Bells Are Ringing

Ray Gifford was stumped.
The questions seemed so simple.
Why have hundreds of US West customers had to face waits of up to five months for telephone service?

Why have these problems plagued the company for five years?
A parade of US West Colorado division vice presidents--in gray suits and trim skirts--took turns at the microphone, trying to provide the answers to Gifford and the two other members of Colorado's Public Utilities Commission, which had summoned them to a hearing last month.

The executives--half a dozen or so--blamed the problems on everything from continuing population growth to spring storms and flooding; from six accidental cable cuts to vandalism to the demand for lines created by the hordes of media that descended on Columbine High School in April and May.

Everything but themselves.
One even told the commissioners that the phone network was getting "hardening of the arteries" because it simply couldn't accommodate the demand on its existing infrastructure, especially with the rise of the Internet and the need for thousands of new computer connections.

Gifford, a Republican who was appointed to the PUC earlier this year by Governor Bill Owens, wasn't satisfied. US West pays its shareholders the highest dividend of any of the regional Baby Bells, he noted, even though it has a reputation for offering the worst service anywhere.

Most perplexing of all, however, was a chart compiled by the PUC staff showing that despite the growth, despite the natural and unnatural disasters, despite the vandalism, US West's investment in Colorado's network--the cables, switches and circuits that make telephone service possible--has declined dramatically over the past three years.

For example, the figures revealed that the company spent $70.3 million on transmission equipment in 1996 but only $51.4 million in 1998, and the budget for cable and wire additions went from $26.2 million to $10.9 million during the same period.

And Gifford wondered aloud why US West would cut back on investments in its network just as AT&T geared up to offer its own local telephone service over cable-television wires, a move that would potentially create genuine competition for residential customers.

"It mystifies me," Gifford told the audience.
Three days later, US West gave the commissioners, the public and everyone else in its fourteen-state region what may have been the real answer.

US West--which had been involved in merger talks with upstart fiber-optics company Global Crossing--announced that it would instead merge with Denver-based long-distance carrier Qwest Communications International. The $48.5 billion deal created a telecommunications powerhouse with 25 million customers and a $12 billion annual revenue stream. The new company, to be known as Qwest, planned to pour US West's accumulated riches into developing a system of fiber-optic cable lines that will zap voice, data and video traffic all over the globe.

The deal marked a major transformation for US West, which instantly shed its reputation as a dowdy old Baby Bell saddled with outmoded technology for the far more profitable role of telecom trendsetter. The agreement also marked a personal triumph for US West chairman Sol Trujillo, who as a fresh-faced MBA from the University of Wyoming was hired by US West in 1974 as an economic forecaster and who now reportedly stands to make $100 million from stock options and other incentives that were part of the agreement (see sidebar, page 28).

It's a long way from the Park Avenue suite in New York where the deal was consummated to the humble Logan Street headquarters of the Colorado PUC. So what could lousy telephone service in Conifer have to do with a multi-billion-dollar merger that was the talk of Wall Street?

A great deal, as it turns out. The Coloradans who have flooded the PUC with more than 5,000 complaints about US West in the past year may have helped the company pull off the most daring transformation in its history, proving that in the new age of telecommunications, customer service can take a backseat to corporate strategy.

From Denver to Des Moines to Seattle, the complaint has been the same: US West has failed to provide decent telephone service. "It's pretty well-known that their service quality and delays in hooking up new service and responding to complaints has left something to be desired in Iowa," says Gary Stewart of the Iowa Office of Consumer Advocate.

Like residents in the other thirteen states served by US West, Iowans have complained about the company for years. Although Iowa hasn't seen the explosive growth that Colorado, Washington and other states have, the experience there has been remarkably similar: hundreds of people waiting weeks for new lines.

"I was talking to a gentleman yesterday who is an executive for another utility company," says Stewart, "and he was complaining about how long it took to get telephone service. He built a new home and went weeks without service. I believe that's a fairly common occurrence."

Like everyone else, Stewart has been asking himself just what the problem was with US West. He believes a simple explanation can be found in the data that the phone company gave the state.

"We've had trouble getting US West to invest in their local telephone network in Iowa," says Stewart.

The data shows that the amount of money the company has spent on its telephone network in that state has been static since 1995, despite increased customer demand for new lines. In several categories, like underground cable installation and circuit equipment, the company's investment has actually declined.

It's a pattern that holds true throughout US West's territory.
In Oregon, the state Public Utilities Commission opened an investigation into US West's construction budget earlier this year after discovering that the company had canceled planned projects in 1998 that could have alleviated service problems in several Oregon communities. The commission acted after the U.S. Forest Service complained, saying its employees in several different towns were going without phone service.

"The company has obviously declined to improve service in some areas, and it's time to investigate what's behind their decisions to withhold investments and whether they're living up to their obligation to provide service in their territory," said Oregon PUC chairman Ron Eachus in March.

As it turned out, US West's investment in its Oregon network--as in Iowa--has been flat since 1996, despite the fact that Oregon is one of the fastest-growing states in the country. However, US West's profits in Oregon increased from $64 million in 1996 to $103 million in 1998.

Officials in other states report similar trends. "Their investment over time in the network has declined," says Glenn Blackmon, assistant director for telecommunications at the Washington Utilities and Transportation Commission. Although Seattle has boomed during the '90s--attracting hundreds of thousands of new residents in the last decade--Blackmon says US West has frozen spending on the network at about $300 million per year.

The story is the same in New Mexico, where some rural and suburban residents have been told that the only way they can get a phone line is if they pay US West $50,000 to cover the cost of adding space on the network.

"Between 1995 and 1997, there was a sharp decline in investments in telephone [infrastructure] in New Mexico," says Rich Weiner, assistant attorney general for the state. "In a lot of places, the infrastructure is exhausted. There's been a lack of facilities in some places for years."

US West is currently battling state regulators in New Mexico over their proposal to reduce phone rates by $5 a month because of the company's excess profits. Since the case is pending, Weiner says the figures on US West's investment in the network in 1998 have been marked confidential and cannot be released.

In Colorado, where the PUC is trying to decide whether to levy a multi-million-dollar fine against US West for delayed customer phone hookups and repairs since January 1998, regulators tell a similar story.

"While the demands on the network have been increasing, the investment has been decreasing," says Dian Callaghan of the Colorado Office of Consumer Counsel. At the same time, consumer complaints and "held orders"--requested lines that the company is unable to connect--have skyrocketed. PUC data shows that the number of people waiting more than thirty days for a telephone has risen sharply over the last year, with 1,400 Coloradans waiting one month or longer for a phone line in March alone.

During the same period, US West's profits in Colorado have soared, with the company posting a profit margin of more than 12 percent.

However, while the phone company was unable to provide many Coloradans with a line, it was still concerned with their emotional well-being. People frustrated with delays are now transferred to a 1-800 call center known as the "Center for Customer Experience," where technicians trained in empathetic listening can feel their pain.

"I have to tell you--in the first couple of weeks, the response has been tremendous," Anne Larson, US West vice president of local network operations for Colorado and Wyoming, told the PUC last month. In just three weeks, employees at the center talked to 4,100 Coloradans who were facing delays in getting telephone service. ("I just hope you didn't have to spend too much money on consultants coming up with that 'Customer Experience Center' name," Gifford said.)

In response to Westword's request for comment for this story, US West supplied several written statements. The company notes that the large majority of service requests are filled promptly. "Through mid-year, Colorado customers have placed 1,543,405 orders for service," reads the statement. "Almost 97 percent of those orders were filled successfully by US West, despite extraordinary events, including six major cable cuts and major flooding in southeastern Colorado, which pulled technicians away from their regularly scheduled installation and repair jobs."

To deal with the pressure, the company says it will finally increase its investment in the Colorado telephone network by 30 percent this year, to $873 million, and boost construction hours by 30 percent through overtime and outside contracting. The company also plans to hire 100 additional repair technicians and move more engineers out of the central office and into the field.

But the question remains: What happened to the money that the company saved by reducing investment in previous years?

Washington State's Blackmon believes US West diverted the money, which could have been spent expanding the network, into highly publicized high-tech services for the Internet in order to better position itself for a sale or merger. Not coincidentally, Wall Street has become infatuated with companies involved in the Internet, and stock prices have sailed into the stratosphere for many of them.

One of US West's primary focuses has been on its high-speed Digital Subscriber Line (DSL), marketed as MegaBit Services, which allows Internet users almost instantaneous access to the Web, without the delays that constantly annoy anyone surfing the Internet. The company has invested millions in it, and the service is already available to 5.5 million customers; plans are in the works to expand it to millions more, according to US West's annual report.

"Things like DSL create a patina of being a high-tech, forward-looking company," says Blackmon. "That made them look more forward-looking going into the sale." Washington State regulators have been perplexed for years as to why the company was refusing to invest in the telephone network, says Blackmon. He thinks US West made a decision at the highest level that the company must become more high-tech-oriented as it prepared for an eventual sale or merger like the one with Qwest.

"Sol Trujillo's big thing is that they get the company in front in certain areas, like video over telephone wires," says Blackmon. "They were focused on things that look good from the outside, with curb appeal. They didn't spend a lot on getting rid of outdated analog switches. Potential buyers wouldn't notice that."

US West's most recent financial reports back up Blackmon's analysis. The company credited a 9.4 percent jump in second-quarter profits in 1999--to $421 million--to a huge demand for DSL service. US West expects to have more than 100,000 DSL subscribers by the end of the year. The company told Wall Street analysts that it boosted capital spending by 21 percent to $981 million during that time, largely to accelerate its rollout of DSL and other data services.

Qwest officials readily acknowledge that US West's high-tech Internet investments played a key role in bringing the two companies together. "US West has been very aggressive in terms of development of fiber optics, and they're one of the recognized leaders of the [Bell companies] in terms of new technology," says Tyler Gronbach, a spokesman for Qwest. "This merger is not about Qwest getting into local telephone service; it's about Qwest furthering its goal to bring the next generation of Internet communication to customers."

However, consumer advocates say it's Colorado's local telephone users who have been put on hold by US West's foray onto the Internet.

"There's only so many capital dollars available," says the Office of Consumer Counsel's Callaghan, who agrees with Blackmon's analysis. "The competition [for investment dollars] is between basic [regulated phone] service and the unregulated services [like DSL]. Their focus is on the bells and whistles, not basic service."

In speeches to investors and employees, Trujillo has emphasized the importance of the high-tech ventures. In his remarks to shareholders at the company's annual meeting in New York City in May, Trujillo repeatedly talked about the promise of the Internet and US West's effort to become a key player in the fast-changing digital world.

"My vision for US West is that we must be absolutely Internet-focused in terms of everything we do," Trujillo told the crowd. "Ours is a strategy built on innovative products and services integrated in unique ways that make voice, data, Internet communications, wired or wireless services work together."

Trujillo did not make a single reference to the company's telephone-service problems anywhere in the speech. However, he did note that US West posted record profits of $1.5 billion in 1998 on total revenues of $12.4 billion. The company is the 135th largest in the country based on revenues, said Trujillo, but the 53rd largest based on profits.

The US West chairman also made it clear that the company's high-tech ventures were now driving its business plan. "We have tripled new revenues from new-growth businesses from 1997 to 1998," he boasted. "This incredible new growth is coming from outside our traditional telephone-company business, and it has only just begun."

Trujillo's upbeat, optimistic speech may seem odd to Coloradans who constantly hear about the phone company's service problems. US West was rated dead last for customer satisfaction among regional phone companies last year, according to a survey by J.D. Power and Associates. It tied for last place again this year.

But then, the speech wasn't aimed at average Coloradans who merely pay their phone bills every month; it was delivered in New York, and its intended audience was Wall Street and the investment bankers who can make or break multi-billion-dollar mergers and acquisitions.

In the financial world, US West was seen as a company in desperate need of some sort of wedding. The question was not just who the intended spouse would be, but whether it would be a shotgun wedding or something more friendly. And when it came to a potential dowry, size mattered.

"The general consensus in the industry was that they needed to take on a partner to grow," says Bob Diddlebock, a former Denver Post business reporter who now works as an analyst following telecommunications for Janco Partners Inc., a local investment-banking firm.

Diddlebock says the telecom world is changing so quickly and requires such massive investment in new technology that even a huge company like US West feels like it needs more resources to survive. "No one company has the money and brainpower to go it alone," he says. "In the telecom world, there's strength in numbers."

US West is actually one of the last of the Baby Bells to pair off with another large company. Bell Atlantic and Nynex have merged to create a Colossus in the Northeast, and three others--SBC, Pacific Telesis and Ameritech--are in the midst of joining forces to form a company that will extend from Chicago to Houston to Los Angeles.

In addition, long-distance companies MCI and WorldCom have already joined together to form a huge telecom pipeline company, and AT&T bought out Denver-based Tele-Communications Inc. and announced plans to eventually offer local telephone service over TCI's cable-television lines.

In May, US West had agreed to a $37 billion merger with Global Crossing Ltd., a Bermuda-based company that's raised billions for an ambitious endeavor to lay fiber-optic lines linking several continents. Global Crossing was widely seen by investors as an odd choice for US West, since that company has just 200 employees and no real experience with customer service. "The question was, how did these companies fit together, where was the potential synergy?" says Diddlebock. "Wall Street did not like [the merger], and both company stocks immediately went downhill."

There was widespread speculation on Wall Street that Denver-based Qwest might make a hostile bid to the US West-Global Crossing deal, and that was exactly what happened in June.

Since its birth in 1988 as a subsidiary of Southern Pacific Rail, Qwest has grown rapidly to become the country's fourth-largest long-distance provider. The firm was created by Denver billionaire Philip Anschutz, who bought Southern Pacific in 1988 and was canny enough to realize that the railroad's right-of-way would be an ideal place to lay a national network of fiber-optic cables.

Originally called SP Telecom, the subsidiary was renamed Qwest in 1995 after it bought a Texas company with the same name. (Anschutz sold Southern Pacific in 1996 but kept Qwest.)

As the demand for Internet access began to explode, Qwest found itself in an ideal position to sell space on its cable lines to long-distance companies and soon became a full-fledged long-distance provider. Last year Qwest paid $4.4 billion to buy the long-distance firm LCI International; today Qwest has more than four million customers and posted record revenues of $873 million in the second quarter of this year.

The firm has been popular on Wall Street as well, where it's viewed as a savvy innovator that stands to make huge profits off the rise of the Internet. Anschutz, who controls 40 percent of Qwest's stock, has seen his investment pay off handsomely. Largely because of Qwest, his billion-dollar fortune has grown several times over to an estimated $16.5 billion, and he was recently ranked as the fifth-richest man in the world.

Anschutz played a pivotal role in striking the deal between Qwest and US West. The reclusive mogul--who is so publicity-shy he once arranged meetings with local business editors and asked them not to refer to him as a billionaire in print--contacted Global Crossing chairman Gary Winnick and arranged a deal. If Global Crossing would give up its planned merger with US West, it could have Frontier Corporation, a major long-distance operator that was being pursued by both Qwest and Global Crossing. (Qwest and Global Crossing were already familiar with one another; in April 1998 they agreed to exchange capacity on each other's fiber-optic networks linking Europe and the United States.)

In a July 14 dinner at the Palace Arms restaurant in the Brown Palace Hotel, Anschutz, Trujillo, and Qwest chairman and CEO Joseph Nacchio hashed out the final arrangement. They agreed that Trujillo would become president of the new company's local phone and wireless business and would be a "co-chairman" of Qwest along with Anschutz and Nacchio. Many people doubt this cooperative leadership will last long, and the betting is that Trujillo may be out the door after the merger is finalized next year.

After the announcement, Nacchio told the media that US West's venture into high-speed Internet access was one of the things that made the company attractive to Qwest. In fact, just last week, Qwest announced plans to launch its own high-speed Internet service in thirty major markets by year's end. They include not only cities where US West already offers DSL, but New York, Los Angeles and Chicago as well. By merging with Qwest, US West may be poised to jump into the telecom major leagues, with the likes of AT&T and MCI/WorldCom.

"To compete in the Internet marketplace, you need three things: a state of the art network, a host of services that customers need and want, and the ability to deliver that to customers' homes," says Qwest's Gronbach. "If you put those three things together, it's an extraordinary opportunity to create a growth company well into the next millennium."

The phone company's investment in the Internet and other cutting-edge technology has paid off big-time, even if its local customers have had to suffer through years of poor service to make it all possible. (The 1998 rollout of the DSL Internet service also took a big toll on US West employees, who were upset at what they saw as a premature launch of the service, with customers berating them over glitches in the program, according to a source who worked closely with the company.)

Nacchio showed a prickly side after the Economist ran an article comparing him to a character in a Martin Scorsese film. "A short, plumpish, Brooklyn-born Italian-American, Mr. Nacchio has all the swagger and verbal braggadocio of Joe Pesci's mobster in the film 'Goodfellas,'" wrote the magazine in June.

Nacchio let the media know that he stands 5 feet 11 inches and weighs 193 pounds, and he sent a letter to the magazine stating, "If you ask anyone who has ever walked alongside me, they would tell you I don't swagger. And to correct one of your implications, the overwhelming majority of Italian-Americans are not mobsters."

Now that Nacchio is about to head up Colorado's telephone monopoly, he may have to learn to be less sensitive. He already seems to have been coached in "targeted communications" by US West's public-relations staff.

Before the merger deal, Nacchio and other Qwest executives were scornful of US West's service record. But now that the deal has been finalized, Nacchio is singing a different tune. "I feel pretty confident that Sol [Trujillo] has made the capital investments necessary to keep up with demand," Nacchio told the Denver Post, adding that the company had been unfairly criticized for its service record.

Even though the final merger is still months away, Qwest executives are already busy making plans to offer high-speed Internet access and data transmission in major markets all over the country.

The question now is whether Qwest will take local phone service seriously.
Gronbach insists the merged company won't neglect local telephone service. "We're talking about reducing the dividend to shareholders and reinvesting that money into the phone network," he says. "Post-merger, we intend to focus on that."

But the temptation to use the local phone monopoly as a cash cow for high-tech empire-building may be hard to resist, especially since there's already a precedent.

"US West didn't weed the garden they'd already planted; they were spending their time planting new gardens," says Diddlebock. "Their emphasis has to be to continue to deliver plain old telephone service."


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