Are We There Yet?

Posted 06/2000

Are We There Yet?
By Dr. Richard G. Tomlinson

How do you eat an elephant? In small bites, the presumed answer goes. Fifteen years ago, fiber-based competitive companies began to nibble away at the local telephone monopolies. The history of competitive companies in the local telecommunications marketplace has been a story of a progressive journey from the exploitation of small market niches and openings toward a fuller, more comprehensive suite of service offerings. The end point in this progression has always been somewhat hazy, but the elephant still appears remarkably intact.

After all these years, it seems appropriate to ask, "Has the industry arrived at where it was heading? Are we there yet?"

Although "there" might not have a concrete definition, a loose consensus has long existed in the competitive telecom industry that progress means movement toward some kind of bundled service operation. At an early stage, this became a desire to evolve into a "full-service" local exchange carrier. CLECs dreamed of offering every service that the traditional ILEC provided. Early CLEC pioneer, Teleport Communications Group, for example, expressed this aspiration when it adopted the self- descriptive slogan, "The Other Local Phone Company." However, competitive companies soon expanded the meaning of "full service" to include services that ILECs either could not or did not offer. CLEC offerings began to include InterLATA long distance, data and other services that went well beyond the services normally associated with incumbent telcos.

CLECs never completed filling the ILEC role. No CLEC has ever offered all the services of an ILEC, and most have focused on business customers. Only a few have made any attempt to address residential markets. Most telephone customers still have no viable option for basic telephone service other than the ILEC. Led on by more attractive emerging market opportunities, CLECs shifted their sights to new goals beyond POTS. Even the label "CLEC" soon seemed inappropriate and too limiting. Leading competitive companies began to prefer to be known as ICPs. In the current embodiment of the ICP role, competitive companies are both more and less than ILECs. They are more because of the advanced services they provide, and less because they do not universally offer basic telephone service. Those watching the development of telecom competition are wondering--are today's ICPs a step toward the creation of comprehensive alternatives to the ILECs, or is this it? Are we now looking at the final stage of development for competitive local telecommunications companies?

If so, this is not at all what Congress or the FCC (www.fcc.gov) had in mind as the objective of the Telecommunications Act of 1996. FCC Chairman William Kennard has made it clear that the intent and purpose of the Telecom Act is to bring competitive choice in all services to the full-range of customers. In particular, he has expressed concern that competition should include residential telephone service and that it should embrace even those markets that may be difficult to serve profitably, such as rural or distressed urban areas.

In pursuit of this goal of encouraging universal competitive choice in local phone service, the FCC has been willing to entertain, at least in the near term, the possibility of a de facto AT&T monopoly in providing Internet service over its hybrid telephone-cable systems. The FCC also has been willing to endorse mega-mergers, such as the one involving SBC Communications Inc. (www.sbc.com) and Ameritech Corp. (www.ameritech.com), provided that the unions result in increased out-of-region local service competition through direct initiatives aimed at other RBOCs and increased in-region competition by more generous discounts to local service resellers.

A Look in the Rearview Mirror

In thinking about the current state and possible future of competitive telecommunications in the United States, it is useful to examine the past. Many of the industry founders and entrepreneurs believe that competition did not arise from some deeply reasoned grand strategy, but rather emerged, sometimes almost accidentally, from the pursuit of targets of opportunity.

Industry pioneer Teleport Communications Group, for example, began as an idea in The Port Authority of New York and New Jersey (www.panynj.gov) for a satellite farm near New York City. The Port Authority viewed the need for a world-class information port as analogous to the need for superior physical ports for aircraft and shipping in order to be a leading center of commerce.

Robert Annunziata, an early Teleport employee, had been on the job only three weeks when he wrote a memo to its president, "Russ" Romanelli, entitled, "Teleport Communications--Main Line of Business." Annunziata, formerly with AT&T, pointed out that the real opportunity for Teleport was not in operating the satellite farm being developed on Staten Island, but in the fiber optic network which linked it to Manhattan.

He noted that the pending breakup of the Bell System made AT&T and the other long-distance carriers dependent on the local telephone companies for call completion, and there would be a market for alternative networks that could avoid the high access charges of the telco networks. He wrote, "We can provide express access service from a building directly to a communications carrier central office switch bypassing not only [New York Telephone] cable, but also its central office switch."

The suggestion was controversial, but after several months, Annunziata was appointed president of Teleport Communications, and his strategic plan was adopted. From the perspective of the ILECs, it seemed that the bypassing activities of Teleport and others that followed their lead permitted them to enjoy "cream skimming" the ILECs' most profitable customers. But to the competitive companies, it seemed as though they were confined to operate within a narrow market niche with limited prospects of building significant businesses unless they could somehow break out.

Teleport's main CLEC competitor, MFS Communications, came into existence as a consequence of fiber network construction activity by Peter Kiewit Sons' Co. (www.kiewit.com). Jim Crowe at Kiewit proposed that the company invest $80 million to build small fiber networks in 10 cities. It was intended to be a pure play in speculative construction. The rationale was that such networks could be sold to long-distance carriers--most likely AT&T--which sought to avoid some of the local access charges. The plan was derailed when Jim Olson, the president of AT&T, sent a letter to Congressman John Dingell (D-Mich.), Chairman of the House Commerce Committee, which seemed to promise that AT&T would not seek to bypass the networks of the newly divested RBOCs. Crowe later won Kiewit backing for a more modest $18 million plan for network builds in three cities. Once networks had been constructed, Kiewit, like Teleport, found the dedicated transport business to be interesting, even though limited--and MFS was born.

Trying New Roads Along the Way

Led by the efforts of Teleport and MFS, the CLEC industry fought successfully to broaden its market opportunities by winning the rights for CO collocation, interconnection with ILEC networks and entry into switched services. It was these pragmatic struggles to force open a market large enough to support viable competitive companies that led to the concept of actually challenging the ILECs for their core business. ILECs were slow to recognize that competitive companies would contend for any and all telecommunications service in which they could make a profit. For many years, ILECs continued to refer to competitive companies as competitive access providers (CAPs) as though the competitive challenge was limited solely to provision- ing access.

CLECs probed every possible telecommunications business opportunity, including some that had nearly been passed up as fruitless by traditional carriers. These included Centrex resale, shared tenant services and advanced data services. Many of these CLEC initiatives proved significant revenue producers, but the greatest coup occurred in advanced data services. All carriers, including AT&T and the RBOCs, had tried valiantly to launch data-oriented services because it was obvious that data transmission services were growing much more rapidly than voice services. Most of these ventures ended in frustration. CLECs also met frustration in their initial data offerings, which focused on native speed LAN interconnection and frame relay. Finally, frame relay began to take off. Out of nowhere, the Internet exploded, bringing a demand for high-speed data transport. Former MFS President Royce Holland, who is now chairman and CEO of Allegiance Telecom Inc. (www.allegiancetelecom.com), acknowledged, "It wasn't part of a strategic plan. We were blindsided." MFS suddenly realized at the end of 1995 that nearly 25 percent of its incremental business was due to Internet-related services, up from 0 percent at the beginning of the year.

Making Room for More Luggage

Competitive companies seized the new data opportunities spawned by the Internet and ran with them. Now ICPs had a variety of services to bundle, limited only by the imagination. Implementation, however, did not prove easy. The wider the scope and the more creative the bundle, the more difficult it was to execute. Sales, installation, maintenance, customer care and billing all presented new challenges, and no single software vendor could supply the tools needed. ICPs found themselves in the role of attempting to integrate disparate vendor products. OSS and back-office issues became the number-one problem for ICPs. The industry is still dealing with these problems. Some have given up and decided that it is better to be excellent at a few things than mediocre at many. Thus we have CLECs who have decided to focus on data services such as provisioning DSL, and we have CLECs who have decided to define their market building by building.

However, some companies are mastering the art of delivering bundled services efficiently, and technology continues to provide new tools that lower the cost of reaching more isolated customers. Meanwhile, the spreading demand for high-speed Internet access shows no sign of abating or remaining confined to high-end residential customers. It is not unimaginable that ICPs might soon find it attractive to deliver bundled service, including all the basic telephone services, even to remote rural customers.

Where Does the Road Lead?

Historically, CLECs have demonstrated that they are opportunistic and will pursue any market which appears attractive, in the order of attractiveness. They have become ICPs, not ILEC clones. As some have gained mass through successive mergers, they have not consolidated into miniature recreations of the Bell System. Instead a new culture has arisen in which creative individuals frequently strike out on their own to form new startups, and the competitive industry has evolved into an engine of constant change and rebirth. It is difficult to imagine that this sea of restless entrepreneurship will leave any market untouched. While the road to universal competition in basic telephone service might not be as direct as regulators and legislators might like, it would be a mistake for ILECs to assume that they will never be challenged in this arena. Ultimately, competition will arrive, ... but we are not quite there yet.

Dr. Richard G. Tomlinson is president of Connecticut Research Inc. (www.connecticutresearch.com) and author of TELE-REVOLUTION--Telephone Competition at the Speed of Light, a History of the Creation of a Competitive Local Telephone Industry, 1984-2000. He can be reached at (860) 659-0009.

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