Local Service Providers
In addition to incumbent telephone companies, a variety of providers sell local services. These include interexchange carriers, resellers, utilities and agents. A new type of provider, building local exchange carriers, sell services to tenants in office parks and multi-tenant buildings.
AT&T
AT&T has been transformed from “Ma Bell,” the telecommunications giant with 330,000 employees in 1995 to a company with 160,000 employees, decreasing long distance revenues, strong cellular sales and massive debt in April 2001.
Background
After AT&T was divested of the local incumbent Bell Operating Companies (BOCs) in 1984, it retained units that sold voice and data communications and switching equipment. Their equipment divisions manufactured and sold gear to carriers as well as general business customers.
Once AT&T started selling local service through bypass and its new subsidiary Teleport, it came to be perceived as a competitor to RBOCs for local and, eventually, long distance service. (See Chapter 3 for bypass.) Thus, for its largest customers of switching equipment, RBOCs, purchasing central office equipment from AT&T could be perceived as buying from competitors. To protect central office sales, AT&T spun off its customer premise and carrier sales and manufacturing units at the end of 1996. The new company was Lucent Technologies. AT&T spun off NCR, its computer systems and services unit early in 1997.
Recent Events
In 2000, AT&T made its wireless unit, AT&T Wireless, a tracking stock to increase its value to shareholders. Tracking stocks may pay dividends and can be traded separately but do not represent ownership in separate companies. AT&T Wireless Group has consistently outperformed the rest of AT&T. It is the third largest cellular provider in the United States and is partly owned by NTT DoCoMo.
AT&T accumulated large amounts of debt by:
Purchasing cellular assets from Craig McCaw and others
Purchasing spectrum and building infrastructure for wireless services
Upgrading its backbone network to OC 192 (10 gigabits) speeds for high-speed data and Internet traffic
Buying cable TV properties TCI and MediaOne to offer residential Internet access bundled with telephone and cable TV service
Upgrading its new cable TV assets for phone and high-speed Internet access over the cable TV outside wires—bringing total investment in cable TV to $115 billion by October 2000
In addition, AT&T's earnings were hurt by losses at its cable TV Internet access provider, Excite At Home, lower margins on long distance and competition that cut into its market share. Many analysts felt that AT&T erred by not building more fiber infrastructure in metropolitan areas to beef up sales to businesses. AT&T also alienated business customers with its billing system on which it was difficult to correct billing mistakes. Its fourth quarter 2000 profits fell 51% from the previous period.
Breaking Up AT&T—Again
To attract investors, AT&T announced plans to spin off its wireless division and create tracking stocks for its business, residential and broadband (cable TV) units (see Table 4.2). AT&T felt that there would be more value for shareholders if they had shares in individual companies rather than one large company.
| Name of Unit | Percent of Total Year 2000 AT&T Revenues | Tracking Stock or Independent Company |
|---|---|---|
| AT&T Business | 42% | Will keep the AT&T brand and stock symbol on the New York Stock Exchange |
| AT&T Consumer | 25% | Tracking stock of AT&T Business (under terms of the contract between the business and consumer units, the consumer unit is required to use the AT&T network for five years for its customer's traffic) |
| AT&T Wireless | 18% | Independent company |
| AT&T Broadband | 15% | Initially a tracking stock; later an independent company |
In 2000, AT&T also announced the 2001 planned spin-off of Liberty Media Group, which at the time was a tracking stock. AT&T acquired Liberty Media as part of its acquisition of TCI. Liberty Media chairman is cable TV pioneer John Malone, AT&T's largest shareholder. Liberty Media holds: 49% of Discovery Communications, 21% of USA Networks, 21% of Sprint PCS plus numerous cable holdings in Europe.
To lower its debt, AT&T sold its 10% stake in Japan Telecom and stakes in various cable properties in the United States. It also plans to sell its 30 million shares of Cablevision. It is shedding its 25.5% ownership in Time Warner Entertainment mandated by the FCC as a condition of its merger with MediaOne. Under FCC rulings, no cable company is allowed to own more than 30% of the total cable subscribers in the United States. These steps are expected to lower AT&T's debt from $65 billion in January 2001 to about $32 billion.
Competitive Local Exchange Carriers (Integrated Communications Providers)
According to the Association for Local Telecommunications Services (ALTS) as of third quarter 2000, CLECs serve 8.2% of the nation's 196 million access lines. They are termed competitive local exchange carriers because they compete with independent and Regional Bell Operating Companies. These firms are known as incumbent telephone companies. However, when they compete outside of their home territories, which is rare for Regional Bell Operating Companies (RBOCs), they are considered CLECs. CLECs, also known as integrated communications providers (ICPs), sell Internet access, data communications services, white and yellow page listings, toll-free (800 and 888) service, long distance and 911 services. CLECs refer to themselves as ICPs when they sell local and data services over their own fiber optic or wireless infrastructure.
The three largest CLECs are WorldCom Group, AT&T and McLeodUSA, headquartered in Rapid City, Iowa. According to Greg Mycio, Director, Broadband Analysis for New Paradigm Resources Group, Inc. (NPRG), WorldCom Group has $15 billion in local sales, AT&T has $14.5 billion and McLeodUSA has $1.4 billion. Between them, AT&T and WorldCom made up 66% of CLEC sales. See Table 4.3 for CLEC revenue by category. WorldCom's purchases of MCI Metro, MFS and Brooks Fiber and AT&T's purchase of Teleport gave them a jump-start on owning fiber infrastructure for local service.
Clark McLeod, who started his career as a junior high school math teacher, founded McLeodUSA. Mr. McLeod first founded long distance company Telecom USA (formerly Teleconnect) in April of 1981. In 1991, two years after Telecom USA was bought by MCI, he started McLeodUSA (at that time, McLeod Telecommunications) with Stephen Gray. With its acquisition of CapRock, McLeodUSA expanded into Texas, Louisiana, Arkansas and Oklahoma. McLeodUSA's local telephone and data services are concentrated in 25 states in the midwest, southwest and Rocky Mountain regions. Interestingly, 25% of McLeodUSA's revenue is derived from the sale of white and yellow page directories to customers in 26 states. It operates an extensive interstate fiber network in its region, and expects to add fiber optic electronics by year-end 2001 to most of the Level 3 fiber for which it has rights.
Some CLECs such as ITC^DeltaCom, headquartered in West Point, Georgia were originally independent local telephone companies. Independent telephone companies were non-AT&T owned incumbent telephone companies, for the most part established prior to the 1984 divestiture. ITC^DeltaCom was established as an independent telephone company, Interstate Telephone Company (ITC), in Alabama in 1986. Through a merger with FiberNet, it owns a 4,600-mile fiber network. It sells wholesale and retail services on the FiberNet facilities as well as on utility companies' fiber networks in the southeastern region of the U.S.
CLECs sell services via a mix of their own facilities and those they resell or lease from incumbents. According to Credit Suisse First Boston, by the second quarter of 2000, the total CLEC line mix was 36% their own fiber or wireless facilities, 31% total resale and 33% unbundled network elements. With unbundled network elements, the provider owns some of its own equipment, perhaps its switch or DSL-multiplexing equipment and resells a portion of the incumbent network, perhaps the last mile to the customer premise. Total resale means the provider has no equipment connected to the incumbent's network.
The Association for Local Telecommunications Services (ALTS) Annual Report on the State of the Local Telecom Industry, 2001 stated that of the 40 public CLECs, only four are profitable. They are Intermedia Communications, NTELOS (formerly known as CFW Communications), Pac-West Telecom and Time Warner Telecom. ALTS used as their sources: WSJ.com, MSNBC.com, New Paradigm Resources Group (NPRG), Morgan Stanley Dean Witter and ALTS.
CLECs sell mostly to business customers. According to the FCC, by mid-June 2000, 66% of CLEC lines served business, institutional and government lines. In contrast, 79% of incumbent telephone company lines served residential and small business customers.
The largest area for growth for CLECs is data communications services (e.g., Frame Relay, ATM, Internet access, DSL and Web-related services).
Table 4.3 shows revenue changes by category for CLECs between 1999 and 2000. Long distance is essentially flat and data services grew 101%.
| Revenue (in Millions of $) | ||
|---|---|---|
| Revenue Category | 1999 | 2000 |
| Switched Local Service[1] | $7,007 | $8,685 |
| Long Distance[1] | $2,627 | $2,591 |
| Dedicated Access & Private Line | $6,131 | $7,358 |
| Data[2] | $10,218 | $20,547 |
| Total CLEC Service Revenue | $25,983 | $39,181 |
| All Other Revenue[3] | $3,211 | $5,361 |
| Total Revenue | $29,194 | $44,542 |
| Source: New Paradigm Resources Group, Inc. | ||
[1] Includes resale revenues.
[2] Includes all data and data-related services (e.g., Frame Relay, ATM, Internet access).
[3] Includes miscellaneous telecom revenue (e.g., reciprocal compensation) and non-telecom–related revenues (e.g., network development and directory services).
Hometown Solutions, LLC—The Smallest CLECThe smallest CLEC in the United States, HomeTown Solutions, LLC, has annual revenues of $25,000 and is located in rural Minnesota. HomeTown Solutions was started in 1998 as a joint effort of the incumbent telephone company, which is Federated Telephone Cooperative (FTC) and electric utility Agralite Electric Cooperative. FTC began operations in 1952 as a cooperative, bringing telephone service to farmers and villages who had no telephone service. FTC today is the incumbent independent telephone company for eight communities with a total population of 2,200 people. The idea of expansion into another town, nearby Morris outside of the FTC territory, was spurred by businesses and residential customers in Morris having only one choice for service, Qwest (formerly U S West). In addition, some fiber was already installed in Morris. HomeTown installed a remote shelf of the FTC central office in Morris and ran fiber to every business. By the end of 1999 and the beginning of 2000, HomeTown Solutions started offering service to business customers. Fiber will be run to every residence by the fall of 2001. The total population of Morris, including a university, is 5500. HomeTown Solutions is now operating as a CLEC in Morris. It sells local service, long distance, high-speed Internet and dialup Internet as well as cable TV service. It also is an agent for Cellular 2000, a cellular company in the area. Although small in scope—currently with 18 employees, some of whom work for both FTC and HomeTown Solutions—the HomeTown endeavor illustrates the trend of independent telephone companies expanding service into other areas and working jointly with electric utilities. Certainly, competition in these more rural areas is less intense than in larger metropolitan areas. |
Carriers with Their Own Facilities
To avoid the expense of constructing new networks, some new carriers purchase switches and connect them to other carriers' fiber optic networks. The most common way to gain exclusive rights to a set amount of capacity on fiber optic cabling is through a technique called Indefeasible Right of Use (IRU). The owner of the fiber system performs installation and maintenance. The carrier installs the switching equipment and is responsible for customer service, marketing and billing.
With IRU, a carrier purchases the rights to a set number of fiber strands from investors that have built a fiber network. Indefeasible Right of Use is analogous to purchasing a condominium. Where a purchaser of a condominium buys only one or more units in an apartment building and pays a “condo fee” for maintenance, an IRU owner purchases a set amount of fiber capacity on someone else's fiber run. This costs less than hiring crews to lay fiber. It also guarantees a fixed amount of bandwidth.
Resellers and Switchless Resellers
According to ATLANTIC•ACM, a Boston-based consulting firm, in 1999 resellers generated $13.26 billion in long distance revenues. AT&T, MCI Group, ITC^DeltaCom, McLeodUSA, the RBOCs and Sprint sell both directly to end users and to carriers. Resellers buy long distance services from other carriers and resell them at retail prices to end users.
There are three types of resellers:
Facilities-based resellers— Own switches that route calls; lease lines from major carriers over which the calls are routed as well as own some of their own outside cabling.
Pure resellers— Do not own switches; purchase large quantities of switched services that they resell; receive billing tapes from carriers with detail from which they bill customers directly for services.
Agents— Work as independent sales agents for local telephone companies and interexchange carriers. Agents do not issue bills. Customers are billed directly by the telephone company or the IEX.
Resellers buy and resell long distance services, local services, Internet access and data services such as Frame Relay. The services they resell are from national and regional carriers such as RBOCs, Sprint, Qwest Communications, MCI Group and AT&T. Facilities-based resellers own switches in high-volume calling areas that route calls over the fiber cable lines leased from the major carriers. Resellers do not necessarily have switches in all of the locations from which they sell long distance.
Pure resellers purchase and resell services from multiple long distance carriers. The carriers that transport the calls send billing tapes to the reseller. The reseller uses these tapes to generate bills, which it sends to its customers. Resellers have customer service and sales staff to which customers report service problems. The reseller, in turn, coordinates resolution of problems with carriers.
Dial around (10-10xxx), prepaid debit cards and international calling make up a large part of the resale market, as does cellular long distance. Cellular carriers owned by RBOCs that don't have permission to sell in-region long distance rely on resale to transport their customers' long distance traffic.
Another form of reseller is the alternate operator service (AOS) provider company. AOS companies supply long distance to privately owned pay phones and telephones in public locations such as airports, hospitals and universities. They buy long distance in bulk from interexchange carriers and resell it at a premium. Calls from these phones are intercepted by alternate operator services equipment. Their highly automated equipment validates credit card numbers and keeps track of calls for billing purposes. They also process debit card calls. The AOS market has been hurt by the proliferation of cellular telephones. People with cell phones do not need to use pay phones. In 2001, BellSouth announced that it is getting out of the pay phone business.
Utilities—A Natural Fit for TelecommunicationsIn many ways, utilities operate similarly to incumbent telecommunications companies. They own miles of fiber, and state and national agencies regulate them. Moreover, utilities as well as incumbent telephone companies own telephone poles. Because of this background, they know how to obtain rights to lay fiber and to gain access to each other's conduits and telephone poles. They've had experience in the rules and regulations and know how to go about the tasks of building outside infrastructure. Utilities are a slow-growth industry. They are faced with deregulation, competition and possible loss of market share. A way some of them hope to expand is by investing in telecommunications. In addition, utility companies have skills in handling billing and customer service issues. The intention is to offer “one-stop shopping” for services such as video-on-demand, Internet access, data services and voice calling. |
The following are examples of utilities that are in telecommunications:
The Montana Power Company started a subsidiary, Telecommunications Resources, Inc., which eventually purchased TOUCHAMERICA and changed its name to TOUCHAMERICA. It has cellular properties, a fiber network in the west and it purchased the long distance assets of Qwest in its 14-state RBOC (formerly U S West) territory. Montana Power plans on taking TOUCHAMERICA public.
Enron Broadband Services is part of Enron Corporation, a utility headquartered in Houston. Enron Communications has a high-speed interstate fiber optic network. Enron offers bandwidth trading where buyers can bid on fiber optic–based routes to carry traffic. It also sells the routes that carriers bid on through their pooling points. Pooling points are places where carriers interconnect their networks to use capacity they have bid on. Enron offers services such as streaming video to ISPs, carriers and corporate customers. Streaming video is a way to carry video to end users more effectively over Internet-type networks by compressing the video so that less network capacity is required. (See Chapter 1 for streaming video.)
Citizens Communications, formerly Citizens Utilities, sees so much potential in telecommunications that it is selling its electricity, water and natural gas businesses to focus on telecommunications. Citizens Communications Company is headquartered in Stamford, Connecticut. It has 2.5 million access lines in 24 states across the United States. Its subsidiary, Electric Lightwave, Inc., of Vancouver, Washington, operates a broadband fiber optic network in the western United States. Its fiber network consists of two routes from Portland, Oregon to Los Angeles and from the state of Washington to California. It sells both to end users and to carriers.
Other utilities in telecommunications include:
Pacific Enterprises of Southern California
Enova Corporation of San Diego
NStar in the Boston, Massachusetts, area
UtiliCorp of Kansas and Missouri
Carolina Power & Light Company of Raleigh, North Carolina
Building Local Exchange Carriers (BLECs)
Building local exchange carriers (Building LECs) build infrastructure inside campus and multidwelling office buildings including hospitals, hotels (there are 3.5 million hotels in the U.S. alone), dormitories, schools and marinas. They essentially are an outsourcing service for all of a tenant's telecommunications needs. Instead of finding providers for all of their voice and data needs, customers are offered one vendor, the Building LEC, for all of their needs. Building local exchange carriers sell:
High-speed Internet access
Email
Web hosting
Secure remote access to email and corporate files
“Firewalls” for LAN-connected computers
Long distance
Building Local Exchange Carriers primarily offer small and medium businesses the convenience of one bill for these services. They connect the in-building cabling, routing and multiplexing equipment to carriers' long distance networks and the Internet.
Initially, most BLECs concentrated on metropolitan areas where they had access to many buildings in each area. Many of them were started by real estate investment trusts (REITs) as a source of revenue. For example, a Building Local Exchange Carrier such as Broadband Office or Advanced Buildings Networks (a division of CLEC Intermedia) signs an agreement with a building owner to offer telecommunications services to its tenants. The building owner receives a monthly commission for each tenant that signs up with the BLEC. Prior to the FCC's ruling that banned exclusive agreements between building owners and carriers, these agreements often barred tenants from using anyone other than the BLEC's long distance or Internet access partner for service. The FCC banned these agreements going forward but allowed pre-existing terms to remain unchanged.
A new breed of building local exchange carrier serves suburban campuses and buildings that might be too far from the central office to qualify for DSL. PhatPipe, based in California, is one example of a BLEC concentrating on suburban areas. In multibuilding office parks, PhatPipe offers to connect the smaller buildings to the main building with wireless service to eliminate laying fiber to these buildings. The main building houses electronics such as routers and T-1 and T-3 access devices. PhatPipe leases T-3 circuits from WorldCom to carry voice and data traffic. PhatPipe puts its Internet access equipment in WorldCom points of presence (POPs) where WorldCom has its switching equipment.
Other Building Equipment Local Exchange Carriers are: Allied Riser (now part of Cogent Communications), Intellispace and Verizon Avenue (formerly OnePoint Communications). Companies such as Verizon Avenue place DSL multiplexers in building wiring closets and operate the DSL over the building's copper cabling. From the building to the telephone company switch, it sends the data over fiber. Placing the DSL access multiplexer (DSLAM) in the building eliminates the distance limitation between the DSL modem in the customer office and the DSLAM, which is often located in the telephone company central office or remote fiber equipment located between the central office and the customer.
Agents
Agents work on commission for local telephone and interexchange companies. They enter into agreements to sell long distance, local toll calling, data services, cellular service and value-added services such as voice mail, paging and local Centrex services. (See Chapter 2; with Centrex, most of the hardware for business telephone systems is located in the telephone company central office rather than at the customer premise.) Many agents sell telephone equipment, inside cabling and other hardware such as videoconferencing systems, as well as long distance, cellular and local calling services.
Pay Now, Hope to Call Later—Prepaid CardsDebit cards represent an area of opportunity for resellers, operator service companies, carriers and agents. Debit cards were introduced in the U.S. in the late 1980s. According to Atlantic▪ACM statistics supplied by the International Prepaid Communications Association, in 2000 prepaid telephone cards generated $3.2 billion in annual sales in the United States. In 1976, debit cards were first used in Europe, where credit is not a ready option for calling cards. With debit cards, people without access to credit or without their own telephone service can purchase telephone calling. Users pay for the card in advance and are allowed a set amount of time or calling units. The cards gained popularity in the U.S. initially as a way for people without telephones or credit to make telephone calls. Prepaid cards are used in landline and cellular networks. Debit cards are sold directly by carriers, resellers, sales agents, distributors and retail outlets. The debit card industry is a “layered” industry with different segments selling the cards, promoting the cards, handling the administration and billing aspects and actually carrying the calls. For example, many of the local Bell telephone companies merchandise the cards themselves, but outsource the processing of calls to alternate operator service (AOS) providers, which buy bulk long distance from carriers at wholesale prices. The “prompts” callers hear when they use debit cards (e.g., “Please enter the PIN number on the back of your card”) are generated on carrier or prepaid company's integrated voice response (IVR) platforms. Integrated voice response equipment also lets users know how many minutes they have left on their card. According to Sean Sundstrom, Managing Director of the Boston office for UK-headquartered consultancy Regent Associates International, larger companies are leaving the business because of low margins and because of its complexity. Companies acting as consolidators are getting into the business. They sell spare capacity in carriers' networks that they buy for .03¢ to .08¢ per minute. The biggest players in prepaid cards are AT&T, Sprint, MCI Group and Telefonica. Other companies are IDT, Primus and Teleglobe (part of BCE). Mobile phone card company Red Tango, Inc. sells prepaid service to low-income people in Spain and Latin America, targeting immigrants who wish to call home. It prints all of its own cards with its own logo to build consumer trust and brand awareness. Red Tango sells its cards at a discount to distributors, which sell the cards to retail stores. The Red Tango IVR platforms are located at carrier sites. Figure 4.3 shows how a user's prepaid call is routed. Figure 4.3. Prepaid call flow. Diagram courtesy of Red Tango, Inc.
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Typically, customers sign letters of agency with the agent when they agree to purchase telephone calling services. The agent places orders for service with the carrier and/or phone company. The agent also manages the installation and reports repair problems for customers. The customers are billed directly by the phone company or carrier for services sold by agents. The agent receives a monthly commission from the carrier. In the late l980s, when agents were first in the business of selling local telephone calling, they sold only local toll and value-added services. They subsequently added interexchange calling to their portfolio of services.
Retail outlets also are agents for local telephone and cellular providers. Staples is a case in point. In November 1998, Staples, Inc. and Bell Atlantic (now Verizon) announced that Staples would sell basic telephone lines and enhanced services such as caller ID and voice mail in all of its 229 stores from Maine to Virginia. Staples also is an agent for AT&T Wireless, Verizon Wireless and VoiceStream Wireless Corporation. Previous to this, most telephone service agent programs were aimed at business customers.