(FORTUNE Magazine) – Ed Whitacre had a blunt message for the Michigan state utility board members: They were killing his company. The chairman and CEO of SBC Communications had dropped by the government agency in late August, loaded with a grim expression and a slide show to back it up. During the 22-hour meeting, he chided the commissioners for forcing him to rent his phone network to competitors at cut-rate prices. Their actions were ruining SBC's profits and diminishing its ability to compete, he said. In his trademark unhurried Texas cadence--and with his trademark directness--Whitacre explained that their actions would come back to haunt them. Keep the rates low, he warned testily, and SBC would be forced to start firing its Michigan employees. Within several quarters, the telco might even be bankrupt.

The contentious meeting ended on a conciliatory note, with both sides promising to revisit the issue. But Whitacre's fight was far from over. Over the next six months the 61-year-old crisscrossed the country, waging what seemed like a one-man crusade to repeal federal rules that require SBC to resell its network at deep discounts. He decried the regulations in speeches to investors and trade groups. He sat with federal policymakers, members of Congress, and newspaper editorial boards. In each meeting he trotted out the same stats: SBC was losing over 12,000 customers a day, revenue had dropped more than $1 billion in the first half of 2002, and the company was cutting jobs--20,000 of them in 2002.

Whitacre also took to blasting companies like AT&T that were reselling his service, accusing them of cherry-picking his best customers. By November the fight had gotten personal enough that AT&T CEO Dave Dorman announced to a group of investors, "I'm tired of Ed Whitacre saying you're not a real man unless you've got your own facilities." Some executives at the other Bell telephone companies--firms that usually march in lock step on political issues--started distancing themselves from Whitacre's message of gloom and doom.

But Whitacre wasn't out to make friends. He had a bigger goal: to persuade the Federal Communications Commission, which had the power to decide whether to keep the wholesale discounting scheme in place. In late February the agency finally took up the issue. And for the week running up to that point, the outcome seemed certain. Chairman Michael Powell, one of three Republicans on the five-person panel, favored ditching the rules; the other conservatives seemed certain to follow his lead. But before it came time to vote, Kevin Martin, another Republican commissioner, offered a rival plan granting the states broad authority to set telecom policy and wholesale prices, essentially affirming the status quo. Two commissioners sided with Martin when the matter came to a vote. In the press, that outcome was presented as a blow to Powell, but perhaps just as damaged was Whitacre.

But anyone who thinks Whitacre is just going to slink away hasn't been following his career closely enough. A 40-year veteran of the Bell System, Whitacre got his start as a facilities engineer--a job that included measuring telephone wire--while earning an undergraduate degree at Texas Tech. He made his way to the top by working hard and speaking his mind, practices he's not planning on ending now. "I feel a lot of frustration," he says, leaning his 6-foot, 4-inch frame back into a leather couch in his tidy San Antonio office, "but I know you can't just stop in your tracks. I am not a quitter." So in the month since the FCC decision, Whitacre has redoubled SBC's efforts to become more than a local phone company, pushing to get into the long-distance business, moving to bring out better and faster broadband service, drafting plans to make the company's wireless goals work, and even hinting that he might take SBC into the satellite TV business.

That's not to say he's accepted the FCC's decision. Even though the details of the ruling have yet to be released, SBC has announced that it will appeal. And Whitacre is now saying legislation may be the only way to reverse the discounts. Let the op-ed pieces accuse him of complaining, let his rivals call him a monopolist--Whitacre is mad as hell. "The FCC ruling sends a terrible message to businesses across every sector. It simply isn't fair," he says. "But they'll say I'm whining."

To grasp why Whitacre is fighting so hard, it is helpful to understand how the industry became so fractured in the first place. The Telecommunications Act of 1996 aimed to bring competition to the 100-year-old local phone monopoly by requiring the Bell telephone companies to rent parts of their networks to competitors. No one, the thinking went, could afford to recreate an entire local phone network, which snakes through every block of every town into virtually every home. The Bells say that is reasonable, but they found plenty to argue about in the FCC's interpretation of the act, which required them to rent out not just the capital-intensive copper wires that lead into users' homes, but other pieces of the network that could easily be purchased--switches for directing traffic, say--at a big discount. The states got to set how much the Bells should charge for access to the network. States that had long been trying to entice competition now had the perfect tool to build it. They set rates low, and many are considering going even lower.

The result has been burgeoning competition and some very happy consumers. In late 1999, AT&T started reselling Bell lines in just one state. Now it boasts more than 2.5 million local-phone customers across the U.S.--all without installing a single copper phone line. MCI, a unit of bankrupt WorldCom, sees local resale as a bright spot, and it has been blanketing the airwaves with commercials featuring Danny Glover hawking local "all you can eat" MCI Neighborhood service. The Bells have been forced to respond with their own discount plans and calling packages. Says Whitacre: "It's not unlike Anheuser-Busch bottling beer, and just as it comes off the assembly line, they're forced to sell it to one of their competitors at 60% of their cost--except in our case, we have to keep on maintaining the system too."

Whitacre's combative stance has set him apart from the other Bell CEOs, who opted to lobby against the wholesale rates largely behind the scenes. He insists he has no choice, given that SBC's states have set some of the lowest rates in the nation. But some longtime observers of the telecom regulatory scene suggest that SBC's CEO lets his ire drive his strategy, as well as the movements of his lobbying team, which includes former Commerce Secretary Bill Daley. "We agree with SBC on policy, but there's a style difference," says one Bell executive. "In my mind, they were somewhat strident on the issues."

Ed Whitacre has never been afraid to cut his own path. For a time, he seemed to be the man who would remake SBC into the anti-Bell, modernizing the company and making it more competitive. Shortly after the telecom law was signed in February 1996, Whitacre organized a retreat in Ojai, Calif., for his top lieutenants. There they crafted a strategy to transform the company, which at the time served only five states and was known as Southwestern Bell. In April the first part of the strategy came into play when the company announced plans to acquire Pacific Telesis for $17 billion. It was a bold purchase, but not unexpected. Whitacre's next move, however, surprised even longtime telecom watchers. He entered into talks to acquire AT&T, then the country's largest phone company and SBC's former parent. The deal would have rewritten the competitive landscape and instantly transformed SBC from a regional Bell into a national company. It was such an outlandish notion that the FCC chairman declared the combination "unthinkable," effectively killing the deal. Whitacre took the lump but kept on buying. When the PacTel deal closed, he agreed to swallow up Southern New England Telephone Co., then Ameritech. By the middle of 2000 the company was servicing 60 million local phone lines in 13 states. Its market capitalization surged past that of AT&T.

In addition to bulking up, Whitacre also refocused the company, turning the renamed SBC toward becoming a one-stop shop for voice, data, and wireless services to corporations and homeowners alike. Whitacre launched an ambitious plan to upgrade much of the company's phone network for high-speed Internet access and acquired Sterling Commerce, a software firm that helps companies do business over the Internet.

By 2001, with Whitacre's transformation just going into effect, the bottom dropped out. As the dot-com bubble burst, the big tech companies SBC serves in California imploded. The rest of the economy soon followed, damaging corporate sales. A much-hyped plan to offer competitive local phone service in 30 cities outside SBC's footprint fizzled. With the demand gone for e-business and superfast data lines, Whitacre found himself defending the legacy business of the Bells he had bought: selling local phone service. But the old business isn't the same old business.

Although the Bells have been out fighting the resellers, many analysts feel wireless carriers and cable operators are a much greater long-term threat to companies such as SBC. Cox Communications, a cable operator based in Atlanta, has successfully grabbed at least one in three customers in some of the communities where it offers phone service over its cable network, including wealthy SBC strongholds such as Orange County, Calif., and San Diego. Cable modems and DSL, the Bells' own high-speed Internet service, are making second phone lines obsolete. And about 3% of households nationwide have ditched their local phone service and use wireless phones exclusively. Talk to any untethered college student or recent grad and you quickly understand how a whole generation of young adults may never sign up for a dial tone from the phone company. More troubling for SBC, such alternatives are especially appealing to the most desirable, tech-savvy, and high-spending customers. FORTUNE, working with industry suppliers, estimates that wireless substitution, cable telephony, and high-speed Internet accounted for almost 30% of the three million residential lines SBC lost in 2002.

But for now, it is resellers that are taking the biggest bite out of SBC's local phone business. SBC says local voice revenue, its biggest source of sales, last year dropped more than 7%--a decline SBC firmly blames on the resale platform. Competitors argue that SBC should be grateful for the resellers: At least the Bell gets wholesale revenue when it rents out a phone line. But SBC counters that it still needs to spend money to maintain and service those wholesale lines--making the sales money-losers at the rates set by the states.

Investors, convinced that regulations and competition are taking a toll, have pushed down SBC's stock 42% in the past 12 months to a recent $21. The once-mighty Bell has underperformed all the major indexes and two of the other Bells. Only shares of troubled Qwest have fared worse on Wall Street. In late February debt-rating firm Moody's downgraded SBC, citing concerns about competition and profitability. "They are not crying wolf," says Scott Cleland, a telecommunications analyst with the Precursor Group in Washington, D.C. "These wholesale rates are deadly to their profits, and they have to fight it."

It's a beautiful spring day in Burlingame, Calif., and Whitacre is taking his talk to the people. He's leading a meeting with 600 California-based executives of SBC, and his message to employees is clear: Despite the regulatory challenges, SBC will succeed. "We will fight until we just can't fight anymore," he says. "But set that aside, and you and I still have a business to run." During a coffee break, Whitacre mingles easily with the employees, many of whom greet him with a sort of starstruck awe. His handshake is more like a gravitational pull, drawing people into his long shadow. During a freewheeling question-and-answer session, he scolds employees who don't use SBC's services, including Cingular, the cellular carrier jointly owned by SBC and BellSouth. "There's no excuse for any of us to have anything but a Cingular wireless phone. If you see an employee with something else," he says, his dry Texas drawl grinding to a halt, "you should stomp it into the ground."

Crushing the competition is one thing, persuading people to buy your service is another. But if SBC is going to buck the states, Whitacre needs new forms of revenue growth. Hawking Cingular service--and not just to employees--is one of the key ways to get there. Dissatisfied with the wireless company's performance through much of 2002, Whitacre in November dispatched his chief operating officer, Stan Sigman, to turn the company around. If SBC residential customers are going to go all-wireless, it might as well be on Cingular's network. And SBC is expected to soon announce an integrated wireless-wireline service that essentially allows customers to use a bucket of minutes on their home or cellular phones. To match resellers' offers, SBC is also launching its own MCI-like calling plan in some states, featuring unlimited local and long-distance service.

Meanwhile, SBC is fighting the broadband war against cable through its relationship with Internet-content darling Yahoo. Last year the two rolled out a co-branded service that attempts to do for broadband what AOL did for dial-up.

SBC also is experimenting with dragging fiber cables directly to customers' homes, a service techies consider the Holy Grail of broadband. Most phone companies install fiber between switching offices, then run copper--a poor medium for transmitting high-speed data--into homes. At a luxury-apartment development in San Francisco, the company is installing fiber into each unit using a technology called passive optical networking, which allows access to the Internet at up to six megabits per second--about four times as fast as typical DSL service. SBC executives say it is too soon to know when it will deploy fiber more broadly: The equipment costs are high, and SBC--not surprisingly--has questions about how the new fiber networks will be regulated.

Whitacre's biggest bet yet in fending off cable took everyone by surprise. While SBC has been long averse to owning and operating video networks, Whitacre appears to be weighing an acquisition of satellite-television operator DirecTV--a prize also sought by media heavyweights Rupert Murdoch and John Malone. SBC already resells Echostar's Dish service to customers who want it, but owning DirecTV would give SBC more pricing flexibility and control. Whitacre says he believes SBC needs some sort of video offering to be competitive with cable, but he won't comment on DirecTV.

Whatever decision Whitacre makes on DirecTV--a bid is by no means assured--shareholders can bet he'll have the backing of his team. Jim Kahan, head of corporate development for SBC, says that when Whitacre and his lieutenants evaluate a possible deal, a bunch of people gather around that big leather couch in the CEO's office and talk through the proposal. Whitacre asks everyone's opinion, usually starting with the most junior person in the room. "He's very smart, very direct, and very clear-thinking," says Hollywood veteran Terry Semel, now CEO of SBC's broadband partner Yahoo. "The team around him was decisive, able, and very nimble."

Which is why a lot of SBC's fans believe it would do well to just shut up and compete already. There's little question the company can rally and be flexible when it needs to. When terrible service problems developed in the former Ameritech region, Whitacre scrapped a reorganization that would have eliminated some operating positions. He instead dispatched some of his best people to run the Midwestern operations like a separate business --with its own president and its own network engineers--to fix the problems. Today state utilities regulators concede that the quality of service is much improved.

SBC executives say that kind of leadership will help the company navigate through this rough patch. To satisfy shareholder activists, Whitacre has implemented new corporate-governance policies, including expensing of options. (Whitacre's compensation, which in 2001 climbed to $21 million in stock, cash, and special grants, has also been a target of shareholder activists. Last year his pay dropped 60%, to $8.6 million.) To satisfy Wall Street, he's pared back debt, giving SBC the strongest balance sheet in telecom. And to win back customers, he has quietly hired 1,000 salespeople, many from WorldCom, to sell services aggressively to small and medium-sized businesses.

In addition to the new services and product offerings, SBC is getting ready for another wave of cost cutting, this time by consolidating calling centers and--bad news for Lucent and others--trying to squeeze even more discounts out of suppliers. All this is intended to make SBC an even stronger competitor. "If I thought I was doomed, I'd be out trying to sell the business or try another tactic," Whitacre says bluntly.

Not that Whitacre is done fuming about the FCC's recent decision. Throughout an hourlong conversation with a reporter, Whitacre keeps steering the discussion back to regulatory issues. Each time he tries to describe the situation, he shakes his head incredulously, as if he can't even believe his bad luck. When pressed to talk about sources of growth, Whitacre hesitates. "We cannot overcome the impacts" of the current wholesale rates, he says firmly. "We can mitigate them somewhat. But we cannot overcome the financial impact. Not in the short term."

And so Whitacre is getting ready for another round of phone calls, speeches, and meetings to make his case. Despite the tough odds, he remains hopeful that some policymaker will see things his way. "I'm always the optimist. I'm optimistic that someone will wake up and say, 'This is not right. This is wrong.' " All telecom will be watching to see if Whitacre's grit pays off this time.

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