The Bells' business model is also revealed through a closer look at the profit margins of specific telephone company product offerings. The exhibit below highlights findings from a Florida Public Service Commission report comparing the actual cost of various calling features to the price paid by subscribers. The Florida Commission found the profit margin on Bell South's Call Waiting feature to be 48,680%. Caller ID, which cost the customer $7.50 per month, had a 3,264% profit margin.
Source: "Report of the Florida Public Service Commission on the Relationships Among the Costs and Charges Associated with providing Basic Local Service, Intrastate Access and other Service by the Local Exchange Companies in Compliance with Chapter 98-277, Section (2) 1 Laws of Florida, February 19, 1999."
Many states, including New Jersey, Rhode Island and Massachusetts, still charge about $1 per month for Touch-tone service. But this service costs the Bells absolutely nothing because it was incorporated into network upgrades that were completed in the 1980s in order to provide customers with equal access to long distance companies. In fact, the Bells would incur an expense to offer old-fashioned rotary dialing service.
Excess profits are also common with directory services. The price for a directory listing in the Yellow Pages was traditionally kept above normal returns primarily because revenue was supposed to subsidize other costs of phone service. But many states have freed directory listings from regulation and those revenues no longer subsidize other phone service costs. Prices and profits remain high, however, because there is not enough competition to keep prices in check.
|Company||Operating Income Margin|
Source: 4th Quarter 1999 SEC filings.
Despite the expansion of their businesses into new areas, the Bells' overall profits are still coming mainly from captive customers. This isn't surprising, since the incumbents' share of the local phone market is 96% of all lines served. Below is BellSouth's breakout of revenues and profits as presented in the company's 4th Quarter 1999 SEC filing. The high percent of revenues and net profits that are derived from traditional telecommunications services is also found in other Bells. Local phone service continues to subsidize most of the Bells' other businesses.
|Percent of Revenues||Percent of Net Profits|
Source: 4th Quarter 1999 SEC filings.
Historically, the Bells have lost billions of dollars on business ventures beyond their core phone service business. In the 1980s, the Bells collectively lost over $11 billion in real estate, and by 1999 they had spent approximately $40 billion overseas, with very large losses. So, although the Bells have continued to talk about being global companies, their profits overwhelmingly come from the local telephone subscriber. And it is the excess profits generated by local service subscribers that have allowed the Bells to become "global" companies. Unfortunately, many of these ventures have just lost money. Here is an example from Bell Atlantic:
"In the third quarter of 1998, we recorded pre-tax charges of $485 million to adjust the carrying value of two Asian investmentsTelecomAsia, a wireline investment in Thailand, and Excelcomindo, a wireless investment in Indonesia. We account for these investments under the cost method.
The charges were necessary because we determined that the decline in the estimated fair values of each of these investments was other than temporary. We determined the fair values of these investments by discounting estimated future cash flows."
BellSouth provides a second example:
"Note FDevaluation of Brazilian Currency: We hold equity interests in two wireless communications operations in Brazil. During January 1999, the government of Brazil allowed its currency to trade freely against other currencies. As a result, the Brazilian Real experienced a devaluation against the US Dollar. The devaluation resulted in our Brazilian wireless properties recording exchange losses related to their net US Dollar-denominated liabilities. Our share of the foreign exchange rate losses associated with the devaluation recorded during the first quarter was $280 million."
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