[February 3, 2005]

Just for the record, here is what I envision Verizon Online's costs to be. I doubt that I am off by any significant amount, but may not have it down to the exact penny. The amounts are per month per customer.

• $26.95 Payment to Verizon—this is a tariff amount.
• $2.43 USF—Verizon requires this
• $2.00 Payment to MSN—no public record that I can find and this is based on an SBC-Yahoo deal. For all I know, MSN may be performing for free but I doubt it.
• $3.00 Bandwidth—I actually think this is low, but I am giving them the benefit of the doubt that they have held Level 3's feet to the fire and gotten a good deal. This cost is also averaged over urban and rural locations, with rural areas having much higher costs unless Verizon has a sweetheart deal with Level 3.
• $1.50 Customer service—at least.
• $1.50 Billing and Collections— payment to Verizon for bill stuffing and the cost of accounting.
• $1.30 Administrative overhead—ok, so I guessed.

Ok, we are up to roughly $39.00 per month or so, at least. Even if bandwidth costs are lower, there are a number of other overhead costs that have to be added, such as the amortized cost of customer acquisition plus churn. Given that Verizon is spending a fortune to acquire customers, that number is likely to be very, very high.

Please don't forget churn, which adds a significant number to the cost of acquiring customers. Then you have to add in the usual accounting numbers such as depreciation, company retirement funding and SBC or Verizon general management costs, plus regulatory costs, legal expenses, equipment and a host of other expenses that are part of the cost structure irrespective of whether the entity is operated as a subsidiary or in house.

At $34.95, their unbundled residential price, or $39.95, their unbundled lowest business price, there is no way Verizon Online is covering its cost of doing business. Of course there is always the incentive program, which yields Verizon Online $150.00 per customer per quarter for each net increase in customer count. If Verizon Online's contract is similar to their standard wholesale contract, the money is supposed to be spent on CPE equipment and so certified by their Chief Financial Officer. In other words, it is not available, in theory, to cover the $60.00 Verizon installation charge or overhead expenses.

I used to do cost accounting, rate analysis and tariff filing for a regulated industry, the railroads. We used formulas that calculated costs based on our out-of-pocket cost and for our fully distributed costs depending on how bad we wanted the business. If we were going for a high rate because the customer had no choice, then we used fully distributed cost formulas. If, on the other hand, we were facing competition, then we used out-of-pocket costs to make our case to the regulators when we filed the tariff.

I would be shocked if the phone industry did not have similar practices.

But wait, as they say on TV, there is more. Second telephone lines are going away. In point of fact, line count is down because of competition from CLECs to an extent, but more likely because second phone lines are discontinued as consumers shift to DSL instead of a dedicated dialup line. In addition, PRI lines—where analog Internet connections are answered, are also likely to be down as consumers move from dialup to DSL or cable, so that source of revenue is reduced. Further, as customers shift from local, facilities based Internet providers to those who use VNXX supported wholesale operations, each RBOC loses 93 cents on the dollar in revenue or more for dialup connectivity circuits.

It could very well be that the ARMIS database does not accurately reflect profit and loss from retail Internet activities by Verizon. That said, there is absolutely no doubt in my mind, nor should there be in anyone's mind that Verizon and SBC are selling below cost. Given that they make a profit from their wholesale contracts, why on earth are they are they doing it? Early on, Verizon Online charged $59.95 for their lowest priced business DSL service. Our own company was doing well competing with that rate, signing the bulk of those businesses we contacted. So Verizon Online lowered their price to $39.95 and gave away three free months. At that price, they do not make a profit, but they are successful in signing up the bulk of smaller businesses that tend to be cost conscious and once again, Verizon destroys "competitors" in favor of their unregulated subsidiary which doesn't make a profit at the expense of their independent affiliates, from whom they do make a profit.

The bottom line is simple. Verizon has retail and wholesale contracts with independent providers at a cost that is higher than their lowest priced "retail" bundled price and an unbundled price little more than the wholesale price. The result is that over 90 percent of DSL customers have chosen to save money (temporarily in my opinion), by taking the lower price from the unregulated subsidiary instead of an independent. This is monopolistic practice, by any definition, in my opinion.

 

1. Background

what the RBOCs really think about competition

missing the Internet revolution

Robert Cannon

2. Pricing and Cost Issues: predatory prices crush competition

RBOC costs, for the record

>3. Business Practices

4. Slamming and other dubious business practices

5. Networks

6. Customer Service

7. VNXX

8. Verizon's Petition for Forbearance

9. Unintended Consequences

10. Conclusion

RBOCs, why you need me