The Securities and Exchange Commission has begun an informal inquiry into the methods used by 20 telecommunications companies to count their customers.
In the increasingly competitive industry, subscriber numbers play a critical role in how investors measure the success of companies as they invade each other's businesses and vie for market share.
In mid-June, the SEC sent letters to telephone industry giants, including Verizon Communications Inc., AT&T Corp. and Cingular Wireless LLC. Several cable companies, including Cox Communications Inc. and Comcast Corp., also received letters from the SEC, representatives from the companies confirmed yesterday.
Less than two weeks after the SEC sent out requests for information, Verizon revealed in a filing with the agency that it had overstated the number of long-distance lines it serves by more than 9 percent, or 1.5 million.
In its first-quarter financial report, Verizon stated that it had 17.5 million long-distance lines as of March 31, but in its filing Thursday the company said that the actual number was closer to 16 million.
Robert Varettoni, a Verizon spokesman, said the company's overstatement was uncovered during a regular internal review and was not related to the SEC's investigation. In its SEC filing, Verizon blamed the overstatement on an "internal system database issue."
Even after the reduction, Verizon remains the second-largest long-distance company, bypassing MCI Inc., which has approximately 15 million customers. AT&T, which reports subscriber numbers on an annual basis, stated that it had 30.3 million long-distance customers at the end of 2003.
"These companies are in a fierce battle with each other," said Drake Johnstone, a telecommunications analyst with Davenport & Co. "These numbers are important because they indicate how companies are doing relative to competition," Johnstone said.
Johnstone noted that subscriber numbers are particularly important to the hypercompetitive wireless phone industry, where the stock values of individual companies often rise and fall based on the quarterly reports of total customers.
Subscriber numbers first caught the SEC's attention in 2002 when the agency charged Adelphia Communications Corp., a Pennsylvania-based cable television company that has since moved to Colorado, with inflating its customer list in an effort to improve its standing on Wall Street. Those charges are still pending. Separately, four Adelphia executives are currently on trial in a New York federal court on fraud charges. The jury is deliberating after a four-month trial.
The SEC's subscriber probe, first reported by Wall Street Journal, is one of many so-called mini-sweeps the agency is conducting under the theory that problems at one company could be endemic to an entire industry. The SEC has taken a similar approach to supplier payments in the food service industry and reserves in the oil and gas industry.
According to one industry executive who has seen one of the SEC inquiries but who spoke on condition of anonymity, the agency is asking broad questions that are not specific to individual companies. The initial SEC inquiry seems to be an effort by the agency to examine how a sample of individual companies calculate their subscriber numbers.
For local, long-distance and cable companies, subscriber counts have become increasingly complicated as customers sign up for more than one service. After questions were raised about Adelphia's subscriber numbers, the cable industry implemented a common standard for reporting subscriber numbers.
Under the cable standard, announced in October 2002, companies report the total number of customers who subscribe to at least one service, most often the basic cable television package. Separately, the companies also report their total "revenue generating units," a term defined as the total number of subscriptions sold to a variety of services including high-speed Internet, premium television packages and telephone service.
For example, a cable company with 1 million subscribers may report that it has 3 million revenue-generating units if each cable TV subscriber also signs up for high-speed Internet and telephone service.
In contrast, MCI and Sprint, two of the nation's largest long-distance companies, don't officially report their total subscribers. Until yesterday, MCI regularly claimed that it had approximately 20 million subscribers. However, in response to questions yesterday, spokesman Peter Lucht said the company has approximately 15 million "pre-subscribed and specialty customers."
Lucht also said that, to his knowledge, MCI did not receive a letter from the SEC requesting information about its subscriber counts.
Staff writer Carrie Johnson contributed to this report.