Ground Zero for competition: No, really.

Forget the major metros. The dogfight for residential consumers is playing out in small towns

Driving into Hutchinson, Minn., is like driving into many other small towns in the northern reaches of the Midwest. There are a few main streets where most of the retail businesses are located but little sign of the chain stores that have crept across most of the urban/suburban U.S. landscape. It's only a few blocks before you're back in the "country."

On this wintry Tuesday, the town is bustling. Six inches of snow fell overnight, but to most Minnesotans, that's simply the price you pay for living in a state that consistently ranks as one of the most livable in the U.S.

I'm anxious to meet Tom Dahl, general manager of Hutchinson Telephone. I'm here to write a story about the company's deployment of a video system that uses Next Level Communications' very high bit-rate DSL (VDSL)-based platform.

Naturally I have certain prejudices, and coming into Hutchinson, I imagine writing a story about a quiet little telco on the frozen tundra of western Minnesota filled with salt-of-the earth people who support their little league teams during the summer, ice fish in the winter, go to church every Sunday and couldn't care less about the latest RBOC dealings.

Having visited Independent telcos before, I know that many are light years ahead of the big guys in deployment of advanced technology. But certainly they don't care about the machinations of competitive carriers, or do they?

Small town, big plans

That myth disappears as soon as I enter the lobby of Dahl's office, which aside from the prominently displayed Vikings and Packers helmet phones for sale, could pass as the office of a Realtor or insurance agent. Dahl emphasizes up front that we are to discuss the company's competitive local exchange carrier (CLEC) operations in Litchfield, Minn., not Hutchinson proper. Did you say CLEC? Serving Litchfield, population 5000?

Turns out that not only is Hutchinson plenty concerned about CLECs, it is one. Welcome to ground zero of competition. It's not just Hutchinson/Litchfield either. In a week of bouncing around Minnesota and northern Wisconsin, I found that the circumstances are a little different, but the plot remains the same.

If you want to see residential competition for voice and video, forget about waiting to see what AT&T will do with all that cable plant or how Bell Atlantic and SBC Communications will use their relationships with DirecTV. Look at places such as Hutchinson and Mankato, Minn., and Dallas, Wis. RBOCs are running away from these places as fast as they can.

In fact, the local RBOC is half the reason Hutchinson Tel is in Litchfield.

In early 1999, when U S West announced it would sell some of its non-core (read: non-contiguous rural) exchanges, Litchfield was put on the auction block. Sensing an opportunity to expand Hutchinson's territory and provide voice, video and data services in the town, the company jumped - but it put strict limits on bid prices.

"We just stopped at a certain point," Dahl says. And though he won't reveal the breaking price, it was based on investment logic. With a cable incumbent already in town, Hutchinson's purchase of the U S West system couldn't require a return on investment that would stretch into several generations. The decision to not purchase that exchange was a blessing in disguise.

Still wanting to provide all three services in Litchfield, Hutchinson Tel formed its CLEC group, HTC, to provide competitive service. However, entering any town as an overbuilder is a difficult economic proposition that even big carriers have turned away from in major metro areas. "The big guys aren't coming into small towns at all," Dahl says.

What's more, Hutchinson Tel had been down this road before. In the early 1990s, the company signed on to use equipment from Lucent Technologies and BroadBand Technologies (now Pliant Systems) to provide competitive cable service. However, after several of BBT's high-profile customers stopped planned projects, the vendor slowed its product development and eventually revamped its strategy (see sidebar on page 48).

Still, Hutchinson was determined to use a single platform to provide all three services. "Every vendor we had in this door was talking about how they could do telephone now and broadband in the future," Dahl says. Vendors also wanted to send teams of engineers to Minnesota for several months to prove their systems.

Enter Next Level, which had been eking out a living after its spinoff from General Instrument by championing VDSL. In an effort not to repeat the Lucent/BBT experience, HTC gave Next Level 30 days to install its system and allowed only two people to do it. Next Level had the system running in 30 days. "Once they did that, I knew they were serious," Dahl says.

Based on an ATM core, the NLevel3 platform consists of a broadband digital terminal (BDT), a remote universal service access multiplexer (USAM) terminal for DSL access multiplexer and digital loop carrier service (DLC), and a broadband network unit (BNU) for fiber-to-the-curb applications (Figure 1).

Typically, remote terminals are located between 750 and 4000 feet from customers; they connect to the BDT via high capacity fiber and to customers over standard copper telephone lines. Next Level also provides the customer premises equipment and management software required to ensure an integrated system (Figure 2).

Typically, the BDT is placed in the central office (CO), though in Litchfield, HTC faced a situation common in high-growth areas. "Our problem in Litchfield is the growth happens on the edge so we wanted to put the BDTs out on the edge," Dahl says. The result was a CO on the edge of town that could target new residents who may not have any connection with a local provider. It also made economic sense. "Fiber is so much cheaper because the CO is now on the edge of the service territory," he says.

As of mid-April, HTC was on schedule to turn up video services, completing the trio of applications on a single platform.

Crystal clear

As I venture away from Hutchinson, I consider it an anomaly, an aberration from that small telco vision that persists in my head. A CLEC serving residential users in a small town with voice, data and video. Who ever heard of such a thing?

Mike Olsen has, for one. As general manager of Crystal Communications' Minnesota operations, Olsen is leading the charge into Nicollet, Minn., (population 800) from an office that resembles a now-defunct bank on the edge of a large suburban mall. This is the epicenter of competition.

If you listen to Olsen tell the story, it sounds like he just sent in an RSVP for a party.

Dissatisfied with U S West, Nicollet town leaders had been shopping for a competitive carrier to provide voice and data services. Enter Mankato-based Crystal, which was formed in 1998 as a division of Hickory Tech and had been serving as a competitive carrier in southern Minnesota.

But instead of moving in stealth mode as most other CLECs do, Crystal took the unusual step of forming a partnership with Nicollet, loaning the city money to build out its infrastructure.

Under terms of the deal, Crystal leases capacity on the network, which becomes city-owned property after 10 years.

"We were sort of the guinea pigs, and it's worked out to our advantage," Olsen says.

Using its close relationship with the city, and Next Level's platform to provide voice and data services, Crystal has won about 70% of the business and residential access lines. And though it's an isolated victory for the company, the approach is becoming something of a success model for others.

"Part of the reason we picked Nicollet was because it's small," Olsen says. "You couldn't overbuild in downtown Minneapolis."

In fact, the homespun attitude is something Olsen is trying to carry through Crystal's ongoing operations. Using up to eight customer service reps and an internal billing system, the company is making sure customers know Crystal is not a faceless monolith.

"People are sick and tired of calling customer service and being put on hold," he says. "That alone is a big difference."

The land of milk and money

By now, it's beginning to make sense. Yes, competition can survive in a small town. And in some cases, those same small towns can serve as petri dishes for unusual collaboration.

The last stop on my tour is Dallas, Wis. About 25 miles or so off the interstate at Menomonee, down two snow-covered county roads, there is Dallas. Unlike Hutchinson or Mankato, Dallas probably couldn't be mistaken for a Rockwellian scene or an average Midwestern college town.

Rick Vergin, general manager and executive vice president of Chibardun Telephone Cooperative, assures me that Dallas is simply the center of the company's service territory and not the showcase town for its technology.

Like the others, though, we're to talk about CLEC operations. Aside from providing basic voice service to about a dozen towns in northwest Wisconsin, the company has entered the towns of Rice Lake and Barron as a CLEC, providing service under the CTC Telecom name. Unlike the others, however, CTC has about 20 years of experience as a cable operator and is hitting the competitive market with a full complement of services, including a digital video package.

Running those services over an OC-48 ring that links eight towns, Chibardun, and by extension CTC, has significantly reduced its cost structure while maintaining a high-quality signal for all three. "We probably wouldn't have come in as low on price," Vergin says. "Customer service and quality of signal is a big deal."

Using a combination of Next Level and Advanced Fibre Communications platforms, CTC has captured about 75% of the data market and 80% of the video market in Barron (population 2500). In Rice Lake (population 9000), the percentages aren't as good, but by this month, CTC will have more lines than the incumbent Chibardun, which serves about 6500 access lines, Vergin says.

On the video side, CTC's decision to use Next Level - and to a lesser extent AFC - equipment was a matter of economics. Starting with a digital video platform also proved less expensive than overbuilding with traditional analog.

"If we go into another town, we have no investment until we get a subscriber," Vergin says.

Beyond economics and invading GTE's voice and data space and Marcus Cable's video space, CTC is finding that bundling video and voice draws customers to its existing long-distance services. What's more, the company still can claim the local advantage.

"We're different from most of the other CLECs," Vergin says. "Our strategy is to be in it for the long haul."

Indeed, Vergin's vision is to use the company's headends to package video services for adjacent telcos. "Once you've got the signal into an OC-12, it's telephony and they understand that."

A telephone cooperative selling video services to other small telcos that want to compete with incumbents for market shares in small towns? A few months ago, I would have thought it was some concoction from a vendor with too much time on its hands. Now it doesn't sound so crazy.

Forgive David Orr if he doesn't get too excited about the crescendo of activity in video-over-copper technologies. He's seen it before.

Pliant Systems, the company Orr now heads as president and CEO, was at the epicenter of the first telco video hype explosion. Way back when - in 1993 - Pliant was known as BroadBand Technologies and was on the cusp of creating a system that would put every telco in the nation in direct competition with cable operators by putting fiber near the doorstep of every American home.

Bell Atlantic was its headline customer, a rumored buyer and already had installed a system in New Jersey. SBC Communications also had started a promising trial in Richardson, Texas, to offer voice, data and video service using BroadBand Technologies' platform. What's more, the company was a Wall Street darling well before the invasion of the dot-coms and seemingly could do no wrong.

And then it all fell apart.

Bell Atlantic's video operations ground to a halt, SBC dropped its video tests like a bad habit, telcos stopped talking about competing with cable operators in video and BBT stock plummeted.

Whether it was the decision by big cable operators such as Time Warner and the former Tele-Communications Inc. to halt their entry into telephony or telcos' desire to refocus on the voice and data market, the new effort hit BBT like a sucker punch.

"Some trigger said video was not in their strategic future, and without video, our product was over-architected," says Orr, who at the beginning of the BBT run up was president of Alcatel's U.S. operations.

Market condition changes also exposed the company's weakness while investors simultaneously started questioning the costs of getting telcos into the video business. Indeed, even with all technology improvement, much of the cost has remained static, Orr says.

"The civic work - things like getting permits and digging up roads - in putting fiber close to the home is pretty tough," he says. "And it only gets more expensive every day because labor costs keep going up."

But it's not just that the technology was ahead of its time. The entire industry was, Orr says in hindsight. "The telco industry doesn't revolutionize; it transitions."

Such talk would have been heresy in the heady days of BBT, but as Pliant, the company is making peace with its past. Part of the reconciliation process has been somewhat confessional as the company admits its sins and asks for redemption.

"We really had to bite the bullet, and it was a humbling experience," Orr says.

The new Pliant still is broadband-focused, but it is not producing a platform that forces telcos to replace their copper infrastructure. Instead, the Pliant 3000 looks and feels like any other DSL system, but it gains some flexibility from its former life and can act a digital loop carrier. "We don't want to convince anyone that you have to replace your copper for our product to work," Orr says.