Border Rebellion

Telecom Companies Prepare for War as Local Telephone Monopolies Start Crumbling

sk not for whom the bell tolls -- it tolls for the Baby Bells. The Regional Bell Operating Companies, the monopolistic offspring of the once omnipotent AT&T, are seeing their fiefdoms turned into battlefields. Ten years after Ma Bell's grip on the long distance telephone market was broken, true competition is finally coming to the local exchange as well. Several bills pending in Congress are designed to sweep aside the last vestiges of the old Bell monopoly system at the local level. (See related story, page 4)

But while Congress stumbles though the complexities of competing legislation and droves of telecom lobbyists stalk "Gucci Gulch," the local monopolies are already beginning to crumble. As Bert C. Roberts, chairman and CEO of MCI, put it recently, "We are already seeing the cracks."

The not-so-babyish Bells, with combined revenues exceeding $82 billion in 1992, currently control about three-fourths of all local exchange business. However, these seven sumos face the prospect of total war on their home turf with themselves and a number of other info-adversaries for a variety of services including voice, data and the much-ballyhooed video-on-demand.

Besides the Bells' local exchange carriers, the combatants include independent locals like GTE, interexchange carriers like MCI, competitive access providers like MFS, cable television carriers like TCI, and wireless carriers like McCaw Cellular.

All these information haulers are potential allies and enemies in the Brave New World of telecommunications, where telephone companies will offer television programming, cable television companies will offer telephone service -- and hopefully, everything will be cheaper.

"Within the next 18 to 24 months, the rules that have guided the telecom industry since the 1930s are going to be rewritten," said Robert Rosenberg, president of Insight Research Corp. in New Jersey. "The old monopoly structure will essentially be done away with, and the new structure will create a competitive environment for telecommunications," Rosenberg said.

While the eventual lay of the local telecom landscape remains terra incognita, the tectonic plates have already begun to shift. Telecoms, cable companies and state regulators have set the process in motion even as they await passage of an ?bertelecom bill from Congress.

Although the following developments are extraordinary, they are but harbingers of things to come:

* Nebraska-based MFS Communications Inc., a pugnacious competitive access provider, was authorized by the Maryland Public Service Commission in April to operate as a local exchange carrier in the playpen of the biggest Baby Bell of them all -- Bell Atlantic.

MFS Intelnet, an MFS subsidiary, will become Bell Atlantic's first local competitor for business and government customers by the third quarter of this year.

MFS, which unveiled the first national asynchronous transfer mode network in 1993, already offers long distance services to business customers in the area. Bell Atlantic said it fully expected Maryland regulators to allow MFS into the local exchange.

* In an early example of internecine warfare among the regional Bell companies, Southwestern Bell announced last month it will apply for permission to offer local telephone service in Maryland, hoping to cut into the business of -- you guessed it -- Bell Atlantic. And they plan to do it over cable television wires.

SBC Media ventures of Rockville, Md. -- a company created by Southwestern Bell out of two cable systems the company purchased in February for $650 million -- wants to offer local telephone service by late 1995, pending regulatory approval.

Bell Atlantic expressed neither surprise nor concern at Southwestern Bell's actions. Indeed, as the only Bell currently authorized to offer video services to its customers and a highly publicized video-on-demand capability slated to become available in 1995, Bell Atlantic can afford to be a little smug.

* Time Warner Inc. announced plans to use one of its cable systems in Rochester, N.Y., to offer local telephone service in competition with incumbent carrier Rochester Tel, which offered to open its market after negotiations with Time Warner and the New York State Public Service Commission.

Under the proposed plan, Rochester Tel will undergo a sort of corporate mitosis -- splitting itself into two separate companies. One entity will remain a regulated public network and the other will become a competitive carrier that will have to purchase network access rights from the former, just like Time Warner and anyone else.

* Ameritech, the Chicago-based Baby Bell serving the Midwest, has also offered to open up its local market to long distance carriers in exchange for the right to play in the long-distance market.

* GTE Corp., an independent local exchange carrier, announced plans last month to offer video-on-demand services in northern Virginia, St. Petersburg, Fla., Thousand Oaks, Calif. and Honolulu by 1995. GTE, the nation's largest local carrier -- larger even than any Baby Bell, -- provides local phone service in 33 states.

* Several weeks ago, Teleport Communications Group, a Staten Island, N.Y.-based competitive access provider, was granted permission by the Washington Utilities & Transportation Commission to offer local service to customers throughout the state in competition with Baby Bell US West. Teleport plans to concentrate initially on business customers in the Seattle area.

* MCI set off local access alarm bells in January when it announced MCI Metro, a wholly owned subsidiary that will spearhead its invasion of local telephone exchanges nationwide. MCI plans to invest more than $2 billion in the wholly owned subsidiary to connect 20 major U.S. cities beginning this year.

* With its pending purchase of McCaw Cellular, the nation's largest cellular operator, AT&T is positioning itself to once again become a local carrier.

Its stated intention to expand McCaw's network to blanket the nation, combined with ongoing negotiations with cable operators such as Time Warner should make AT&T a carrier to be reckoned with in the local exchange. The auctioning off of additional radio frequencies by the Federal Communications Commission in July promises to augment the importance of wireless in the local loop.

SO WHAT DOES IT MEAN?

So what does all that mean? William Gaik, national director for telecommunications and electronics services, Deloitte & Touche, likened the events to the breaking up of Rockefeller's Standard Oil Trust.

"This is whole series of tactical thrusts and parries to test the market, which is fairly typical of an industry coming out of a heavily regulated environment, nobody really knows what will happen," he said. "They are significant in that they point out a trend, but not at all decisive," said Joseph Kraemer, managing director of communication industries management consulting, EDS.

Bell vs. Bell?

Now that the writing is clearly on the wall, how serious is the threat to the Baby Bells and other local exchange carriers from others and each other? Despite the infantile appellation, they are hardly defenseless start-ups.

As Pierrette Chabot, director of telecom research for the Business Research Group quipped, "The RBOCs [Regional Bell Operating Companies] are larger than most states, they can afford a few hits."

Will they strengthen their position within their home markets, or prepare to go plundering far afield? Factors likely to dictate to RBOC strategy include the nature of the competition and the inclination of regulators. Because of any given community's ability to support only so many entertainment providers and the capital-intensive nature of the infrastructure, Chabot believes there will be more cooperation than competition among the Baby Bells.

"If you are an RBOC, you secure your own territory first," she said. "A number of strategic moves are being made to protect the local monopoly, including making deals with sister companies."

Southwestern Bell's desire to offer local phone service in Bell Atlantic's market, Chabot said, "is an anomaly."

Some believe the RBOCs are preparing to wage war with any and all comers. "I think they are girding for battle with anybody, they will decide where their interests lie and deal with that," said Gaik. One Bell Atlantic executive recently admitted as much, saying that Baby Bells will begin to compete for business customers before the year is out.

The Cable TV Factor

One can no longer discuss the telecommunications industry without considering the impact of video, be it video-on-demand, video phones, video conferencing and a host of other possibilities in the pipeline.

While a few arranged marriages between high-profile cable and telephone companies were never consummated, these two industries are converging, and may become indistinguishable before long. But for now, how these two industries pair off, and where they do so, will determine how successful they are in challenging incumbent carriers in their home markets.

Cable television wires possess more bandwidth than most telephone networks, making them ideal for offering a combination of video and voice, or telephony, which is already the case in Great Britain. However, what cable TV companies possess in infrastructure, they lack in reliability, which could hurt them in their drive for new markets.

"I think there are going to be some hurdles for the new entrants," said Chabot. "Consumers will not accept on the voice side what they expect on the cable side."

Kraemer made a similar point, singling out this difference as a critical element in the success of these video-voice alliances will have in challenging a local carriers on their home turf. Without an out-of-region telco partner, he said, a local cable company is simply not a credible competitor to a local phone company offering video services. "It's unlikely the cable companies will be effective competitors, their reputation for quality of service and customer responsiveness is not as high."

But a local cable company in concert with an outside telephone company could offer very competitive telephony against a local carrier offering the same services. And if a local telephone company offering only voice service faces an outside telephone company allied with a local cable company, Kraemer said, "the in-region [telco] loses."

But at this stage, Bell Atlantic alone among the RBOCs has the right to offer video to its customers, and may well prove more effective in selling video services than Southwestern Bell is at selling telephone services, Kraemer said.

But the real winners should be customers, business and residential, who stand to benefit from intense competition in the form of reduced rates, a variety of services and heightened responsiveness by companies desperate for dollars.

Attacking the local carriers

Competitive access providers already pose a particularly viable threat to local exchange carriers, and the damage they have inflicted will only increase as market forces finally begin to dominate the local exchange.

MFS, Teleport and other competitive access providers have already made significant inroads against RBOCs and other local exchange carriers in the past decade. These young and aggressive carriers continue to siphon away many of the local carrier's most lucrative customers in the business community, while shunning far less profitable residential service.

Rosenberg said the competitive access providers strike fear into the hearts of the seven sumos. MCI, he said, also started out as a small company that eventually precipitated an enormous shift in telecommunications policy by helping precipitate the break up of AT&T. As a result, MCI dramatically increased its marketshare and ushered in the era of cutthroat long-distance rate price wars.

Competitive access providers "are looked on the same way by RBOCs, and are greatly feared way out of proportion to their revenues," Rosenberg said. "The possibility exists they will do to them what MCI did to AT&T."

MCI is also positioning itself to reap rewards in the local exchange with the creation of MCI Metro. Construction of a local fiberoptic and switching infrastructure is already underway in Atlanta, the first of 20 major metropolitan areas slated for the initial assault.

Thanks to telegraph rights of way MCI acquired from Western Union Corp. several years ago, the company has access to more than 200 cities and 2,000 office buildings nationwide, giving MCI Metro plenty of room to expand.

Although CEO Roberts acknowledges MCI Metro faces considerable regulatory and legislative hurdles, he left little room for doubt concerning the outcome, at least as far as he is concerned.

"It will have to be fought state by state, but we will break these barriers down like we did in long distance," said Roberts in an interview following MCI's annual shareholder's meeting in May. "It's going to happen."

Kraemer said MCI Metro could well do to the RBOCs what it did to AT&T.

"MCI Metro, in combination with a cable alliance, could be very effective in reducing revenues and access charges, which is where a lot of their [RBOC] money comes from," said Kraemer.

The Rochester Model

Catherine Duda, a Rochester Tel spokeswoman, said the local exchange carrier's decision to divide itself into two separate companies -- one price-regulated and one competitive -- was motivated by two factors.

Competition had already arrived, since a number of cable companies and competitive access providers had filed with state regulators for permission to enter the market. "We felt it was necessary to take a bold step to open up the market and create a level playing field," she said.

Secondly, by splitting off a chunk of the business and creating holding company like the RBOCs and other local carriers, the competitive company will be able to pursue its business opportunities free from regulatory constraints.

"Unlike other major independents, we never had a holding company structure to expand, it frees us up," Duda said. "We decided to create a truly competitive company to look Time Warner in the eye and compete with them."

Rochester Tel's decision to divorce itself could well provide a model for deregulating other local exchange carriers, and a similar proposal has been placed on the table by Ameritech, said Rosenberg. "Rochester has been looked at by number of folks, I think others will try it as well."

In the meantime, as Congress tries to legislate new telecom rules, the game has already begun, as Kraemer summed up with a football analogy: "The kickoff has just occurred, we are in the first or second play of the first quarter, and the outcome is not at all certain. Regulators are on the sidelines deciding the size of the field, the size of the ball, the number of players, the rules of the game and whether or not one or both will have handicaps. And the game has already started."


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