Fitch: US ILEC Access Line Erosion Heavily Weighted Toward Wholesale.

CHICAGO -- Total switched access lines showed a decline of 1.6% sequentially between the third and fourth quarters of 2005, and Fitch Ratings estimates that less than a quarter of this is associated with primary lines. The full-year 2005 access decline was 6.2% compared to 5% for 2004.

Of particular interest in the 4Q05 was the impact of cable multiple system operators' (MSOs) digital phone offerings on the ILECs. The fourth quarter represented the most widespread and aggressive cable MSO phone marketing that the sector has experienced to date. The quarterly decline in access lines was approximately 2.485 million, but adjusting for Hurricane Katrina and business line disconnections reduces the decline to approximately 2.089 million lines. Estimating adjustments for high speed data substitution as well as wholesale access line erosion reduces the decline to approximately 500,000 primary lines. Earlier period aggregate line losses would indicate that approximately two-thirds of all primary line losses are due to wireless substitution. Therefore, one-third of primary line erosion can be associated with cable phone offerings, or 165,000 primary lines.

Interestingly, cable MSOs reported more than 500,000 net new telephone subscriber additions in the fourth quarter. Therefore, this would indicate that approximately 67% of all cable telephony subscriber additions are coming from low-margin former UNE-P customers.

'It is likely this trend will continue as there are still significant numbers of wholesale access line subscribers that have made the decision to switch from the incumbent telephone company already and are easily attracted to competitor offerings,' according to Michael Weaver, Managing Director, Fitch Telecommunications and Cable team.

Other wireline data points would also suggest that cable MSOs are luring a material number of UNE-P customers, since wireline revenue trends are showing relatively modest declines from traditional services in spite of the competitive environment. Factoring in the strong digital subscriber line (DSL)-driven data results, wireline revenues are up modestly for full-year 2005.

The Fitch report, 'Quarterly ILEC Aggregates and Comparative Statistics' provides numerous operational and financial measures for the industry, representing approximately 95% of total industry access lines. This information is shown in a historical formal for easy trend comparisons. Additional trend discussion, aggregate data points, and individual operator comparisons are also available in the report.

The full report is available on the Fitch Ratings web site at www.fitchratings.com. The report is located under 'Corporates' and the 'Corporate Finance' header and then under 'Special Reports' once on the 'Corporates' home page.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.