Where Have All the Telecom Firms Gone

The collapse of the NASDAQ not only extinguished the lives of many dot-coms, it also significantly reduced competition in the telecommunications market.

by / August 31, 2001
Ask a local government telecommunications official whats been the biggest issue in the past few years and he or she would probably say managing public rights of way. The frenzy on Wall Street over upstart dot-com firms also included the equally intense telecommunications market. Firms with names like Teligent, Covad, NorthPoint Communications and RCN were raising lots of money and laying down fiber-optic cable in anticipation of huge demands for data, voice and video services.

The demand to bury cable through cities of all sizes has been extreme, according to Ron Mallard, president of the National Association of Telecommunications Officers and Advisors (NATOA) and director of telecommunications for Fairfax County, Va. "We dont want to hinder the deployment of these new technologies, but we also dont want our streets torn up every six months," he said.

But that problem may begin to slow down, now that the financial markets have cooled, cutting off the easy money that led so many firms to grow fast and to lay more fiber than was necessary in some urban areas. For communities eager to have some competition for local phone service, cable TV and high-speed access to the Internet, the wait continues. "Competition, which looked so promising before the NASDAQ collapse, has since fizzled," said Mallard.

Even in technologys hotbed, Silicon Valley, telecommunications competition has slowed, according to Brian Moura, assistant city manager for San Carlos, Calif., and chairman of the San Mateo County Telecommunications Authority. "Some cities here have competing cable service from AT&T and RCN, but RCN has pulled back, especially in the Santa Clara area," he said.

Moura pointed out that telecom firms, such as Qwest and Linx Communications, are focusing on business-oriented, long-haul connectivity from city to city or region to region, versus short-haul networks, which wire metropolitan areas. "That concerns us, because it means letting them use our right of way without providing the community any real value in return," he said.

The Mighty Bells
Nationwide, approximately 500,000 customers have lost their dial tones and Internet hookups, according to the Association for Local Telecommunications Services (ALTS). More disconnections are likely to occur as more firms close shop. And its not individuals and small businesses that are being inconvenienced. In May, a bank in Maryland lost its online banking Web site when a Web-hosting company called Pilot Network Services Inc. shut down, according to the Washington Post.

Since the Telecommunications Reform Act of 1996, competition in a few local telecommunications markets has slowly taken place. Smaller firms are offering competing services in markets where once only a monopoly existed. These upstarts have spent billions of dollars and today claim over 16 million access lines in service, or about 8 percent of the local telecommunications market, according to ALTS.

But ALTS President John Windhausen has complained the challenges faced by the associations members are severe. In a statement about the health of the telecommunications market, he pointed out that the incumbent telephone companies continue to make it extremely difficult for competitors to interconnect with their networks, despite numerous federal and state orders calling on the regional Bell companies to open their networks to competition. Windhausen also pointed out that, rather than compete against each other outside their home territories, the regional Bell operating companies (RBOCs) have merged into even larger companies. He also chastised local governments for imposing "enormous franchise fees and onerous regulations that are unnecessary and anti-competitive."

Service, Regulatory Concerns
As the RBOCs tighten their grip on the local telecom market, local officials worry about reduced competition, sloppy customer service and the relaxed attitude toward regulation by the Federal Communications Commission. While minimum standards are in place to ensure a certain level of service, Mallard pointed out that the rapid pace of mergers and acquisitions can lead to inconsistencies in service levels. "When a company from far comes in and buys a local provider, they impose different customer standards than what the local community has come to expect," he said.

San Carlos began tracking the service records of its cable provider, AT&T, and found that by closely monitoring the level of complaints, they were able to get the large companys attention and persuade them to upgrade their training as well as improve hiring because of large turnover in the field. "Its an interesting area," commented Moura. "You have to keep an eye on it. If you do monitor it closely, you can get their attention."

But if competition withers and customer service standards slide, will the FCC step in? FCC Chairman Michael K. Powell has made clear his philosophy is to let market forces determine the outcome of the telecommunications market. But economists, as well as government associations such as NATOA, believe such an approach is tantamount to approving the RBOCs monopoly on voice and data services. Without regulations to ease competitors access to the wires and switches of the major carriers, it will be difficult to expand competition beyond its current 8 percent share of the market. In the view of most local officials, Washingtons hands-off approach is simply not in the vested interest of the taxpayers.

Last year, the General Accounting Office (GAO) examined the quality of telephone service in the country and found enough problems to raise federal concerns. Since 1999, customer dissatisfaction with the incumbent local exchange carriers -- as the big telecom firms are called -- has been on the rise, according to the GAO.

Public Sector Alternatives
For some local governments, waiting for quality telecom services that compete with the big Bells isnt enough. More than 200 state and local governments are running their own telecom services ranging from phone and cable service to Internet access. Despite the burst of competition in the private sector over the last several years, the number of local governments entering into the telecommunications market is on the rise, according to a report published by the Progress & Freedom Foundation (PFF).

Not only are local governments expanding their existing municipal utilities into this field, but they are also making investments in entirely new infrastructure. Jeffrey Eisenach, president of PFF and author of the report, questions the wisdom of investing taxpayer money in these kinds of initiatives when the private sector is active in the market already. "Evidence suggests that such entry [into telecom services by local governments] will not achieve its desired goals of lower costs and more rapid deployment of efficient telecommunications systems. To the contrary, government entities are not well suited to compete in the dynamic world of telecommunications."

But dont tell that to South Sioux City, Neb., where work on a 144-strand municipal fiber-optic ring is nearing completion. The city of 11,500 will use the fiber to provide voice, video and data services to municipal and educational facilities. But Lance Martin, communications coordinator for the city, makes it clear that the long-term reason for the fiber ring is to attract competitive telecom services to the area. "Right now, we dont have any competition for phone, cable or Internet service," he said.

Local phone service is provided by Qwest, which bought out U.S. West, a company that garnered a reputation for poor customer service. He pointed out that Qwest has done a much better job at customer service, but city residents still dont have DSL service and cable modem service is showing up at a snails pace. In the interim, customers must pay for a T1 connection, which costs $1,000 per month, if they want any kind of high-speed connectivity to the Internet. To speed things up, the city will allow the local cable TV company to use some of its fiber to offer residents high quality digital programming as well as broadband cable modem service to the Net.

So while Beltway analysts urge communities to rely on market forces to bring competitive services to their area, cities like South Sioux City would rather not wait. Its easy to see why.
Tod Newcombe Features Editor