Local Competition

There are technical, legal and financial considerations in providing local telephone service. Understanding how calls are passed between competing local carriers and between local carriers, resellers and interexchange carriers is important in comprehending the structure of the industry.

Components of Local Calls

The following should be considered within the context of local calling:

• Transport— The line from a home or business to the central office.

• Switching— The central office switch directs calls to their destination. It also has links to billing and enhanced feature systems such as voice mail and caller ID.

• Terminating transport— The transmission of the call to its end site, or destination.

• Signaling— Signals in the network include telephone number dialed, busy signals, ringing and the diagnostic signals generated by carriers for repair and maintenance of the network.

Transport termination and switching functions are illustrated in Figure 4.1.

Other elements of calling include directory assistance, repair reporting, white and yellow pages, 911 and value-added services such as caller ID. It takes large capital investments to install and maintain networks. According to the Association for Local Telecommunications Services (ALTS), CLEC investment in local telecommunications infrastructure was $24.9 billion in 2000. According to ALTS, the Regional Bell Operating Companies invested $33.6 billion during the same period. These capital improvements include central office switches, data equipment and fiber optic cabling. Because of the large numbers of competitive local exchange providers that went out of business, much of this investment was lost.

Table 4.1. A Sampling of Mergers and Acquisitions of Carriers in the Telecommunications Industry (U.S. and Canada)

Purchasing Company	Purchased Entity	Details
Adelphia Communications Corporation	GS Communications Cablevision Systems Cleveland Properties Harron Communications Corporation Century Communications	With purchase of Harron, Adelphia is the sixth largest cable TV company in the U.S. Previously purchased FrontierVision Partners, FPL Group and Verto Communications.
Allegiance Telecom, Inc.	Adgrafix and HarvardNet, Inc.	Companies will be part of CLEC Allegiance's Web hosting and data services unit.
AOL Time Warner (formerly America Online, Inc.)	Time Warner	Largest ISP bought entertainment and cable TV conglomerate Time Warner in 2001, creating the world's largest media company. The FCC imposed three conditions: Cannot restrict customers from other home pages and must open cable Internet access to three other Internet service providers (ISPs); its instant messaging must work with rival multimedia instant messaging systems; must make AOL's DSL available at same price in cable modem–capable areas as elsewhere. Time Warner owned Warner Brothers, HBO and Turner Broadcasting System, which owns CNN, TNT, the Cartoon Network and various sports teams as well as Time Inc. and Warner Trade Publishing.
AT&T	NorthPoint Communications	Announced its purchase of the assets—but not customers—of DSL provider NorthPoint after NorthPoint filed for Chapter 11 bankruptcy.
	Net2Phone	A 32% interest from long distance provider IDT Corporation. Net2Phone sells voice over IP service.
	American Cellular Corporation	Joint venture with Dobson Communications for 398,000 cellular customers in northeast, midwest and southeast.
	Chambers Communications Corporation (five properties)	Purchase of five of Chambers' cable TV properties in the northwest.
	Honolulu Cellular	Covers Honolulu and Maui. Purchased from BellSouth.
	SmarTalk TeleServices, Inc.	SmarTalk is a provider of prepaid telephone calling cards. It was in Chapter 11 when the purchase was announced in 1999.
	Vanguard Cellular Systems, Inc.	Vanguard is an independent cellular company headquartered in Greensboro, North Carolina. It covers mid-Pennsylvania, parts of Ohio and West Virginia. Announced in 1998.
	IBM Global Network	In 1998, AT&T purchased the global Internet, frame relay and data network from IBM. IBM Global Network covers 850 cities in 59 countries.
	Excite At Home	High-speed Internet access and Web portal concern formerly owned by Cox, Cablevision, Comcast and TCI. AT&T acquired 23% when it bought TCI. Cablevision sued to stop AT&T's purchase of Cox and Comcast's shares. In January 2001, Cox and Comcast declared their intention to exchange their ownership in Excite At Home for shares of AT&T.
	MediaOne Group, Inc.	MediaOne, the fourth largest cable TV company in the U.S., owned 25% of Time Warner Entertainment, which included its cable business, HBO and Warner Brothers Studio. FCC required that AT&T divest Time Warner Entertainment. It also required AT&T to sell its 8% stake in cable TV ISP Road Runner.
	Tele-Communications (TCI )	Approved in 1999. TCI, the largest cable company in the U.S., covers one-third of the U.S. market. Purchase is a way for AT&T to gain access for sale of local Internet access and interactive video service over cable lines. TCI divested itself of its stake in Sprint PCS. AT&T took control of AtHome from TCI. AtHome provides Internet access to the cable industry's customers.
	Teleport Communications Group (TCG)	Acquired in 1998 to give AT&T a presence in local telephone service. TCG was the largest competitive local exchange carrier at the time with service in 66 cities. Cable companies TCI, Comcast and Cox Enterprises formerly owned it.
	AT&T Canada	Bought out the non-AT&T owners.
	McCaw Cellular Communications	Provided AT&T a foothold into wireless services.
BCE	Teleglobe	Global broadband provider Teleglobe purchased U.S. long distance reseller Excel in 1998. BCE is the largest telephone company in Canada. It owns 80% of Bell Canada and SBC owns 20%. BCE owns the second largest wireless provider in Canada, Bell Mobility, and various media concerns. Purchased in 2000.
	CTV The Globe and Mail	Purchased in 2000. In 2001 BCE combined these properties into Bell Globemedia, which owns TV, newspapers and Internet portals.
Broadwing, Inc. (formerly Cincinnati Bell)	IXC Communications, Inc.	IXC is a wholesale carrier with a fiber network. IXC had previously purchased Coastal Telephone Company, which sold telephone service to small and midsize companies. Broadwing operates Cincinnati Bell, an independent telephone company and wireless provider. Purchased in 1999.
	AT&T solutions customer care	Call center service bureau in Florida.
Choice One Communication, Inc.	US Xchange LLC	Rochester, New York–headquartered CLEC purchased US Xchange, a rival serving the midwest. Also offers Web hosting and design, and DSL service. Purchased in 2000.
Cable & Wireless PLC	MCI Internet backbone, wholesale and business customers	Cable & Wireless now carries the third largest amount of Internet traffic. WorldCom carries the most. The European Union required MCI to divest these assets for approval of its merger with WorldCom in 1998.
Call-Net Enterprises, Inc.	Fonorola, Inc.	Fonorola was a long distance rival of Call-Net when it was purchased in 1998. Sprint owns 25% of Canadian based Call-Net, which does business as Sprint Canada.
Charter Communications	Oxygen Media Go2Net	Paul Allen's venture capital firm Vulcan Ventures made investments in these Web portals.
	Marcus Cable InterMedia Partners Helicon Cable Communications Avalon Cable Television Falcon Cable Fanch Communications	With the purchase of these cable companies, Paul Allen, a cofounder of Microsoft, owns the fourth largest cable TV company in the U.S.
Citizens Communications (formerly Citizens Utilities)	Frontier Corporation	Twelfth largest independent telephone company headquartered in Rochester, New York; sold by Global Crossing. Frontier purchase completed in 2001.
	Verizon properties	Various local telephone properties from Verizon in Arizona, California, Illinois, Nebraska and Minnesota that were part of GTE. The Illinois, Nebraska and Minnesota purchases were completed in 2000; Arizona and California are pending.
Comcast Corporation	Lenfest Communications Calpers cable TV assets Jones Intercable, Inc.	Lenfest is in mid-Atlantic area. Comcast increased its stake in the Calpers and Jones ventures to 100% from lower stakes. In 2001 Comcast purchased systems in six states from AT&T Broadband for $2.75 billion. Comcast is the fourth largest cable TV provider.
Cox Communications	Gannett Company's cable TV assets TCA Cable TV Media General, Inc.	The purchase of TCA and Media General's cable TV systems gives Cox access to 5 million subscribers. The Gannett purchase in 2000 adds 520,000 subscribers in the midwest. Cox is the fifth largest cable TV provider.
Deutsche Telekom AG	VoiceStream Wireless Corporation	U.S.'s largest GSM carrier purchased by German incumbent telephone company. The FCC delayed approval until 2001 because of security concerns about foreign government ownership of a telecommunications company.
Exodus Communications	GlobalCenter	Provides Internet services such as Web hosting. Purchased its rival from Global Crossing.
Global Crossing	Cable & Wireless PLC's undersea cable operations	Will enable Global Crossing to install and maintain its own fiber cables.
	IPC Ixnet	Designs and sells voice trading systems for financial services firms. Voice trading systems enable traders and brokers in different firms to place direct calls to each other. Ixnet, which builds and designs corporate extranets for financial firms, was a subsidiary of IPC. Purchased in 2001.
Level 3 Communications, Inc.	GeoNet Communications, Inc.	GeoNet is an ISP to small and medium customers in the Silicon Valley area. It was acquired in 1998.
	RCN Corporation	Owns a 33% common stock interest in RCN, a CLEC and cable TV company. Paul Allen's Vulcan Ventures owns 27%.
	XCOM Technologies	XCOM is a CLEC that sells Internet access to ISPs.
Liberty Media Corporation		AT&T announced that it expects to spin off Liberty Media in August 2001. Liberty Media owns interests in many cable and media companies worldwide. It spun off most of Teligent to IDT in 2001. In 2001 it purchased six cable TV companies from Deutsche Telekom.
McLeodUSA	Intelispan	CLEC McLeodUSA purchased a data services company in 2001: Web security, network monitoring and network design services.
	Splitrock Services, Inc.	Texas-based provider of data networking, Internet access and hosting services.
	CapRock Communications Corporation	Facilities-based Texas CLEC with coverage in six southwestern states. Acquisition of CapRock extends McLeod's coverage to 25 states.
Metromedia Fiber Network, Inc.	SiteSmith	Metromedia Fiber (owned by Metromedia Company) builds fiber optic networks within metropolitan areas. SiteSmith designs, manages and hosts Internet solutions. Purchased in 2000.
Qwest Communications International, Inc.	U S West	Fourth largest long distance carrier purchased the smallest baby Bell in 2000. As a condition of the merger, Qwest sold its long distance arm in the U S West area to Montana Power subsidiary TOUCHAMERICA, Inc.
	LCI International, Inc.	LCI is a reseller of long distance to residential and small business customers. 1997 revenues were $1.64 billion. Provided Qwest LCI's marketing skills and customer base. Acquired in 1998.
	Icon CMT Corporation	Icon is an ISP and Web hosting company. It targets financial, media and pharmaceutical companies.
	EUnet International Ltd.	EUnet, based in Amsterdam, is one of Europe's fastest growing Internet Service Providers. Acquired in 1998.
	Colorado Supernet	Colorado Supernet is an Internet access provider. Acquired in 1998.
	Phoenix Network Systems	Phoenix is a long distance reseller. Acquired in 1998.
U S West Media (Now Qwest)	Continental Cable	Provided a source of cash for Continental Cable to expand its service offerings. New venture called MediaOne. In 1998, U S West split off its cable division into a new company called MediaOne Group, Inc., which was purchased by AT&T.
RCN Corporation	Erols Internet Interport JavaNet UltraNet	RCN purchased these four ISPs in 1998 and rolled them into their Internet access service. Level 3 owns 33% of RCN and Paul Allen's Vulcan Venture owns 27%.
SBC, Inc. (Southwestern Bell Communications)	BellSouth Wireless (Renamed Cingular Wireless)	Cingular Wireless is a joint venture 60% owned by SBC and 40% by BellSouth. This is the second largest cellular company in the USA behind Verizon Wireless.
	Ameritech	A 1999 merger of two RBOCs. Ameritech provides service in five mid-western states.
	The cellular unit of Comcast	This sale was announced in January of 1999. Licenses are in Illinois and Pennsylvania. Comcast is a cable TV company.
	Pacific Telesis Group	A merger of two Regional Bell Operating Companies.
	Southern New England Telecommunications Corporation (SNET)	SNET is the independent telephone company that provides wireless, long distance and 2.3 million local service lines in Connecticut. Completed in 1998.
Science Applications International Corporation, SAIC	Bell Communications Research (Bellcore) Renamed Telcordia Technologies	Announced in September 1996 by all RBOCs, original owners of Bellcore.
Sprint	People's Choice TV Corporation	People's is a wireless cable TV company with licenses in the midwest and west. Service will be used for “last mile” wireless local loop high-speed Internet access and local telephone service.
	American Telecasting, Inc. Wireless Holdings, Inc. Videotron Bay Area, Inc.	Sprint purchased these three companies for their wireless licenses to be used for high-speed Internet access and voice and data services. Service will be deployed using wireless local loop technology.
	Centel Cellular	Became Sprint Cellular in 1993, spun off in 1995 to become an independent company named 360°, which was bought by ALLTEL in 1998.
Telus	BC Telecom (BCT)	Telus was created as the result of a 1999 merger of BC Telecom (incumbent telco in British Columbia). Telus is the second largest telephone company in Canada after BCE. Also bought QuebecTel. Also competes in central and eastern Canada. Verizon owns 27% of Telus.
	Clearnet (renamed Telus Mobility)	The largest wireless provider in Canada.
	Alberta Government Telephones Commission (AGT)	The incumbent telephone company in Alberta. Later purchased the local phone company in Edmonton (ED TEL).
Verizon Communications (formerly Bell Atlantic)	OnePoint (renamed Verizon Avenue)	Verizon Avenue, purchased in 2000, supplies telecommunications services within multidwelling buildings. For example, it brings DSL equipment into a building's wiring closet.
	Metromedia Fiber Network	In 1999, purchased a 19% stake. Metromedia lays fiber in metropolitan areas. Helps Verizon position itself to sell data networking service outside its regions.
	GTE Corporation	Merged company owns one-third of the access lines in the U.S., 63 million. GTE is the largest independent telco. It has revenue of $100 million in long distance and investments in foreign markets. Also sells cellular service. The FCC required that GTE Internet backbone subsidiary Genuity be divested. It can be bought back in five years if Verizon is approved for long distance in all its states by then.
	Vodafone AirTouch (Joint venture called Verizon Wireless)	Largest cellular company in the U.S. Formed in 2000. Joint venture between Verizon and Vodafone. Consists of Verizon, GTE, PrimeCo and AirTouch wireless assets. Vodafone owns 45% and Verizon owns the rest.
Vodafone Group PLC	AirTouch Communications, Inc.	AirTouch had previously purchased the cellular assets of Pacific Telesis and U S West. Vodafone is the largest cellular company in the world with a presence in 23 countries.
WorldCom Inc.	Digex (part of Intermedia Communications)	WorldCom bought Intermedia but has stated that it only intends to keep Digex, the Web hosting subsidiary of Intermedia. Digex supplies caching (Web content distribution to avoid traffic bottlenecks) and Web services. Sale of Intermedia was required by U.S. government.
	SkyTel Communications	Paging company; part of MCI Group.
	CAI Wireless Systems, Inc.	CAI owns 14 wireless cable TV systems, 6 of them in the northeast. Will be used for high-speed wireless local loop telephone service.
	MCI	Provides local fiber optic networks as well as interexchange facilities. In 1998, it was WorldCom's fiftieth purchase in four years. MCI previously had purchased Nationwide Cellular, its cellular resale arm, and Western Union Corporation's Advanced Transmission Systems Division. This was the unit building fiber optic networks in cities.
	Brooks Fiber Properties	Announced in 1997. Added more local fiber optic networks.
	CompuServe Corporation	WorldCom kept CompuServe's 1,200 corporate Internet customers and turned over CompuServe's 3 million residential customers to AOL. AOL, in turn, transferred its Internet access and backbone to WorldCom, which sold it to Cable & Wireless.
	MFS	Provided WorldCom with local fiber optic networks and ISP services. MFS had previously purchased UUNET Technologies, a supplier of Internet backbone services.
	WilTel, IDB, Metromedia	Enabled WorldCom to become the fourth largest domestic interexchange carrier prior to its purchase of MCI.
	ANS Communications, Inc.	Sells Internet access, virtual private networks (VPNs), and security services.
	GridNet International	Internet access provider.
XO Communications (formerly Nextlink Communications Inc.)	Concentric Network	XO Communications is a competitive local exchange carrier. Concentric is an Internet access provider. It was purchased in 2000. Cellular pioneer Craig McCaw owns a controlling interest in XO.

Strategies for Entering the Local Calling Market—Resale, Wireless, Cable TV and Construction of Facilities

Companies that compete with incumbent local telephone companies either build their own infrastructure or resell incumbents' facilities. Many use a combination of both strategies. However, resale has proved to have slim margins and many remaining providers are concentrating on selling services based on their own facilities.

Resale

The Telecommunications Act of 1996 requires that Bell telephone companies unbundle components of local calling for resale. Competitors can choose to buy, for example, only local loops in some regions and switching and local loops in other regions. They also can pick from an array of services including enhanced services such as caller ID and call forwarding.

Long distance vendors, Internet service providers, carriers and resellers resell local telephone company and CLEC capacity. Resale of local services enables new competitors to avoid the cost of building fiber routes or adding wireless equipment. Many vendors have a combined strategy that includes both resale and construction of facilities. For example, in high-density areas where there is a potential of many customers, they may construct their fiber and wireless routes. In other, less densely populated locations, they may resell Bell telephone company service.

According to the ASCENT (Association of Communications Enterprises) 2000 Membership Survey and Statistics filled out by its members and compiled by ASCENT:

• Fifty percent use total service resale of incumbent telephone company facilities as their principal method of offering local exchange services.

• Fifteen percent use a combination of resale and their own fiber optic and wireless facilities.

• Fifteen percent primarily use their own facilities to provide local exchange service.

• Twenty percent do not provide local exchange service.

Competitors buy elements such as transport, switching and terminating services at discounts approved by the local utility commissions under guidelines set by the FCC. Their profits are realized in their markup to end users. Resellers bill end users and handle repair and customer service calls. If a repair problem is on Bell lines, the reseller reports the problem to the Bell company, which either fixes it remotely or dispatches a technician. For example, an end user buying local service on a resale basis from a company such as ITC^DeltaCom might have a BellSouth repairperson come to his or her business to repair the line if the line was resold by ITC^DeltaCom.

Data Services and Internet Access via Resale

Resale of data communications services is a high-growth application. Companies such as DSL.net collocate their equipment in incumbent telephone companies' central offices. They sell data services such as digital subscriber line (DSL), Frame Relay, ATM and SONET. (For specialized data services, see Chapter 6.) The resellers' switches route dialup Internet traffic from Bell lines to interexchange carriers. Their switches often are used to send customers' data traffic to ISPs. ISPs such as Verio sell Web hosting email, Internet services and connections to the Internet.

Some data communications and Internet providers resell services using other companies' switches as well as Bell telephone lines.

Because of the low margins in resale, many carriers are investing in leasing fiber strands and putting their own dense wavelength division multiplexers (DWDM) on the fiber. They also are installing their own switches and routers. However, for many of them, they still need to use incumbent telephone company lines in large parts of their network because they don't have fiber optic cabling to all of their customers' premises.

Wireless Local Loop—WLL for Voice and High-Speed Data

Competitive local exchange carriers such as Sprint, WorldCom, AT&T and XO Communications (formerly Nextlink) at one time used a combination of high-capacity wireless, cable TV lines, fiber optics and resale to enter the local telecommunications market. They determined that providing wireless services was less labor-intensive and did not require digging up the street. See Figure 4.2 for a diagram local loop using a mix of fiber and fixed wireless.

Some carriers initially implemented fixed wireless as their primary strategy for building local infrastructure. Of these companies, ART (Advanced Radio Telecom Corporation) and WinStar have filed Chapter 11 bankruptcy. Teligent, as of April 2001, had $1.44 billion in long-term debt and only enough cash to see it through the second quarter of 2001. In all of these companies, initial costs to build new infrastructure were high, losses mounted and investors stopped putting money into the companies. Moreover, customer distrust of the technology and early technical glitches hurt sales. Finally, these companies resold incumbent telephone company service as a large part of their strategy while building out their own infrastructure. Because of high wholesale prices incumbents charged for network services resold, this turned out to be a low-profit strategy.

Sales of wireless local loop have been low in developing countries as well as in the United States. The article, “Waiting for Wireless,” published in SmartMoney.com, 18 April 2001, by Tiernan Ray, cited statistics from Oyster Bay, New York market research firm Allied Business Intelligence that fixed wireless reaches only 100,000 users worldwide. There are, however, expectations that fixed wireless might grow in developing regions because it costs less than laying all new fiber and copper lines. The fact that countries have not standardized on spectrum they will allocate to fixed wireless service means that manufacturers must make different equipment for each frequency band. This, as well as high costs to purchase spectrum in many countries, has kept infrastructure costs high.

Wireless local loop (WLL) services are different than cellular services. Whereas cellular users use their handsets from different locations, wireless local service is a fixed service. It is available between specified points. Antennas placed on customers' roofs send radio signals to vendors' hub-site antennas and receivers. Carriers that use wireless local loop technology run fiber between their central office switches to hubs located on rooftops. Hubs consist of transmitters and receivers cabled to antennas. The antennas located at the hubs beam millimeter-size waves to antennas located on customers' rooftops.

Millimeter wireless technology refers to high-frequency services such as microwave and WLL services. The wavelengths are very small and capable of very fast transmissions. WLLs use gigahertz (GHz) frequencies, billions of waves per second in the 24 to 38 Gigahertz frequencies. (See Chapter 1 for an explanation of frequencies.) Wavelengths at these high frequencies only can travel short distances before they deteriorate. In climates with heavy rain, antennas need to be spaced closer together because heavy rain can destroy small millimeter-sized waves more easily than it damages longer waves in lower frequencies. Most companies that use WLL technology place customer antennas no farther than 1.5 miles from their base station antennas. In rainy areas such as Florida, antennas are spaced as close as .25 miles apart. Heavy rain is more damaging to radio waves than light rain. The heaviness of the rain is more critical than how often it rains. Careful engineering of antennas is required so that rain does not impair service.

In wireless local loop services, antennas must be within the line of sight of each other. No buildings, trees or other objects can obstruct the straight-line path between two antennas.

Local Multipoint Distribution Service (LMDS) and Multipoint Multichannel Distribution Service (MMDS) Fixed Wireless Service

The 28-Gigahertz service is called Local Multipoint Distribution Service (LMDS). The FCC auctioned LMDS frequencies in March 1998 and in 1999. The FCC did not make this spectrum available to the RBOCs. LMDS is known as the wireless version of fiber. It supports high-speed transmissions for voice and data communications. The FCC originally intended this spectrum for cable TV services. XO Communications uses LMDS to reach customers as an alternative to laying fiber or using the incumbent telephone company service. For example, the WLL might cost less than laying fiber for customers who don't need the capacity of fiber. WLL also is deployed for customers as a backup in the event that their fiber is cut. Their voice and data traffic is automatically switched to the wireless service.

Multipoint Multichannel Distribution Service (MMDS) is another wireless service used to provision high-speed local service. It operates at lower frequencies than LMDS and originally was conceived as a way to provide access to cable TV service. Because it uses a lower frequency (2.1–2.7 GHz), MMDS antennas can be farther from each other. Lower frequency signals, because they are based on longer wavelength signals, travel farther before degrading. Because of the longer wavelengths, the speed of MMDS service, 10 megabits per second, is slower than that of Local Multipoint Distribution Service (LMDS), which is 100 megabits per second. Sprint and WorldCom are using MMDS technology for their fixed wireless local loop service. MMDS is less costly to provision than LMDS.

Point-to-Point, Point-to-Multipoint and Daisy Chained Wireless Local Loops

Wireless local loop facilities can be point-to-point or point-to-multipoint. In point-to-point wireless, each vendor antenna, the base antenna, can support only one customer antenna. With point-to-multipoint wireless technology, each base antenna with electronics maintains communications for multiple customers. Thus, one point—the vendor's hub-site antenna transmitter and receiver—supports multiple customers.

Point-to-multipoint wireless technology was developed by the military for applications such as satellites used for surveillance. The technology is now declassified for commercial applications. Point-to-multipoint wireless services are based on bandwidth-on-demand protocols similar to those used in hybrid fiber cable TV systems. In a point-to-multipoint configuration, customers share the bandwidth. It is available “on demand.” The software that manages access to the network is installed on transmitters and receivers connected to antennas. Transmissions are packetized, encrypted and sorted by software on chips. ATM switches at the hub sites transmit customer data over wireless local networks. (See Chapter 6 for ATM service.)

XO Communications sells a daisy chain configuration that provides primary as well as back-up disaster recovery service. In Figure 4.2, building A is connected to XO's fiber by wireless service. Building B is connected to XO's equipment by fiber and to building B by wireless service. If building B's fiber is cut, XO can transmit its traffic through building A's antenna.

High-Capacity Free Space Optics for Fixed Wireless Service

Companies such as Terabeam are developing high-frequency, high-capacity services that use lasers to beam data over short distances. The technology is referred to as free space optics, or fiberless optical service. Terabeam's service is being developed to support speeds of 1 gigabit. This is a higher speed than traditional [256 kilobits to OC-3 (155 megabits)] fixed wireless service. A one-hub antenna can support multiple antennas from a single originating site. Terabeam's service is not commercially deployed at this time. The high frequencies make it prone to disruption from fog and rain. Lucent Technologies owns 30% of Terabeam.

Construction of Fiber Optic and Cable Routes

Many CLECs, utilities and cable TV companies have fiber optic cabling in metropolitan areas. MCI, before it was part of WorldCom, started a subsidiary in 1994 called MCI Metro to develop fiber networks in major metropolitan areas. When WorldCom bought MFS and Brooks Fiber, it gained the miles of fiber MFS and Brooks had deployed in cities. WorldCom's purchase of MCI gave it this entire fiber infrastructure. These local fiber networks are used to transport calls from local customers to the WorldCom network, as well as for providing local calling and Internet access.

New local carriers often construct their own fiber routes in areas where they have many customers, and initially resell Bell transport in regions where they have fewer customers or have not yet built facilities. Both WorldCom and AT&T resell local telephone company services in areas where they have no fiber or coaxial cable facilities.

Cable TV companies have local networks that consist of both coaxial cable and fiber optic cabling. These networks are known as hybrid fiber coaxial (HFC) systems. Fiber runs from the cable headend or main location to the neighborhood. Coaxial cable is used in neighborhood streets and to individual homes and apartment buildings. (See Figure 2.17 in Chapter 2 for a drawing of an HFC network.) Some cable TV companies directly route fiber to a customer's building. This is generally the case with multi-tenant apartment buildings. Large investments of capital are required to convert one-way cable systems to two-way systems and add switches for telephone and data communications applications. According to the National Cable Television Association (NCTA) cable operators sold 1% of their cable TV subscribers, 800,000 customers, telephone service as of year-end 2000. The majority of the service, in 500,000 homes, was sold by AT&T Broadband.

An Example of a Utility as an Overbuilder UtiliCorp United, a utility located in Kansas City, Missouri, has a subsidiary, Everest Connections, which is an overbuilder. UtiliCorp's first telecommunications venture was in Australia, where it built fiber networks using in part the incumbent telephone company Telstra's conduit. UtiliCorp is leveraging the telecommunications expertise gained in Australia and its utility resources to start telecommunications ventures in the United States. It also thinks that the telecommunications business looks a lot like the utility business, where companies serve a mass market in every neighborhood and maintain a network. According to UtiliCorp's 2000 Annual Report discussion of Everest, “Our overall strategy is to enter areas that are underserved by existing broadband providers.” According to Kevin Anderson, President of Everest Connections, “The focus is on last/first mile connections to homes and businesses.” Everest sells high-speed Internet access, telephone service and cable TV to customers in 30 municipalities in the Kansas City, Kansas and Missouri areas. Under the Telecommunications Act of 1996, utilities must provide the same access to competitors and, to their own subsidiaries, to telephone poles. Everest has the skills, knows the rules and language of how to obtain these permissions. It also has relationships with construction companies for building hybrid coaxial cable fiber routes. Everest started selling service in February 2000 and quickly reached 20% penetration in residential neighborhoods. It believes it will reach 30% to 40% penetration quickly. Ninety percent of its customers are taking all three of the services it sells. According to Kevin Anderson, the following is the reaction of customers: “Just give me a local reliable offering that saves me a few dollars and gives me one bill.” Business customers are an attractive option for Everest. The investment is the same but monthly revenues are anticipated to be higher than with residential customers. Everest is targeting small businesses in locations such as strip malls. The impact of competition is already being felt in the first city in which Everest started selling service. The incumbent cable TV provider raised prices 5% in all of the neighboring towns but not in the town where Everest provides service.

Overbuilders—Cable TV Competitors

For the most part, competitors for local service sell to the business, government, education and health care industries. New cable TV companies are the largest telecommunications segment that target residential customers. Competitors to incumbent cable TV companies are known as overbuilders. Overbuilders lay fiber and hybrid coaxial cable fiber systems to which they connect central office switches, television antennas and routers and switches for high-speed Internet access. (See Chapter 5 for details on network architecture.) According to the National Cable Television Association, RCN is the largest overbuilder in the United States. RCN has 335,000 cable TV and 500,000 dialup Internet subscribers in seven markets including New York, Boston and Los Angeles and has raised $6.56 billion in capital. RCN has joint ventures with electric utilities in Boston, Los Angeles and Washington, D.C. for their cable build-outs. In December 2000, RCN announced that it was halting expansion plans due to a cash shortfall.

The overbuilder market is just starting and has not made a serious dent in incumbent cable TV company's monopolies. Overbuilding, building all new infrastructure, requires large capital expenditures of $2500 to $3000 per residence. Because of the cost, widespread competition will develop slowly. Many overbuilders are planning service in suburban areas outside of cities. Overbuilders sell cable TV, telephone service and high-speed cable modem Internet access. They usually offer long distance on a resale basis. For example, they might resell Sprint or WorldCom long distance.