A changing competitive landscape

Jimmy Durante would have loved today's telecom scene. "Everybody wants to get into the act," was his signature line. In this case, it's the Telecommunications Reform Act of 1996. Lots of players are bustling in the wings. On stage, however, no one wants to make room.

It's the latest in a classic standoff. Neither the incumbent local exchange carriers nor their competitors - the interexchange carriers and competitive LECs - want to concede first. The Bell regional holding companies, under siege from regulators and competitors, appear to be stalling, using as much foot-dragging and regulatory action as they can muster. The IXCs and CLECs, on the other hand, seem to be downplaying their growth and market strength to keep the market for combined local and long-distance services under their control for as long as possible.

Hanging over everything is the new possibility that AT&T may merge with SBC Communications.

Incumbent LECs still provide virtually 100% of residential dial tone service. IXCs tend to wave this fact every time the issue of competition is raised.

The business market is a different story. Twenty CLECs offered high-speed service in 100 metropolitan statistical areas last year, bringing their share of the local business market to about 3%, according to a report by the Strategis Group, a Washington consultancy. CLECs' U.S. local revenues are expected to grow from $1.8 billion in 1996 to $3.4 billion this year, upping their share to 5.7% of the business market (Figure 1).

Competitors have captured about 20% of Nynex's prized New York City business market, a Northern Business Information report reveals. One example is Citibank, which uses MCI as its primary voice provider in the United States and Cable & Wireless as its data carrier. It sends traffic over a Sonet ring network in the New York City area that, in a rare example of cross-carrier business, Nynex and MFS run cooperatively.

The impact of competition also is clear. The cost of a T-1 line in New York has dropped from more than $1000 to $500 a month.

Pacific Bell says it has lost 100,000 lines to local competitors - AT&T accounts for the biggest hit - since last fall. Local competition started in California on Jan. 1, 1996, but the IXCs waited until December to start marketing heavily.

The biggest companies enjoy the choice of the best prices. But as new fiber and digital switches go in, carriers will need to fill that capacity with more customers. It is only a matter of time before competition trickles down to medium-sized companies.

"Once that happens, it will get interesting," says Daniel Ernst, competition analyst for the Strategis Group.

On the other hand, two IXCs have proved that LECs have legitimate concerns about IXCs selectively targeting the most lucrative markets. AT&T and MCI have told U S West that they are in no position to start providing service in the company's less lucrative and more expensive-to-serve territory until the first quarter of 1998, a U S West spokesman says.

Buildouts galore Several major infrastructure initiatives are aimed at taking revenues from incumbent carriers.

AT&T is testing its proprietary wireless local access system in Chicago and, for the short term, reselling local exchange service on a limited basis in California, Illinois, Connecticut and Michigan.

"So far, there is not any place in the country where an RHC can provision unbundled network element entry," says Steve Davis, vice president of law and government affairs at AT&T. AT&T also provides outbound local calling service to medium-sized and large business customers in 45 states through its Digital Link service.

MCI, on the other hand, has invested $1 billion in building its own local networks and intends to spend an additional $700 million by the end of this year. It offers business service over its own facilities in 21 cities and plans to expand to 31 cities by the end of the year and 60 by the end of 1998.

Sprint provides local residential and business service in parts of 19 states over its own network as the incumbent LEC. It is approved to provide residential and business service as a CLEC in 36 states and the District of Columbia through a combination of resale and facilities-based service.

LECs will be forced to lose 15% to 20% market share before the FCC will let them offer long-distance, says analyst Alvin All, vice president at Everen Securities, Chicago. The IXCs will benefit by being able to offer higher margin services such as voice mail, says All.

In the long run, however, when all LECs offer long-distance, they collectively could grab 10% to 20% of the long-distance market share as resellers, a Duff & Phelps credit rating report estimates. AT&T would be hit hardest because it has the largest residential customer base of the IXCs.

Many of those customers have never chosen another carrier, so they might look to the Bell companies as a familiar and attractive alternative, the report says. AT&T must aggressively bundle its services, including direct broadcast satellite services like DirecTV and personal communication services, to meet the threat, advises Michael Weaver, author of the Duff & Phelps report.

AT&T's Davis disagrees. "Many of our customers want to get both [local and long-distance] through AT&T," he says. AT&T also has the brand name, reputation and customer service that can win the day, he says.

Both sides are using a number of strategies to infiltrate the other's market while successfully keeping others out of their own. Battlegrounds range from the touchy area of interconnection, where a single guideline can be interpreted in numerous ways, to the complex issue of carrier operations support systems (OSSs). Competitors say incumbents are moving too slowly to modernize their information technology. Incumbents say they are being forced to spend oceans of money just to allow competitors to steal customers. And no one is shying away from using good old-fashioned political clout to press on any front.

Interconnected like a fox The telecom act requires the RHCs to interconnect with competitors, including CLECs, IXCs and Internet service providers (ISPs), on terms equal to or better in quality than the terms they give themselves or their affiliates. The provision is similar to the equal access rule that required the Bell companies to offer the same right of long-distance entry to MCI as they did to their former parent, AT&T (Figure 2).

The incumbents also must make interconnections at any "technically feasible point" and on "just, reasonable and non-discriminatory rates, terms and conditions" (Telephony, May 12, page 34).

"The [RHCs] have an incentive to get a few carriers into the market, but not many," says Craig Clausen, senior vice president of New Paradigm Resources Group, Chicago. "Some of the [RHCs] have gotten it down to a science with interconnection agreements. If you're willing to sign on to a template, fine. If you try to do something a little different, sorry.

GTE and U S West have been the most stubborn, alleges Heather Gold, president of the Association for Local Telecommunications Services, a Washington association that represents CLECs.

GTE, which never fell under federal court orders concerning the Bell System, offers long-distance throughout the country via a resale agreement with WorldCom. "GTE is not negotiating easily or quickly in line with the act," says Gold.

"GTE has become the stalking horse for everyone else," says Tom Allen, division vice president for strategic planning, regulatory policy and industry relations for Intermedia Communications, a Tampa, Fla.-based CLEC. GTE not only challenged the FCC's interconnection order in federal court, but it has appealed 50 arbitration agreements in about 20 states.

The carrier defends its actions. GTE contests agreements it believes violate the act's provisions that carriers provide unbundled network elements at cost, plus a reasonable profit, and that they sell services at retail rates, minus costs avoided by being a wholesaler. These issues are important because they protect universal service and ensure affordable customer rates, a GTE spokeswoman says.

The FCC gave new competitors the option of building their own networks, reselling local service or buying unbundled network elements to use alone or with their own equipment.

AT&T wants to avoid paying access fees by going after the unbundled network elements. Of the carrier's 50 arbitration agreements, 47 have stipulated that no access fees will be charged when AT&T uses the unbundled element platform. AT&T is appealing the others.

"Obviously, politics are involved," AT&T's Davis says. State public utility commissions really do want competition, so most have tried to adopt terms and conditions that would let competitors enter, he believes.

The IXCs contend that most of the incumbent LECs don't share that enthusiasm.

Rick Bailey, AT&T's law and government affairs vice president for the Western region, calls U S West "the most recalcitrant [and] the most difficult to deal with of all the [RHCs].

When AT&T started negotiating with U S West in early 1996, the Bell company's representatives wouldn't agree to escalate certain issues to get them resolved, says Bailey.

Public service commissions in Iowa and Colorado got fed up. The Iowa Utilities Board ordered U S West on April 4 to pay more than $125,000 in civil penalties for failing to comply with interconnection agreements with AT&T and MCI. The board found that U S West's violation of its agreement with MCI was willful, and assessed a $10,000-per-day civil penalty - the largest the board can impose. The board also levied a $1500-per-day penalty against the carrier for failing to comply with its interconnection agreement with AT&T.

The Colorado board on April 28 rejected U S West's second filing of information about internal standards and benchmarks for quality of service and found that the carrier failed to negotiate in good faith under the telecom act.

U S West counters that AT&T started the negotiations with a list of more than 800 issues, then dropped the list after 350 issues were resolved and switched to a 1000-page contract as the basis for discussions.

"We had to meet with more than 90 companies in our territory who wanted to negotiate [interconnection agreements]," says Wendy Moser, corporate counsel for U S West. U S West appointed a negotiating team to deal solely with AT&T. Although U S West's representatives couldn't immediately answer every question that AT&T had, they took time to get the right answers, she says.

The Iowa and Colorado board rulings were based on a lack of communication and a misunderstanding, U S West says, and it is asking the Iowa board to reconsider.

Beyond the skirmishes, U S West and other LECs question the motivations of the IXCs, particularly AT&T and MCI. After all, the long-distance companies eventually must open their markets to a horde of new competitors. The RHCs, on the other hand, are fighting rivals on their home turfs.

"We've been able to negotiate and reach agreement with dozens of parties," the U S West spokesman says. "If people want to interconnect sincerely, we'll work that out. The only thing holding them back is their own resolve." U S West has 154 agreements pending and adopted in its 14-state territory.

A network's technical revolution The carriers' OSSs, and especially the Bell companies', have proved to be just as significant a hindrance to competition. While OSS modernization remains a major industry issue, competitors openly wonder if incumbent telcos use their outmoded OSSs as a convenient excuse for poor cooperation.

MCI contends that its contract with Pacific Bell requires that customer orders be processed within three days. "Three months is not uncommon, nor is three weeks," says Nate Davis, chief financial officer for MCI Telecommunications.

The RHCs' back offices hold important internal information which creates "a long list of consequences," says Gail Garfield Schwartz, vice president of public policy and government affairs for Teleport Communications Group. The incumbents have superior data about such nitty-gritty issues as repair, maintenance, pre-ordering and ordering requests, and whether a competitor has asked to buy an unbundled loop.

"If we ask to buy an unbundled loop, [the incumbent] can use that to market services to the very customers we're trying to serve," she says. "[The incumbent] can delay our ability to turn up service to a customer, cause calls to be blocked by not giving sufficient trunking capacity or cause calls to be lost by not porting the numbers.

"None of these keep us from addressing the market, and we are very successful in doing that," says Garfield Schwartz. "But it does create a playing field that can hardly be called equal.

One man used his cellular phone for three weeks while waiting for Pacific Bell to install local wireline service in his house under the MCI name, MCI's Davis alleges. The customer called the carrier to ask what was taking so long and finally enlisted an installer he saw in the neighborhood to get the job done.

Pacific Bell concedes that getting service to a new customer can take three days and that it uses more manual order processing than it would like.

But the carrier has hired more people, equipped itself with electronic ordering and maintenance interfaces and spent $100 million last year on systems and other capabilities designed to open the local market to competition. Pacific Bell plans to spend even more this year, says Lee Bauman, vice president of local competition for Pacific Bell.

The number of Pacific Bell employees processing orders has jumped from 150 at the start of the year to 300 in mid-May and will be more than 1000 by fall. After the process for ordering key services is automated, some manual work will remain because Pacific Bell has a broad range of service offerings, which all must be available for resale. An estimated 1500 to 2500 orders were being processed daily in mid-May, but that number will increase soon, Bauman says.

A major obstacle is the lack of standards and specifications for the interfaces. The interfaces were developed in line with competitors' requests, but the new entrants now want changes and more elaborate capabilities, he says.

"When competitors say a certain thing is not available, most likely, they just thought of it," he says.

Some are willing to give telcos the benefit of the doubt. A Harris Corp. spokesman calls it "embedded thinking." RHCs just can't come to grips with a world of open, interconnected networks, he says. Harris markets a testing product that lets carriers test lines across the boundary between incumbent and CLECs.

"The RHCs have thought the same way for the last half-century," the Harris spokesman says.

The U S West spokesman seconds that opinion. "We're trying to figure out how the network will work as a multiservice provider environment. We're going to have a lot of starts and stops and re-dos.

It's all about clout The IXCs, being national in scope, often get the best hearing from national agencies such as the FCC. LECs obviously have a major advantage in state and local politics.

So incumbent LECs often turn to state-level agencies to overrule or uphold federal actions. Late last year, GTE challenged whether the FCC had the authority to determine guidelines for interconnection, arguing that those guidelines should be established at the state level.

Although no one alleges impropriety, it's no secret that the Bell companies have long-standing, powerful ties to politicians at the state and local levels. And it's no wonder. The latest Fortune 500 list ranks the RHCs and GTE among the top 20 revenue-generating businesses in their respective home states. U S West is ranked No. 1 in Colorado, GTE is No. 3 in Connecticut, BellSouth is No. 3 in Georgia, Bell Atlantic is No. 4 in Pennsylvania and SBC is No. 5 in Texas.

They bolster their clout by supporting goodwill efforts ranging from baseball teams to emergency disaster relief. "It is the natural action of any monopoly," says AT&T's Bailey. "A monopoly doesn't want to voluntarily give up its [status].

"They are acting as any profit-motivated company would - keep the competition out," says Clausen of New Paradigm Resources.

U S West took the unusual step of petitioning state commissions in Arizona and Minnesota to modify their LATA boundaries so the carrier could immediately offer interLATA services in those states. The Competition Policy Institute and the Minnesota Department of Public Service filed a petition seeking an answer: Do states have the authority to create or change LATA boundaries? The FCC said no on April 21. The telecom act shifted jurisdiction for LATA boundaries from the federal judge who oversaw the AT&T breakup to the FCC.

"The commission did not and could not delegate its authority over the definition of LATA boundaries to the states," says the order from the FCC's Common Carrier Bureau.

Michael Morris, TCG's Western Region vice president of regulatory and external affairs, alleges that "U S West had badly wanted to find a way around the requirement that its local monopoly be eliminated as a precondition to entering the long-distance business.

"[The] FCC decision should be read by U S West as a signal - start cooperating with the process of establishing local phone competition," he says.

U S West sought the changes because it interpreted the FCC's second interconnection order, issued last August, to mean that states had been granted that authority. Further, Arizona and Minnesota offer competing carriers 1-plus dialing for calls within each state's borders. "We're only asking to be able to do the same within our service territory," says Nancy Bernstrom, director of federal information for U S West.

Ameritech and SBC are taking a more traditional route to the long-distance market. Ameritech reapplied to the FCC on May 21 to provide long-distance service in Michigan, vowing that it meets the legal and regulatory requirements to do so. The FCC gave Ameritech little choice but to withdraw its first application in February because of unresolved issues with the Michigan Public Service Commission (Telephony, Feb. 17, page 10).

After Southwestern Bell filed its application with the FCC in April to offer long-distance service in Oklahoma, ALTS, the competitors' group, issued a "competition handbook" designed to help state and federal regulators "see through these monopoly snow jobs and to quickly dismiss unfounded Bell arguments." ALTS asked the FCC to dismiss SBC's application, accusing the Bell company of overstating its claim that there is sufficient facilities-based, local competition in Oklahoma to let it compete.

The ALTS petition was one of several condemnations of the application, including one from MCI, an Oklahoma administrative law judge and Brooks Fiber, which has an interconnection agreement with Southwestern Bell, the operating company subsidiary of SBC.

Despite objections, the Oklahoma Corporation Commission approved Southwestern Bell's application (Telephony, April 28, page 8). The FCC will have the final word.

The IXCs also may be gaming the process, Clausen says. "I don't think MCI or AT&T has a clear view of what they're going to do yet in the local market. What are they going to do with these agreements once they have them in place? If you don't know what you're going to do with the agreement, you may be asking for everything under the sun.

The IXCs are, to some extent, creating an opportunity for CLECs because the long-distance carriers are offering such limited facilities-based local service, Garfield Schwartz points out. Yet the long-distance carriers insist they mean business.

ISPs have their turn ISPs represent another challenge to the telecom hierarchy, even as internal disputes threaten to rupture the "network of networks.

UUNet has notified a dozen small ISPs that it will start charging them to access its Internet backbone. ISPs had previously worked together under peering arrangements in which they exchanged traffic at no charge.

At the same time, increasing data traffic is pushing telephone companies to become end-to-end datacom service providers.

GeoNet, a small company in Florida offering a solution to Internet congestion, claims that the Bell companies and GTE ignored its solution to divert data calls off the voice network because they are intent on building out their own data networks and maintaining control over those networks.

Given carriers' resistance to having third parties such as ISPs connect to their networks, a short-term solution seems unlikely.

Bell Atlantic agrees that GeoNet's solution is valid. But that solution calls for a special purpose service control point - owned and maintained by someone else - to be connected to the telco's network through an SS7 interface, says Pat Donovan, a member of technical staff at Bell Atlantic's technology planning department. That's anathema for telco technicians.

Southwestern Bell is selling its own Internet congestion solution, the Internet/Intranet Transport Service, in 13 major markets in its five-state service area. The service splits the phone network into two traffic lanes - one for voice calls and one for Internet calls.

The Commercial Internet Exchange, the largest trade association of ISPs, sees solutions such as these as further evidence of LEC balking. Carriers' solutions are incompatible with ISPs' equipment, the pricing structure is not competitive, and ISPs are not allowed to collocate, says Barbara Dooley, executive director of the Herndon, Va.-based association.

The ISP industry accuses LECs of providing their own Internet arms with favorable terms that aren't available to competing ISPs.

Amid the squabbling among industry segments, some long-term alliances appear certain. CLECs already are inviting IXCs to share some of their servers to reduce costs, and IXCs can use the CLECs to gain quick access to the local loop, says All of Everen Securities. Certain CLECs may be perfect fits for Bell companies offering service out-of-region. And the incumbent local carriers have wholesaling long-distance agreements with IXCs, primarily Sprint and WorldCom (Table 1).

Regardless of future partnerships, competition promotes growth. The competitive carriers are capturing much of that growth without challenging the incumbents' bases of operation. And the incumbents have met new market demands by setting up operations in wireless, video and Internet access. "They'll find ways to adapt, survive and grow," says Clausen.