TDS Telecom
TDS Telecom also achieved meaningful growth in 2004. Revenues at TDS Metrocom, TDS Telecom's competitive local exchange carrier (CLEC) operations, were up 7 percent, and revenues for the incumbent local exchange carrier (ILEC) operations rose 1 percent, for a consolidated TDS Telecom revenue growth of 2.4 percent. TDS Metrocom added 62,000 access line equivalents, while our ILEC added 8,000 access line equivalents. Both rates of growth represented excellent results compared to industry peers. ILEC operating cash flow rose by $13 million, while CLEC operating cash flow was flat despite an extremely challenging CLEC regulatory environment.

Data services are an important part of TDS Telecom's growth strategy at both the ILEC and the CLEC. The success of TDS Telecom's rapidly growing high-speed data offerings—and their future potential—is seen by the milestone the ILEC operations achieved in November 2004, when our Digital Subscriber Line (DSL) market share surpassed that of cable modems in those markets where our ILECs provide DSL service. DSL ILEC connections grew by 78 percent during the year. The company's CLEC also made good progress, with DSL connections growing by 44 percent.

Another growth driver for TDS Telecom is its long-distance services, where it operates as a reseller. TDS Telecom's ILEC has been very successful in increasing its long-distance customer base and penetration by offering large-minute plans in most of the states it serves, and unlimited plans in some states. ILEC long-distance lines increased in 2004 by 28 percent. TDS Telecom offers long-distance and high-speed data service offerings in packages, simplifying purchase decisions for customers and increasing customer loyalty.

During 2004, TDS Telecom began the construction of three Fiber-to-the-Premises (FTTP) trials. These trials are designed to determine how best to offer customers a robust triple play (voice, high-speed data and video) offering. In one of these trials, the company is also trialing ADSL 2+ technology, an advanced form of DSL with greater bandwidth, as another way to deliver the full range of services. At the same time, in its ILEC territories TDS Telecom continues to act as a marketing agent for EchoStar, a direct broadcast satellite provider.

TDS Telecom believes it needs to eventually offer a full range of communication services, including video. This is especially important as cable TV companies become capable of offering voice services using Voice over Internet Protocol (VoIP) .While fiber-optic technology and developments in DSL technologies like ADSL 2+ allow wireline telephone company providers to offer triple-play services, such new technologies require considerable infrastructure investment. While the economics of deploying these technologies are improving, it is important to choose the most effective combination of service features and cost. The best solution may vary based on the characteristics of a specific market and on customers' needs.

During the year, TDS Telecom continued to make its views known to legislators and regulators at both state and federal levels. Its ILEC business segment is dependent on reasonable regulation for a significant portion of its revenue streams. TDS Telecom put a good portion of its effort into regulatory reviews of inter-carrier compensation and the Universal Service Fund. With regard to these efforts, TDS Telecom has been encouraged by recent FCC comments, which underscore the importance of providing quality universal communications services to rural Americans. The FCC has also emphasized the need for an equitable revenue system that requires all technologies to compensate for the use of carriers' networks and to contribute to the Universal Service Fund. TDS Telecom strongly supports this approach.

Less encouraging, however, was an FCC ruling in late 2004 that significantly changed the rules governing network access for CLECs like TDS Metrocom—rules originally put into effect to implement the Telecommunications Act of 1996, enacted to promote greater competition. This recent ruling poses considerable challenges for CLECs that rely on the Regional Bell Operating Companies (RBOCs) for various network elements. TDS Metrocom is better positioned than many CLECs because it operates primarily on its own switching and transport facilities. However, FCC rulings restricting access to various RBOC network elements have negative impacts on TDS Telecom's CLEC's cost and revenue prospects. Additionally, subsequent price increases for RBOC facilities authorized by public utility commissions in several states, as well as increased competitive pressures, have also altered future prospects. As a result, TDS Telecom did an impairment review of our CLEC's intangible and fixed assets as of the end of 2004. The outcome of the review was that we recorded two non-cash impairment charges totaling $117 million, which affected TDS's overall income for the year. TDS Telecom is responding rapidly and effectively to the changing CLEC environment by emphasizing more profitable customer segments and trialing alternative last-mile technologies. On a positive note, based on an independent survey, TDS Metrocom achieved superior customer satisfaction and customer loyalty scores compared to its RBOC competitors, and TDS Metrocom is continuing to add customers at a rapid pace.

People are communicating more than ever before and are willing to try new carriers to meet their needs. This provides tremendous opportunities for those wired communications companies like TDS Telecom and TDS Metrocom that are strong, nimble and innovative enough to take advantage of these opportunities. TDS Telecom is essentially transforming itself to become the preferred communications company that meets the voice and broadband communications needs of customers in both ILEC and CLEC territories.

Our context for growth at TDS is the long term, and U.S. Cellular's and TDS Telecom's initiatives position TDS as a whole for profitable growth well into the future. Our experience is that sound investments for future growth may mean incurring losses in early stages of these growth initiatives. The initial sacrifices are usually small, however, in comparison to the eventual positive outcomes. We have adhered to this long-term perspective from TDS's first years as a business, and it has proven to be effective.