,

Great article. It seems VZ and the other RBOCs have the power to destroy MCI and the other competitors and the battle is about over. MCI lays off another 7500 this Friday. We will likely be in a monopoly-like situation very soon with all the negatives that comes with it. How long do you expect government will allow that to continue before cycling through another telecom act aimed at creating competition?

Steven Pearlstein: I appreciate your comment. In fact, however, Verizon failed in its effort to strangle the MCI bankruptcy reorganization in the crib. The layoffs probably are more reflective of the continuing price war in long distance and loss of market share by MCI, now that the Baby Bells are able to offer long distance/local combined packages.

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Arlington, Va.: I don't see anything wrong with the way Verizon is running its business. Aren't Verizon's political and legal tactics part of the business reality of our times, especially for a heavily regulated industry such as telecom? It would be a disservice to its shareholders not to play the game well.

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Arlington, Va.: Verizon has reportedly been blocking efforts by its competitors to move off its network. I thought that originally Verizon didn't want to share its network with its competitors. Can you please explain this change of heart?

Steven Pearlstein: I'm not familiar with that. But if you are saying that Verizon takes whatever position in regard to an issue is convenient at the moment, without any regard to past positions, the answer is that the record is full of such flip-flops. Compared to Verizon, John Kerry is a paragon of intellectual consistency.

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Washington, D.C.: In your article, you mention that Verizon has been seeking harsher penalties for MCI/Worldcom, including liquidation. Why do you believe that such a company deserves to be absolved of all their debt and to emerge from bankruptcy with a clean slate? What kind of message does this send?

Steven Pearlstein: Public policy involves tradeoffs. Do you destroy an entire company, with millions of customers and tens of thousands of employees, just to send a message. That's what we did with Arthur Andersen and I think the general belief now is that this was a mistake. The fact is that the people responsible for the bad deeds at MCI/WorldCom are in the process of being punished. The shareholders were punished when the value of their shares were wiped out. The creditors were punished in having to had most of their debts written off. So what was to be accomplished by wiping the company off the face of the earth. Nothing other than to advantage competitors like Verizon. Again, this wasn't their deal. If they would spend as much time and money trying to fix their customer service operation as they do trying to disadvantage their competitors, we'd all be better off.

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Washington, D.C.: Steve: On the Worldcom issue... given the ongoing indictments of ebbers, Do you think the punishment of the company was appropriate for the size of the crime?

Steven Pearlstein: Not sure we know yet what the punishment is. Nor has the full story come out at trial.

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Washington, D.C.: If Verizon is accurate in saying the FCC was on the verge of handing Nextel a spectrum windfall, why do you defend the Nextel "deal" even when the taxpayers who own the spectrum would have been shortchanged by billions of dollars during a time of war and budget deficits?

Steven Pearlstein: I don't know if it is such a huge windfall. That may be just Verizon propaganda. I do know that the FCC has a large and professional staff that is certainly clever enough to have scrubbed Nextel's proposal to make sure the government was getting a fair deal. Maybe they made mistakes, maybe they were wrong, but please let's not buy into the Verizon line that this was a giveaway by people who didn't have a clue. And as to the argument, presented by the Verizon executive earlier, that they were willing to bid in at $5 billion, that is not an enforceable promise, and if the government turned around and accepted the offer, I wouldn't put it past Bill Barr to say, sorry, we now think its only worth $4 billion.

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Lansdale, Pa.: Why are Verizon's charges inconsistent from one state to another? For example, I moved from Fairfax, VA to Lansdale, PA two years ago; and Verizon's Pennsylvania fees were 20 percent higher than Verizon's Virginia fees for EXACTLY the same services.

Steven Pearlstein: Each state has its own operating company, with its own set of regulations and historic costs and configuration of more or less profitable customers.

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Washington, D.C.: The current system that provides access for competitors to the Bell monopoly networks has saved phone consumers billions of dollars as competition has started to take hold. Consumer organizations continue to push for affordable wholesale prices charged to competitors, especially the last mile and other monopoly parts of the Bells' systems. Too much is at stake. Competition would end if the Bells were able to charge the wholesale prices they are demanding. Given the history of Verizon, SBC and BellSouth resisting reasonable commercial relationships, don't consumers continue to need regulatory oversight at the state and federal level? Doesn't that mean that the FCC should appeal the U.S. Court of Appeals decision that ends regulatory oversight?

Steven Pearlstein: Ah, somehow I sense we now have heard from someone associated with ATT, MCI or some other would-be competitor to Verizon. But in answer to your rhetorical question, yes, competition is good and has provided downward pressure on prices. The regulated pricing that the FCC and the states came up with isn't perfect, but was hammered out after extensive, extensive hearings and analysis, by regulators who in the past have had very close relationships to the Baby Bells (or, as some believe, have a history of being in their pocket). The Bells victories in court have been won on narrow legal and process issues. At this point, consumers would be better off if everyone gave in a little and some sort of settlement were reached, so everyone could focus on what really matters, which is figuring out ways to provide better services at better prices.

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Washington, D.C.: Steve, you do agree that WorldCom/MCI should have been held accountable for wiping out $176 billion, including the retirement savings of many of its soon-to-be ex-employees, right? Reading the Thornburgh reports indicated to me that the problems at WorldCom were pervasive, and that the still-being-indicted Bernie Ebbers created a toxic corporate culture over there. Why should a company like that be trusted with government contracts?

Steven Pearlstein: I have read much of the Thornburgh report, and commented critically on it in print. But there is nothing in there that suggests this company is rotten to the core. It was rotten at the top, the top has been lopped off, safeguards have been put in place and lots of people have been punished financially. Unlike you, I don't believe in financial capital punishment in this instance. And if the government believes that they offer the best service at the best price, that's not something to be thrown over lightly.

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Washington, D.C.: Do you think that the problem with incumbent telecom companies (and you focus on Verizon in particular) is that to be able to "duke it out in the market" one needs predictable rules, but we currently don't have that? Many of the regulations governing network "open access" have been declared unlawful in federal court three times in the past eight years (and the FCC has been badly micromanaging the telecom market and Congress needs to update the '96 Act). You blame Verizon for playing the "Washington game," but shouldn't you really be blaming the game itself?

Regards,

Braden Cox

Steven Pearlstein: No Braden, I do blame the Bells for dragging out these pricing questions as long as they have. There is no "right" answer here, it has to do with broad assumptions you have to make about historic costs and incremental costs. There was an extensive process to come up with an answer to those questions, in which the Bells had plenty of input. They would have provided the clear rules you ask for, only the Bells wouldn't accept the decisions of duly elected and appointed officials. So they litigate and litigate and then go whining to Congress that the system doesn't work and regulation is stupid and you should just deregulate everything, which of course has been their position since day one and would put them in a greatly advantageous position that was, in effect, financed and developed on the public's money, not the shareholders. That would be the biggest giveaway of all.

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Atlanta: The federal courts have ordered the FCC to draw up new regulations on broadband and the FCC needs to do it. Why should verizon "compromise" a position that has prevailed in federal court? The U.S. trails every major industrialized nation in the world in broadband. Why criticize Verizon when you ought to be prodding the FCC to do its jobs and issue the regulations?

Steven Pearlstein: The FCC has made clear, and is supported by key members of congress on this, that they can charge whatever the market will bear in providing broadband service to the home. They've been slow to take up that offer, whining as they always do about the regulators, but really because this is a close call economically at this point -- very expensive with a very long payoff. I'm sure as soon as the FCC would issue whatever regulations you refer to, they'd be in court the next day accusing them of abusing their discretion and being capricious, in an effort to get a better deal. They just never are satisfied.

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NY, NY: This article seems to be extremely one-sided. Where did you get your info from?

For example, you say "Verizon dragged its feet in meeting its obligation to let rivals offer local phone service using some of its own network." when the truth is that Verizon led all RBOCs in this respect up to the point where Bell South jumped ahead with their fairly small territory.

Steven Pearlstein: Yes, it is a one-sided column. That's what columns are supposed to be, just like the one by Verizon's hired lawyers in yesterday's Wall Street Journal op ed page. And if you (yes, this is surely another Verizon exex. on the line) hadn't dragged your feet, then you wouldn't have been fined.

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Washington, D.C.: Steve,

I don't understand your sympathy for WorldCom/MCI -- wasn't it that company that was run out of a law firm, called Money Comming In, and made their money off of not paying Separations and Settlements -- and even now lied about their business plans and commitment to not lay off people?

What gives?

Steven Pearlstein: I think I've answered that twice already. It also is not lost on this columnist for the Washington Post that many of those jobs are in the Washington area. I like to root for the home team.

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Washington, D.C.:

Why does your column not mention that Verizon's local telephone competitors benefit from not having to build their own networks, and, instead, they use Verizon's network and pay wholesale prices that are below cost?

Steven Pearlstein: Ah, more Verizon propaganda. Actually, the wholesale prices are not below cost, as regulators have tried to calculate those costs. But that is what the argument is all about -- calculating what the true costs are. But nice try.

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Washington, D.C.: Are not Bush and Commissioner Powell responsible for the FCC's consistent caving in to VZ? Under the Dem leadership competition at least had a chance. Now it is being crushed at every turn.

Steven Pearlstein: That is certainly one point of view with alot of currency around town. Let is be said that Commissioner Powell has a good working relationship with Verizon, shall we say. And Verizon also has an advocate in the White House in the form of Treasury Secretary John Snow, a former Verizon director, who puts his two cents in during those informal Monday lunches in the White House mess with the Bush economic team. I know that because his spokesman confirmed that to me yesterday.

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Ashburn, Va.: Verizon was seeking to kick CLECs off their network but then when "negotiations" began for new pricing one requirement they put was that the CLEC could not move to their own network. The TRO was all about money. Not about consumers or what was best for the industry.

Steven Pearlstein: Ashburn, Va/ Now what company is there? Ah, yes, MCI. Thanks for that observation, though.

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Alexandria, Va.: Mr. Pearlstein,

Please tell us: Who at Verizon hurt your ego so much that you are going on such a vendetta? You arguments are weak and your reasoning flawed. This has all the markings of a personal get-even campaign.

Steven Pearlstein: This is a company I've been watching for years, before it Verizon (in fact, if you look in the clips, you'll find an article by me raising questions about the wisdom of the merger that created it). You call it a vendetta. I call it a longtime interest and consistent attitude, which only gets reinforced every time Verizon sends its team in to convince Post editors and writers of how the big bad regulators are ruining the telecom industry and market.

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Steven Pearlstein: I sense another Verizon exec. is on the line. I've written some pretty tough stuff about ATT, so if your suggestion is that I'm in their pocket, forget it. MCI, too. But it is Verizon which has the reputation for a scorched-earth strategy, and that's what I was writing about today. This sounds like the whining of a young child who, when confronted with his misdeeds, is quick to point out that Johnny or Sally did the same thing.

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Steven Pearlstein: Lots of telecom experts on line this morning.

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Baltimore: Thanks for another column highlighting what's really going on in the business world. It seems to me that we're returning to the old days of "trusts" from the late 19th century that Teddy Roosevelt was so famous for opposing. More and more industries and beginning to become monopolies/oligopolies via takeovers and mergers and the reduction of government oversight. The sectors seem to be then run for the benefit of the managers rather than consumers. They're following the classic model of Monopolistic behavior from Introductory Economics. Which I'm all sure we remember is a bad thing. The music industry is a perfect example of this. How far will this trend go? Is there any hope in the near future of reversing this?

Steven Pearlstein: What is going on today is that we are trying to transform telecom from a regulated monopoly model to a competitive model. The transition is difficult, and yes, the regulators sometimes make mistakes. But there is no really easy or perfectly fair way to do this. What will NOT work is giving in to Verizon's whining for full deregulation now, with them having the huge advantage of their monopoly customer base plus a fantastic network paid for by consumers and a huge head-start on any other facilities-based competitor.

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Washington, D.C.: To be blunt, do you think it's appropriate from a media ethics standpoint to use your platform at a major newspaper to kick the crap out of one company in a way that obviously betrays your personal bias and animus against that company?

Steven Pearlstein: Its not personal animus toward a company, its personal animus toward the way this company is behaving at this time. That's what columnists do, just like on the Wall Street Journal editorial page. I don't see you complaining about their "animus" against Reed Hundt.

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Steven Pearlstein: The difference, quite bluntly, is that ATT and MCI want the chance to get into the competition and Verizon and the Bells want to keep out competitors for as long as they can. So because I'm for competition, I favor the new rivals position. Verizon and the Bells aren't for competition except when it comes to their using their monopoly profits to finance their entry into new areas.

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New York: Hey, wasn't it ATT who kept fighting tooth and nail to keep Bells from offering long distance, -- talk about regulatory morass --- how come they are all of a sudden the good guys. Aren't they the one's use the front group Voices for Choices!

Steven Pearlstein: Yes, it was ATT. And in the end, regulators didn't fall for it and insisted that ATT face the full brunt of competition for long distance, which has unleashed a ruinous price war. The system worked, however imperfectly. And what Verizon is now doing is trying to prevent the system from working by never settling for decisions that have been made. This isn't a question of which company is the one that always stands with the angels. It is a question of seeing through corporate arguments that are faulty and criticizing corporate behavior that shows a pattern of disregard for the public interest.

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Greenbelt, Md.: Pearlstein,

You hang in there, I work for Verizon and you are right on. Keep up the good fight.

You know anyone who's hiring?

Steven Pearlstein: Thanks. I was beginning to feel a bit lonely.

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Steven Pearlstein: My advice: negotiate the best deal you can and get on with life.

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Buffalo, NY: As a manager for a CLEC since 97' I've seen first hand the way Verizon ignores the rules, creates confusion, and attempts to run it's competitors out of business. To all that say "well that's just business" I would say, that is just business if we're all playing on a level playing field. When you have had a monopoly position you have all of the advantages so there is no level playing field. The question is what recourse do Consumers and the CLEC industry have. The FCC has not shown a willingness to force Verizon to live up to the rules of the Telecom Act, The state PSC will only state the "FCC regulates the Telcom Act" so where do we go from here?

Steven Pearlstein: I'm not sure that regulators never enforce the act, but obviously your complaint has been made by more than a few CLECS (those are the competitive upstarts who want to compete against the Baby Bells by using, in part, some of the Bells own network equipment, paying a wholesale price for the privilege.)

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Washington, D.C.: You claim that wholesale rates are not below cost simply because they have been set by regulators but doesn't that beg the question? The methodology by which regulators set wholesale rates does not even purport to gauge Verizon's actual costs. Instead "cost" is calculated at the cost that would be incurred by some optimally efficient hypothetical competitor. Aren't you being a little glib when you dismiss a question about the economic basis for regulatory policies that require Verizon to provide competitors with access to its network at prices that are below Verizon's actual costs?

Steven Pearlstein: Do you think they came up with this methodology one afternoon while sitting on a bench? Do you know how many experts and economist they consulted. And how many filings were made by Baby Bells. Obviously you think they are stupid or they are bought-and paid for. I don't. And I suspect if the FCC had come up with some alternative methodology that fell short of your recovering your full historic costs, you would have whined and sued and stomped your feet until you got your way, just as you are doing now.

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Alexandria, Va.: Steve,

It seems that you have resorted to name-calling. You should stick to answering the questions professionally and not slamming people who you "sense" are Verizon execs or others that disagree with you.

Pearlstein reply: I sense another Verizon exec. is on the line (wrong). This sounds like the whining of a young child who, when confronted with his misdeeds, is quick to point out that Johnny or Sally did the same thing (wrong, again Steve).

Who's pocket did you say you were in? It wasn't clear by your replies.

Steven Pearlstein: Fair point, Alexandria.

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Hometown, Md.: Did you ever think that the reason that MCI was not seriously punished was due to the fact that they owned UUNet? The bulk of the fed's internet traffic rides this backbone, and the fed could not afford to lose this conduit, especially after 9/11? It would have taken the fed years to migrate off of their network.

Steven Pearlstein: I'm sure that was a factor. Like the defense contractor who is reinstated quickly after debarment because they are the sole source provider.

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Columbia, Md.: Wonderful column today Mr. Pearlstein. Looks like you've stepped on a few toes based on the responses today too. I am simply amazed at the number of people who apparently cannot recognize corporate propaganda when it is right in front of them.

Keep up the good work.

Steven Pearlstein: Thanks. Our time is about up. See you next week.

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