End Run on Long Distance Market Lands Two Baby Bells in Court

Posted: 07/1998

End Run on Long Distance Market Lands Two Baby Bells in Court

By Carol L. Bowers

Federal law prohibits regional Bell operating companies (RBOCs) from offering in-region
long distance service until they meet 14 requirements, but US WEST Inc. and Ameritech
Corp. are trying to prove the law doesn’t preclude them from offering long distance
services–provided an unrelated company performs the actual service.

In an end run around various legal and regulatory obstacles to long distance market
entry, Ameritech and US WEST recently reached separate agreements with Qwest
Communications Inc. that allow them to market Qwest’s long distance service in packages
along with their respective local exchange services. The result was a cheaper long
distance service that drew the ire of AT&T Corp. and MCI Communications Corp., who
joined with the Association for Local Telecommunications Services (ALTS) and other
companies to stop the new service-bundling ventures.

"We’re providing half the service, Qwest is providing the other half of the
service. So we’re not offering long distance ourselves, and that’s what makes it legal for
us to do this," says Nanci Bernstrom, a spokeswoman for US WEST, the first of the two
companies to align itself with Qwest. "We’re still moving ahead with our Section 271
applications, but this is a place-holder until those applications are approved."

Section 271 of the Telecommunications Act of 1996 is the section that prohibits the
Baby Bells from offering long distance service until they have met 14 criteria that have
become known simply as "the checklist," used to determine whether a company has
opened its markets to competition. So far, the Federal Communications Commission (FCC) has
rejected four applications by three Baby Bells.

Shortly after US WEST announced its alliance with Qwest–to offer a 10 cents-a-minute
flat rate long distance calling package–Ameritech followed suit, offering its customers,
through Qwest, a 15 cents-a-minute daytime rate for consumers and 7 cents-a-minute
off-peak calling between 7 p.m. and 7 a.m. when bundled with local exchange service.

The Telecom Act allows "a teaming arrangement where we team with a partner who
provides a service that we cannot provide…with us being the packager," says
Ameritech spokesman Dave Pacholczyk.

Ameritech and US WEST were then sued separately–Ameritech in the U.S. District Court
in Chicago, and US WEST in the U.S. District Court for the Western District of
Washington–by AT&T, MCI, other companies and ALTS. Hearings were scheduled in June
for both cases, but U.S. District Judge Blanche Manning in Chicago denied the temporary
restraining order AT&T had sought, presenting a legal argument that may influence the
outcome of both cases.

In a May 18 ruling, Manning says AT&T’s argument that Ameritech was
"providing" in-region long distance service was "unconvincing." First,
Manning says the plaintiffs "failed to establish that the [Modification of Final
Judgment, reached after the breakup of AT&T’s monopoly] trumps the specific
provisions" of the Telecom Act. Manning also says there was no evidence that
Ameritech would actually be providing the long distance service itself, nor was there
evidence to demonstrate Ameritech’s involvement with Qwest’s provision of long distance
service. In addition, Manning says "the Ameritech/Qwest alliance appears to comport
with [FCC] interpretations of the [Telecom Act]."

One day later, AT&T Chairman and CEO Michael Armstrong sent a letter to Ameritech
suggesting the Bell company and AT&T consider an alliance similar to the one Ameritech
had with Qwest.

"They want to play and they want to kick sand in our face. Go figure,"
says Ameritech’s Pacholczyk. "So, we’re going forward with our talks with AT&T,
and AT&T is going forward on its lawsuit."

Wayne Jackson, an AT&T spokesman, says the company quite simply wants
"policymakers to resolve whether or not this is legal." He says AT&T
believes the arrangements to be illegal, "which is why we filed the lawsuits.

"Then, in her denial of the request for the temporary restraining order, Judge
Manning suggested that maybe these arrangements were legal," Jackson says. "If
they are, we would like to be a party to this game. But if it’s not legal, we want the
court to stop it."

Appeals Court Says Coinless Rate Akin to ‘Subtracting Apples from
Oranges’

The Federal Communications Commission (FCC) must conduct further proceedings this year
to determine the appropriate compensation for coinless payphone calls because a federal
appeals court says the FCC "failed to explain adequately" how it derived the
rate set in 1996.

However, the court did not vacate the current compensation rate "on the clear
understanding that if and when on remand the commission establishes some different rate of
fair compensation for coinless payphone calls, the commission may order payphone service
providers to refund to their customers any excess charges."

The case evolved from a requirement in the Telecommunications Act of 1996 that the
commission establish regulations to ensure payphone service providers would be compensated
fairly for calls made on their telephones. Prior to passage of the Telecom Act, payphone
service providers were not "fully" compensated for coinless calls. As a result,
in September 1996 the FCC set the payphone compensation rate at .284 cents per call based
on the 35-cent "market rate" for coin calls. That rate would hold until Oct. 6,
1999, when reimbursement then would be calculated by subtracting .066 cents per call from
the "market rate" of coin calls in a given location.

In its ruling in a case brought by MCI Communications Corp., a three-judge panel of the
U.S. Circuit Court of Appeals for the District of Columbia says the FCC "never
explained why a market-based rate for coinless calls could be derived by subtracting costs
from a rate charged for coin calls. If costs and rates depend on different factors, as
they sometimes do, then this procedure would resemble subtracting apples from
oranges."

WorldCom to Wholesale Local Services

By Bob Titsch Jr.

Long distance companies spinning their wheels through the rough terrain of Bell company
resale will have a new alternative in selected cities this year and in nearly every major
market beginning in 1999 because WorldCom Inc. is adding local switched and private-line
services to its carte du jour of wholesale offerings.

In the next few months, the carrier will run extended beta tests with Louisville,
Ky.-based UniDial and up to eight more service providers in seven cities in the Ameritech
and BellSouth regions, with additional cities in other RBOC territories to follow.

"These betas will allow us to test our systems and refine them so the burden of
dealing with different RBOCs–and their different interfaces–is completely taken off of
our wholesale customers," says Dale Thompson, director, WorldCom Wholesale Local
Services. "Until we refine the systems, we’ll use the brute force of manpower to
understand, administer and manage the process."

The end goal, adds Thompson, is to cultivate an automated, centralized system that
manages and administers everything from inventory, order administration and provisioning
to customer input and billing.

"Rolling out a nationwide wholesale local service program is far more complex than
one plus," explains Judy Reed Smith, chief executive officer of ATLANTIC*ACM, a
Boston-based strategy consulting and market research firm. "Early on, it could be
fraught with back-office and administrative problems, because everything with local has
been.

"They’ll work in concert with the betas to iron those issues out before they make
the offering available to other customers–and when they do, they’ll have an incredible
differentiating advantage in the wholesale marketplace," she adds. "It’s news to
nobody that giving resale customers an alternative to dealing with Bell operating
companies will be extremely popular in the competitive long distance community."

Unlike the long distance resale realm, local resale customers will not be required to
ramp up to specific volume levels. They will have access to deep discounts off Bell
company rates regardless of how much local business they turn up, according to Thompson.

And resellers will be able to aggregate local business with long distance traffic to
satisfy volume commitments, he adds.

"Our 500-plus carrier and reseller customers have been asking us to provide this
service," says John W. Barnett, president of WorldCom Wholesale Services. "They
recognize WorldCom as the only facilities-based carrier which could provide this service
in a cost-effective manner and with the depth of back-office support for which WorldCom is
known."

WorldCom currently is advising several customers on certification, tariff, 911
authorization and back-office support issues to prepare them for selling local service by
Jan. 1, 1999.

Drastic Retail Price Declines Drive Changes in Long Distance Industry

Significant declines in retail pricing for long distance services are thinning provider
ranks and straining traditional business plans, according to Boston-based strategy
consulting firm ATLANTIC*ACM’s sixth annual report on the telecommunications resale
industry, "U.S. Telecom Resale Services: Trends and Opportunities-1998-2003."

The report is the culmination of six years of long distance carrier surveys on
questions concerning customers, services, sales and marketing, finances and operations.

"1997 proved to be a period of rapid change in long distance both for specific
providers and the industry as a whole," says Dr. Judy Reed Smith, chief executive
officer of ATLANTIC*ACM. "Alterations in the competitive environment as well as an
evolution of customer expectations for pricing and service have forced distinctive changes
in business models and market tactics used by long distance service providers."

The study reveals an industry in consolidation driven in large part by declining retail
rates. Price competition among long distance providers is more intense than the industry
has ever experienced. Following widespread adoption of flat-rate per-minute pricing
schemes, providers have continued to cut rates. The resulting loss of margin has
discouraged new market entrants and prompted consolidation of smaller players, the report
reveals.

"For the first time in the history of competitive long distance services, the
number of players with annual revenues under $15 million may have shrunk in 1997 due to
limited new entry and extensive consolidation," says William West, principal at
ATLANTIC*ACM.

For more information or a copy of the report’s table of contents and exhibits, call
(617) 720-3700.

Telecom Industry Mourns Loss of Friend

The telecommunications community has lost a star member and trusted friend with the
unexpected passing of John C. Fudesco. He was 47 years old.

Fudesco, vice president of sales for Atlas Communications Ltd., is remembered as a
family man and avid golfer as well as Atlas Communications’ representative at trade shows.
He was one of the founders of Atlas, acting as president and chief counsel at the
company’s inception and later assuming his role as vice president of sales.

An attorney by trade, Fudesco was a member of the Bar Association in California, New
York, Florida and Washington, D.C., where he practiced for 15 years with the law firm
Fehrenbacher, Sale, Fudesco & Quinn. In addition, he served as an attorney advisor to
the Interstate Commerce Commission. Prior to joining Atlas, Fudesco was with Value-Added
Communications, where he served as senior vice president and general counsel.

"Everyone loved John–he was part of Atlas and its people and especially me,"
remembers Frank Scardino, Atlas Communications’ chairman, in a written statement.
"John was of large stature and was the biggest teddy bear I’ve ever been around. He
loved people and he was at his best around them. One of our customers told me that John
was his education in telecom, his mentor and first person to really help him to get
established.

"In our industry, success is measured in how high your stock is or at what price
you sold your company. I’ve had that success and I’m sure John’s success in life was more
than I will ever achieve," Scardino continues. "Someone in our office said, ‘I
wish I can have one more conversation with him.’ So does everyone that knew him."

Fudesco is survived by his wife, Jill, and children Nick, 7 and Mia, 5.

IXC Acquires Stake in ISP

IXC Communications Inc. has purchased a 34 percent stake in the New York-based Internet
service provider (ISP) AppliedTheory Communications Inc.

The addition of AppliedTheory’s team of Internet experts, including some who were
involved in the Internet’s original development, positions IXC to build the
next-generation Internet protocol (IP) technical infrastructure to meet the explosive
demand for data communications such as multimedia and real-time video applications,
according to Ben Scott, chairman, president and chief executive officer at IXC.

"IXC’s investment in AppliedTheory is an important strategic step in our ongoing
effort to deliver a comprehensive set of network-based communications solutions to
customers," says Scott. "A strong Internet offering built for the future is
another key component in IXC’s product mix for our wholesale, retail and international
markets."

The agreement gives IXC critical Internet advanced fiber expertise and AppliedTheory
access to an advanced fiber network to immediately begin building an international network
with multiple data centers, as well as support for web hosting.

"Through this strategic alliance, AppliedTheory and IXC have the opportunity to
deploy a new generation of Internet technology," says Richard Mandelbaum, president
and chief executive officer of AppliedTheory. "We are poised to build the world’s
first terabit-per-second network and thereby help assuage the Internet’s insatiable
appetite for more bandwidth. With IXC’s network expertise, we can move quickly to provide
more capacity to commercial and academic users as well as other ISPs, competitive local
exchange carriers (CLECs) and cable operators."

In addition to IXC’s 34 percent stake, AppliedTheory has sold 17 percent of the company
to Grumman Hill Investments III, a private equity firm and investor in IXC.

El Nino Fails to Dampen Mood at TRA Spring

By Bob Titsch Jr.

El Nino and news of the proposed SBC Communications Inc.-Ameritech Corp. merger stormed
all over the Telecommunications Reseller Association’s (TRA’s) Spring Exhibition and
Conference in San Francisco May 11-14, but failed to dampen the mood. Official numbers
were unavailable at press time, but TRA staffers reported a registration count of
somewhere in the neighborhood of 2,500 attendees, eclipsing the association’s record show
attendance by some 15 percent.

Despite taking recent hits from preferred interexchange carrier charges (PICCs),
universal service fees, payphone compensation and "investment" in local resale,
long distance providers attending the show generally were positive about market conditions
and the future of long distance resale. Indeed, they seemed more concerned about their
inability to get a phone call outside of the hotel than the proposed SBC-Ameritech deal.

"I kind of like the idea of SBC and Ameritech merging, and the reason is that it
really affords us opportunities," says Frank Scardino, president of Atlas
Communications Inc. "We’re niche players. The more the smaller guys exit and the more
the bigger guys get bigger the easier it is for us to make money. The best thing they
could do is go out and buy Qwest (Communications Inc.) or another large carrier. Then I’d
really get excited because then we could really compete with these guys."

TRA also had a record turnout to elect its nine-member board of directors for 1998-99.
Elected to the board were incumbents Meri Braziel, IXC Communications; Thomas Coughlin,
Vista Communications; Robert Hale Sr., Networks Plus; J. Sherman Henderson, UniDial
Communications Inc.; Cliff Rees, Telegroup Inc.; Laura Scher, Working Assets Funding
Service; and Jim Wolfinger, WorldCom Wireless. Newly elected to the board, which was
expanded this year from seven to nine members, were Ernest Ellis, ACS Systems and Brian
Fitzpatrick, Frontier Communications.

Fitzpatrick and John Barnett, president of WorldCom Wholesale Services, tied for the
ninth and final seat. However, just before the runoff, Fitzpatrick told members he would
appreciate their vote and asked, "Did I forget to mention our new discounts?"
which brought down the house, according to several voters, and likely put him over the
top.

Hale, Henderson and Scher will serve three-year terms on the board; Braziel, Coughlin
and Wolfinger will serve two-year terms; and Rees, Ellis and Fitzpatrick will serve
one-year terms. Beginning next year, all new board members will be elected to serve
three-year terms. Colin McWay of Connecticut Telephone will continue to serve on the board
as an advisory member for the next year.

Henderson again was chosen by the board to serve as chairman, Scher as vice chairwoman
and Hale as treasurer. The board also determined new committee and advisory council
chairmanships. Hale will serve as membership chairman; Braziel will serve as public
relations chairwoman; and Fitzpatrick will serve as ethics committee chairman. Rees will
chair the international resale council; Wolfinger will continue chairing the wireless
resale council; and Sher will continue chairing the local resale council.

Wholesale Internet Offerings Reach Epoch Proportions

By Bob Titsch Jr.

Epoch Internet has beefed up its wholesale Internet solutions program for long distance
companies and established a new referral program–called ECAP (Epoch Certified Agent
Program)–for independent agents interested in selling Internet solutions to business
customers.

Epoch has been wholesaling private-label dial-up and dedicated Internet access services
to long distance companies for a couple of years now, and, in that time, learned that some
of them are not equipped to sell a more technical product. As a result, the company has
developed a more mature support infrastructure that includes an implementation manager who
customizes software to ensure Epoch’s billing system communicates with its resellers’
billing systems; a modular training program that can be configured for specific resellers
based on their level of Internet knowledge; and virtual account executives who sales reps
can phone for help in the middle of sale that becomes too technical.

"They can pick up the phone and conference in a seasoned Internet salesperson who
can handle any objection a potential customer might have and help close the deal,"
says Brian Scholte, Epoch’s director of product management. "These virtual account
executives don’t really work for resellers, but they might as well."

Telco Communications Group, a nationwide long distance carrier, resells Epoch’s
Internet solutions and often utilizes its customer support infrastructure, according to
Stephanie Ziontz, Telco’s marketing communications manager. "If a customer calls with
a basic question like ‘How does Prime Business Internet appear on the bill?’ [the
customer’s call] routed to our customer service department," she says. "If the
question is technical in nature, it goesto Epoch’s technical support people–and they
brand the service as Telco’s."

Ziontz says reselling Internet services opens doors to new customers and fits
comfortably into Telco’s model to build a one-stop shop, without having to acquire a
network backbone. In fact, Telco is so pleased with the product that it’s working to make
it available to agents by this September.

Epoch is a tier-one ISP with a fully redundant network spanning the nation, connecting
three data centers, 24 hubs and some 150 points of presence (POPs). Generally, 50 percent
to 80 percent of a reseller’s service area is already covered by Epoch. However, the
remaining 15 percent to 20 percent often is integrated into the company’s network
expansion plan, depending on the reseller’s volume commitment. "In a sense, it really
helps fund our growth and build infrastructure," says Dennis Glavin, director of
strategic account management. "We have about 50 new POPs scheduled to go into place,
primarily to accommodate new branded reseller deals."

Epoch is simplifying the process for independent agents also, providing them with sales
engineering, field support, provisioning and other resources on both a local and national
level. The company also prepares quotations, provisions the lines and handles installation
of equipment and ongoing support, according to Scholte.

"Agents can choose from one of two compensation plans–lump-sum or annuity
payments," adds Scholte. "The lump-sum plan pays agents a percentage of annual
contracts up front. The annuity plan is structured on a sliding scale, between 10 percent
and 16 percent, and pays quarterly."

Uniquely, he says, Epoch pays agents on both installation and monthly recurring
revenue.

News Briefs

DCA introduced a new accelerated level of service that offers a 24-hour
turnaround on its billing services and printing fulfillment. Called World Class Service,
the offering is the first of its kind, and backed by a no-pay guarantee if the 24-hour
deadline is not achieved, according to Bill Bricking, president of DCA.

"Speed and accuracy are the foundations of any solid billing solution," he
says. "We want our clients’ revenue to hit the streets as quickly as it comes through
our doors."

The new level of service is a direct result of rising industry pressure to beat the
average bill delivery cycle, says Bricking.

WinStar Communications Inc. signed resale agreements with Chicago-based CIMCO
Communications Inc. and New York City-based Gillette Global Networks.

"WinStar’s strategy of combining wireless fiber services and local
telecommunications services fits perfectly with our own focus of complete telecom
provisioning for building owners throughout the New York area," says Joseph Gillette,
president and chief executive officer of Gillette Global Networks Inc. "We look
forward to a long-term partnership of our operational teams and resulting growth in our
profits and share of the competitive market for local services."

WinStar offers local switching and transmission services, high-bandwidth Wireless Fiber
solutions, and "robust" back office support to resellers across the United
States at discounts substantially greater than current regional Bell operating company
(RBOC) wholesale tariffs, according to the company.

President and CEO of IXC Communications Inc. Ben Scott has been named Chairman
of the Board. With more than 26 years of telecommunication industry experience, Scott
joined IXC last September. He recently was president and CEO of PrimeCo Personal
Communications LP, a provider of digital wireless service.

IXC Communications Inc. supplies network-based delivery solutions designed to address
the speed and capacity requirements of the global telecommunications market. IXC offers
private line, broadband, Internet and long distance switched and dedicated services.

Williams Communications has implemented the Intertech Network Strategies Billing
and Customer Care Solution on two Compaq ProLiant 6500 series systems using a Windows NT
server and Microsoft SQL server. This arrangement has the capacity to manage a sustained
throughput of 43 million call detail records (CDR) per hour. "Intertech has developed
a robust, highly functional billing and customer care product. The fact that Intertech’s
Network Strategies software is available on the Windows NT Server platform and
strategically aligned with the Microsoft solutions is also very important to us,"
says a senior manager of network revenue for Williams. "We need a billing and
customer care solution that has the capability to scale with us as we grow."

Cleartel, Quisqueyana to Trial VoIP

Operator services provider Cleartel Communications Inc. announced a commercial trial
with Quisqueyana USA to provide long distance telephone service using Internet protocol
(IP) over a private packet-switched network.

Quisqueyana, with 35 branch offices and 400 agents in the United States, Puerto Rico,
Spain, Canada, the U.S. Virgin Islands and the Dominican Republic, is a provider of wire
transfer, telecommunications, courier and travel services between the United States and
Latin America. Quisqueyana agents will market long distance telephone service provided by
Cleartel and Quisqueyana at the agent’s calling center location to retail, walk-in
customers who make international and domestic long distance telephone calls.

Initially, the packet-switched voice-over-IP (VoIP) service will involve two
Quisqueyana branch-office calling centers in Brooklyn and Queens, N.Y. The New York
calling centers mainly provide international long distance calling services to individuals
who live in adjacent neighborhoods and who often have large-volume international calling
needs. Each of the two calling centers will be equipped with personal computers (PCs) with
VoIP functionality. Calls from the PCs in the two New York calling centers will be sent as
a digital signal to an IP gateway, converted to packetized data using IP and handed off to
a private packet data network. When the packets reach the destination city, they are
converted through another gateway to standard analog telephone signals and transferred to
the foreign telephone company for call completion.

"This trial with Cleartel is an example of using innovative technology in a
practical way to provide value to our customers and help us stay ahead of our
competitors," says Ernesto Armenteros, executive vice president of Quisqueyana.

Cleartel is able to make the packet-switched VoIP service available due to an agreement
made by its sister company, CAIS Internet, a first-tier Internet service provider, with
Networks Telephony Corp., a provider of web-enabled telephony services.