Three-Way Fight

Posted: 09/2001

Three-Way Fight
IXCs, ILECs, Cablecos Dig In on Local
Ground
By Kim Sunderland

Verizon Communications Inc. has offered up to a $10,000 reward to anyone with information leading to the arrest and conviction of culprits responsible for thefts and vandalism of the company’s telephone cable in Southern California.

Bummer man. Like, who would do such a thing?

“We will not tolerate these deliberate and malicious acts of
violence against our telephone network and our customers,” Deb Anders, Verizon region president, says. “Not only does the vandalism and theft affect our customers’ ability to place normal calls, but it jeopardizes their use of 911 service during emergencies.”

And hey, it’s just not cool, ya know? This is Southern Cal, where people are supposed to be laid back.

But Verizon says that in July, hundreds of feet of underground and aerial copper cable were cut and stolen, causing service delays for thousands of Verizon customers, and thousands of dollars of damage.

In five of the six cases, Verizon reports that the copper cables were cut cleanly with “professional” cable cutters and stolen from telephone poles and from underneath the street. In two cases, the underground cables were cut, but not completely removed through the manholes that had been opened with professional tools. Each of the cables was several feet long, up to nine inches thick and weighed tons.

Seriously, could this be the work of professionals? Would Verizon’s competitors actually stoop this low?

Verizon won’t go out on a limb, or a cable, regarding that question, but in the world of regulation, some sources guess the question probably isn’t a stretch.

The quest for local market control–or at the least some solid, long-term financial security–continues with the nation’s IXCs, ILECs and cable companies slinging mud harder and with more conviction than ever before. It’s a battle out there.

Analysts with IDC, for instance, say the ILECs are threatening to take control of the long-distance market away from long-time traditional players such as AT&T Corp., WorldCom Inc. and Sprint Corp. These findings were published recently in an IDC report, “The ILEC’s Effect on IXCs and the Long Distance Market,” which examines the state of the long-distance market, the positions of Verizon and SBC Communications Inc., local market competition, and strategic reactions by the IXCs.

According to IDC, recent FCC rulings have enabled ILECs to sell long-distance services in five states: Kansas, Massachusetts, New York, Oklahoma and Texas. Because of the increased competition in these states, the traditional IXCs have been forced to reduce their rates and, as a result, are experiencing plummeting profit margins.

Bundling and the discounts offered on the bundles are key to the ILECs’ appeal, the firm says.

“Consumers want to purchase all their communication services from one source, receive one bill, and have one point of contact,” said Ross Sealfon, an analyst for IDC’s Residential Telecommunications Services program. “They also realize it’s less costly for service providers to offer bundled services and expect a portion of the savings to be passed on to them, and ILECs can offer deep discounts on bundles.”

Another advantage ILECs have is their existing customer base. Typically, they’re selling long distance as an additional service to customers with whom they already have a history, which is easier than selling to new customers, Sealfon says.

While the ILECs seem to have the upper hand, IDC says traditional IXCs won’t go down without a fight.

“Low-volume users seem to be the ones most attracted to the ILECs’ plans, and traditional long-distance companies are working to retain their high-volume customers, who generate substantial revenues,” Sealfon says. “Additionally, bundling may prove to be a double-edged sword for ILECs. Being all things to all people is a very difficult strategy to sustain.”

Can a service provider be all things to all customers?

According to national lobbyist the National Cable & Telecommunications Association (NCTA), cable companies sure plan on trying. “Cable companies have invested substantial amounts of risk capital to upgrade their facilities and deploy new services,” according to a new NCTA report, “Cable Telephony: Offering Consumers Competitive Choice.”

The report says consumers throughout the country are benefiting from the deployment of these new services, including cable telephony, and they have shown their willingness to purchase telephony services from their local cable companies and are saving substantial amounts of money in the process.

Image: Residential Cable Telephone Subscribers

“Cable companies will deploy even more new and innovative services in the future, such as IP telephony, and consumers will benefit further by new choices, convenience and savings,” according to the report.

NCTA says the cablecos are researching and testing VoIP telephony, and they’re spending billions to upgrade their plants. However, the cable industry’s first efforts will be digital video and Internet access before cable telephony.

In the few markets where cablecos offer telephone service via their cable lines, their rates are about 10 percent less than the Bells, and customers also enjoy other steep discounts. Fewer than 1 million residential customers nationwide actually use cable phones, however.

Facilities Matter

In this three-way battle for the local market, only facilities-based competitors likely will provide sustainable long-term competition, according to the NCTA report.

“Such competitors are less dependent on incumbents to provide needed inputs into the provision of the competitive service,” the report says.

Nevertheless, the ILECs often have done much to frustrate facilities-based competition, NCTA notes, by attempting to impose onerous interconnection terms and conditions to delay the connection of facilities, order processing and numbers porting, and generally to place barriers in the way of competitors.

NCTA says cable companies also have faced difficulty in persuading regulators of the importance of promoting facilities-based competition over the resale and UNE competitive entry strategies.

The reality is that it’s difficult to implement a business model that relies heavily on purchasing essential inputs from one’s fiercest competitor. A far more reliable approach is to make capital investments in one’s own infrastructure and to decrease reliance on the ILECs as much as possible, according to NCTA.

While NCTA didn’t say it, this is probably a suggestion that also goes for ISPs, which seek to use the networks of the cable companies to provide Internet access.

NCTA president and CEO Robert Sachs, speaking during the summer National Association of Regulatory Utility Commissioners (NARUC) conference in Seattle, addressed the open-access debate. He said in part that some of the RBOCs and large ISPs have sought to have the government require that cable share its facilities with all ISPs.

“This regulatory effort has been variously known as ‘open access’ or ‘forced access,’ or the term I prefer, ‘government-mandated access,'” Sachs said. “While only a handful of the more than 30,000 local cable franchising authorities have passed ordinances to mandate access to cable’s facilities, the federal courts have rejected such efforts, invalidating mandated access ordinances in Portland, Oregon; and just last week, in Heroic County, Virginia.”

And state regulators are skeptical, he said, noting that at least 23 of them considered legislation in 1999 and 2000, but not one piece of legislation passed or one bill even made it out of committee in a single state.

The market is taking care of this issue, Sachs said, adding that cable companies have begun announcing they would voluntarily carry multiple ISPs.

Incumbents Heard Screaming

But to hear the incumbents tell it, the cable industry controls more than 70 percent of the high-speed Internet market because cable companies compete under different rules than the phone companies.

Cablecos’ high-speed service is completely unregulated, while phone companies face regulations on DSL service that make it more difficult and more expensive to deploy and operate, the ILECs say.

Regulating one provider in a nascent market stifles competition, raising prices for those consumers that can get high-speed connections and leaving millions more with no access at all, they add.

If the ILECs can receive federal approval to compete under the same rules as the cable industry when building and operating national networks for providing high-speed Internet services, they say they’ll serve the underserved areas too (providing telephony, Internet and cable services to these more rural geographic segments has been the center of many debates at the state and federal levels. More haggling can be expected during the years to come, sources say).

Meanwhile, competition in long distance, where prices are going down, remains. But even the IXCs, which charge less for individual calls, make up for it in other ways.

For instance, while rates fall for high-volume customers, the IXCs’ monthly fees rise. And if a caller uses a calling card or an operator, forget about it–the costs practically sting them through the receiver.

Likewise, bills for phone and cable TV prices continue to skyrocket, largely because most folks still don’t have a choice in either a cable or phone provider.

High-speed Internet access via DSL, for example, now costs almost $50 a month, thanks to increases from SBC, Verizon and others. And AT&T raised its prices on Internet access via cable modems by $6 a month, bringing that price tag up to almost $46 a month. AOL Time Warner Inc. expects to raise its basic rates soon.

Cable companies also have raised monthly rates, saying they’ve had to pay higher fees to carry more popular programming and to upgrade their facilities for the Internet and phone use.

In the end, the local, long-distance and cable companies blame one another for competition’s slow approach, while they largely ignore basic residential service because the margins aren’t there.

And what do the lawmakers say? They’re still trying to figure out whether to impose more piecemeal regulations or to let the companies continue to duke it out in the marketplace, winners take all.

“All we need is the government’s active oversight and enforcement of the rules,” says one competitor, “We’ll all figure out the rest of it on our own.”

The
Links

AOL Time Warner Inc. www.aoltimewarner.com
AT&T Corp. www.att.com
Federal Communications Commission www.fcc.gov
IDC www.idc.com
National Association of
Regulatory Utility Commissioners www.naruc.org
National Cable &
Telecommunications Association www.ncta.org
SBC Communications Inc. www.sbc.com
Sprint Corp. www.sprint.com
Verizon Communications Inc. www.verizon.com
WorldCom Inc. www.wcom.com