Even the 1996 Federal Communications Act is far from beyond challenge. A New Year's Eve court decision scrapping key provisions of the telecommunications-reform law sparked speculation that Congress would revisit the legislation.
In that decision, U.S. District Judge Joe Kendall of Dallas rejected key provisions of the telecom law. He ruled in favor of a challenge filed by SBC Communications -- and backed by US West Communications -- saying the law unfairly hampered efforts by the nation's Baby Bells to enter the $80 billion long-distance market. The ruling is now under appeal.
While this was the year's largest and most significant battle in the telecom cosmos, it represents only a small portion of the maneuvers that may dramatically change the way the telecommunications business operates. And while state and local governments play a role in remapping the telecom topography, competing interests are at work.
COALITION CHALLENGED
In San Diego, what began as a simple idea soon became a hotbed of local political maneuvering. The city and county formed a cross-jurisdictional consortium to investigate buying government and educational telecommunications services "in bulk" and put these out for open bid. The object was not just to save money but also to gain access to more advanced technology -- providing schools in the area, for example, with bandwidth for Internet and administrative needs they could not otherwise afford, even with e-rate subsidies.
The county had begun to put out telecommunications services for bid, received significantly better prices than the state contract, and suggested the city simply come in on that contract. However, Bill Bostwick -- a Los Alamos National Laboratory
employee who came on as project manager for the initiative -- argued they could do much better if they started with an alliance of at least four partners.
In the fall of 1996, with two additional partners -- the San Diego Unified School District and the County Office of Education -- the San Diego Regional Network Consortium was formed to explore the joint purchase of telecom services, and new bids were sought.
"Our basis for doing this, our goal so to speak, was to see if we could significantly improve the telecommunications at least on the data side," explained Bostwick. "We were looking for an ATM [asynchronous transfer mode] SONET-type platform [Synchronous Optical NETwork] to share, and wondered if, through volume buying, we could drive the prices down to the point that people could afford them, especially the schools who were crying for bandwidth and had only limited budgets."
The consortium received six bids, and in June 1996, after further negotiations, Teleport Communications Group (TCG) of San Diego was announced as the winner. Teleport has been building its own fiber-optic network since 1993 and has over 20,000 fiber miles installed.
TCG's signed contract with the San Diego Data Processing Center marked the first time a major U.S. city awarded a large portion of its phone and data business to a Baby Bell competitor.
In signing the multi-year contract with TCG, the city of San Diego announced that, apart from gaining more advanced technology, it would also shave about 10 percent off its yearly telecom bill. The new deal also meant that TCG would eventually take over the city's data traffic, previously worth $2.2 million a year to Pacific Bell.
The county's part of the deal was originally scheduled to go to the Board of Supervisors Aug. 12, 1996. "That is when things started getting messy," said Bostwick.
TACTICS
Pacific Bell -- and later, Central and Southwestern Bell, which meanwhile had purchased Pacific Bell -- fought back with a surprising array of tactics, according to Bostwick. The companies challenged the fairness of the bid process; lobbied city and county officials and staff members; publicly questioned the validity of the new telecom contract; disparaged individual coalition staff; and even submitted new unsolicited bids to the county after the thorough and completely audited bid process -- in which they participated and lost -- was already completed. "I guess it is typical of the telecommunications business, to come back and say we want another chance," Bostwick said.
However, there was a lot at stake for Pacific Bell. If San Diego County carried through with its purchase of telecom services via the consortium, this would threaten an estimated
$4.6 million in yearly revenue for Pacific Bell.
And these revenue losses might only be the beginning because of the way the consortium had structured its deal with TCG; the more cities, counties, hospitals and schools that joined, the greater the volume of telecommunications traffic and the greater the savings for each member.
"They simply don't want this consortium to happen," said Bostwick. "They came in and talked to me about it. They said, 'We had the wrong people on this. Give us another chance.' I told them, 'We went through a bid process; it has been audited.' They got upset with me when I asked when it came up for bid again in four years time, 'who should I call to find out if you have the right people on it this time?'"
Charlie Christ, general manager of TCG San Diego at the time, publicly put it even more harshly. "This consortium strikes at the heart of PacBell's business," he told the San Diego Union-Tribune. "So they will do everything in their power to destroy the consortium."
However, Pacific Bell said it actually welcomes the consortium. "In California, the rates we sell our services for are regulated," explained Maurice Laque, a spokesperson for Pacific Bell. "We have a tariffed rate and we can't sell that service below that tariffed rate. So when we originally went in to compete with TCG, we were prohibited from going below that tariffed rate and couldn't be competitive. However, the PUC later approved allowing Pacific Bell to go below a tariffed rate if it was in competition with another provider for business. That is what allowed us to come back in and offer a lower bid to try to keep our business with the county. That was the difference.
"My understanding of this," Laque said, "is that this has allowed us to keep our business with the county and the other two partners in the consortium. The one contract we did lose was for $2 million for part of our services we provide the city of San Diego.
"The whole nature of the business is changing dramatically," added Laque. "We applaud the consortium. We think it is good for taxpayers; it is good for the public; it is good for customers; it is good in general. We want to compete for business. We believe very strongly that we are the best. We make a $300 million a year investment to improve our network. So in this new brave world of competition, we welcome it. All we want is a level playing field to compete for business, especially when you have other players entering the picture who don't fall under the same regulations, who don't have to provide universal service and who are more interested in picking the most lucrative accounts."
There is little question the consortium has already had an important economic impact. Under the consortium contract, schools would get 45 megabit access to the Internet for $2,250 a month, for example, something that previously would have cost them $250,000 to $300,000 a year, according to Bostwick. Estimated savings for the city of San Diego are well over $250,000 a year in operating costs under the deal. And where previously the city was planning to build its own system, this no longer offers any advantages, and it eliminates the need to invest in equipment that might be soon outdated.
CONSORTIUM CATCHES ON
In December, due to increased interest from groups outside the San Diego area -- in particular Orange and Los Angeles counties -- the consortium was renamed the California Communications Alliance. However, Bostwick, now director of the new alliance, feels even this name may have to change. "We've been visited by people from Utah who have asked to join, so we may have to rename it yet again to something representing even a larger region."
Yet the future of the alliance is still very much up in the air. Not only has the county reopened the bid process for some of its services, but the education members, at the time this goes to press, still have yet to commit to their part of the deal.
"The goal," said Bostwick, "was to get more advanced technology, get it at affordable prices, and to create more competition by waking some of these sleeping giants up. You can ask almost any school district or any government entity in San Diego County if they are not getting much better deals from their local phone company and others than they were a year ago. If there is one thing for certain that this alliance has accomplished, it is that." he said.
"Whether the alliance will survive or not, I don't know," lamented Bostwick. "We are out for bid now for long-distance service. But it is possible that the alliance could be killed off with nice, one-year deals. If people buy into those, not thinking about the future, that would be a big setback. People might say after that, 'I'm not going to go back and try that alliance thing again.'"
STATE TELECOM OUTSOURCE
However, California itself may soon figure into the equation. John Thomas Flynn, the state's chief information officer, announced a decision to privatize the state's $300 million telecom system, which is comprised of 17 separate networks that piggyback on Calnet -- the state-owned and operated voice network. Calnet, originally established to save the state money, is currently estimated to be more than $20 million in debt and is simply unsuited to the bandwidth demands now being placed upon it.
Part of Flynn's plan is to consolidate an array of long-distance services used by the state -- currently from 15 different long-distance providers -- into one state contract, which will be worth $500 million over the next five years. This contract is expected to be awarded by this May.
"We have 225,000 dial tones," explained George Kostyrko, communications director at California's Department of Information Technology. "By the sheer amount of potential traffic, the state should be able to get a very competitive price for its phone service. Therefore, rather than splintering it up into 15 different contracts, one single contract should provide not only a very competitive price, but also superior service.
"PacBell has been an excellent partner with the state of California," Kostyrko added. "We hope to continue doing business with them."
The initiative, according to Kostyrko, is being closely watched by other states.
BATTLES CONTINUE IN IOWA
Iowa represents perhaps the other side of the coin -- political battles and even some questionable tactics -- over the fiber-optic network the state was forced to build and own because no private company would initially bid on it -- a move many believe was originally designed to block the project completely. However, after the state went ahead with the plan, there has been an ongoing debate in the Legislature as to whether the network should remain in the public sector or be privatized.
Currently the fiber-optic network, called the Iowa Communications Network (ICN), has 531 interactive full-motion video platforms online. This makes it the largest full-motion video network in the world. By the end of next year, the network will be up to 798 platforms. ICN carries state government data and voice traffic and links classrooms in higher education and
K-12 with interactive video for distance learning. It also links hospitals and clinics for telemedicine applications.
The network is impressive, but building it was more of a political achievement than a technological one. Initially, US West filed suit in district court and was able to overturn the first RFP the state tried to put out for the network, largely on the basis that government should not compete with the private sector. So before the second RFP was issued, the governor's office, Iowa Public Television and General Services created legislation that would ensure the next RFP couldn't be overturned by the courts.
Yet that was only the beginning. "During the first years of my being the full-time administrator of the network," explained Harold Thompson, ICN CEO, "a political tactic called 'muddying the water' was used. What the telecom companies did is throw all this misinformation out -- rumors, half-truths, you name it. I was constantly having to fight my way through trying to educate everybody, keep the record straight and to make sure that everybody really understood the decisions and the issues, because I was fighting all this false information that was floating out.
"For example, people were saying ICN was a black hole. It was going to cost the state millions and millions and millions of dollars. People were quoting that this was going to cost a billion dollars. Things like that were just thrown out there and then legislators would take it and run with it. A piece of paper would be floated amongst the legislators, and it would have this totally erroneous information on it. You'd ask, 'Where did you get this from?' 'Well, I just kind of picked it up,' they'd say. Then you would have to counter it with correct information.
"The first year was terrible -- just awful," Thompson said. "However, slowly but surely, the Legislature began to formulate the position that we want our schools in Iowa to be at the head of the pack, and that the state was going to make this investment for education."
Nevertheless, the political pressure against the network has continued in different forms. "The governor, recognizing the importance of electronic commerce, has given us a new mandate to be in a position to be ready to do encrypted electronic commerce with the general public by the year 2000," explained Thompson. "So we are working hard laying that part of the network, the capability
to do public/private key encryption and things like that. So the thrust of the telecommunications sector has changed yet again. First, it was that we just need to privatize the network, that we just need to get rid of it -- government shouldn't be doing this. Then they changed their position to: 'We don't think you ought to privatize the ownership of it, but we think you ought to privatize management of it.' Then last year, ironically, they changed their position a third time, saying we really don't think you should do anything with the network, except that you should not expand the uses of the network any more than they are already; keep it at state government, schools, libraries and telemedicine."
However, there is now tremendous pressure from the business sector in Iowa to also get access to ICN for commercial purposes. Fiber now exists within 17 miles of every citizen in Iowa. That means that for many businesses, often just a mile or two away, there is a connection that would give them a high-performance connection to the Internet at a T1 or T3 level, or whatever they want.
The preponderance of resistance to ICN has come, said Thompson, from the smaller companies -- GTE, the Independent Telephone Association, the Rural Telephone Association, and the small telephone companies -- some 158 of them scattered through-
out Iowa.
"Most of this resistance is not well thought out," added Thompson, who looks to the day when partnerships with the private sector might bring affordable high bandwidth to anyone who wants it. "It is protecting the status quo, if you will. Some people have been making great livings out of these little telephone companies, and they really don't want to see that disturbed. They don't want to spend a lot of money upgrading technology. They just want to be left alone to continue to do their thing in a noncompetitive environment. Well, the Federal Telecommunications Act changed all that."
REAL SLEEPING GIANT
In Iowa, the real sleeping giant, however, might not be the ICN, but what municipalities are now doing to get into the telecommunications business directly -- some 30 of them so far -- by laying fiber to deliver cable TV to residents in competition with existing cable companies. A number of court cases challenging these moves are still pending. However, the first suit brought by US West was found in favor of the municipality.
The implications are far reaching. Once the fiber is in the ground delivering cable to residents, it is not a far step to also delivering voice and data over the same fiber.
"No one is talking about going out and competing in 'Little Town, Iowa,' except the municipalities themselves," said Thompson. "The municipalities are the sleeping giants that are going to roar, because we are starting to get towns of pretty good size -- like Cedar Falls -- that are starting to vote these bond issues and municipal mandates through."
A fundamental issue lies behind many of the telecom battles now raging in California, Iowa and other places around the country.
In Virginia, for instance, the only way a backbone could be created was by the state threatening to lay fiber itself. Three vendors already had fiber in the ground. But these companies, like most of the private-sector telecom companies, did not want to sell bandwidth or capacity. They wanted to sell circuits, because that is where they make their money. So Virginia told the vendors, "Either you step up to the table and bid capacity, or we are going to build our own system."
Minnesota represents yet another variation in the theme. The state has just let a contract to build a 1,500-mile backbone along the state's interstate highway system at a cost of $150 million. And the state has agreed to pay a 15 percent service fee, or $22.5 million for 20 percent of that backbone, to be used for education and government services.
AGGREGATION
Richard Varn, director of Information Technology Production Services at the University of Northern Iowa, has been researching and teaching telecom policy for over a decade. He said that the handwriting has been on the wall for some time for government to get into aggregated purchasing of telecom services. "This trend is driven both by the technology and by the nature of public institutions -- both by bid law or by our own consciences -- to get the best goods for the lowest prices," he explained.
"It first started with Centrex and PBXs. Groups started to buy technological services and other things -- all part of the disintermediation process. Then as other technologies came along that really unified networking, such things as internetworking and the Internet, people began to realize that many of their networking needs were the same. And the more that IP eats up other technologies like telephony and videoconferencing, the more networking needs become similar. What we really need is bandwidth.
"If all educational institutions, all city and other government buyers can all be on the same network and pay a lot less and all be connected together, why shouldn't they do that?"
One of the illuminating questions for Varn is why the aggregated purchase of telecommunication services in government has been so long in coming. "The model we are talking about -- the aggregation of needs through bulk purchase -- has been done in business for a long time, including purchase of phone company services," he said. "Big companies long ago began saying, 'We want to carry this many bits, and we want the lowest price, and we don't care who carries it -- satellite, metropolitan fiber, intercity microwave. We don't care how it gets carried. We just need a reliable network at the lowest cost. Now who is going to give it to us?' Government never did that."
CHANGING THE SYSTEM
Based on his long study of telecom policy, Varn concludes that two factors have played the largest role in forestalling what he sees as inevitable -- turf issues, which are now increasingly dissolving, and an army of professional lobbyists in the employ of the big phone companies who didn't want the old way of doing business to change.
"The phone companies have spent millions on lobbying," he pointed out. "They are one of the leading sectors spending the most money on lobbying each year. They are one of the top contributors to PACs. Yet these lobbyists hardly ever wanted anything. So they built up this huge goodwill reservoir. And the few times they did ask for something, it was often to make a case that the government didn't want to own a phone company.
"These lobbyists were able to stop people in government even thinking about area networks. Although, if you look at it in terms of bid law and our duties in spending public money -- as well as based on the direction the technology is going -- government traffic should have aggregated a long time ago the same way that many big companies aggregated their traffic.
"The fact is that the big phone company lobbyists are very, very good," added Varn. "And they are also able to use a lot more corporate strength -- their foundations, their people who sit on various boards. And they have a lot of employees and those people ingratiate themselves in a number of ways. They are very good at what they do. Ask anyone who is involved in telecommunications policy and who is trying to make some of the things happen which need to happen. I've talked to people in almost every state. None of them praise the saintly attitude of the phone companies or what they are trying to do."
In all fairness, Varn nevertheless sympathizes with the phone company side of the story. "The big phone companies have the worst of both worlds," explained Varn. "They have a regulatory infrastructure that more closely mirrors government and therefore is often not as efficient as many other big businesses. They have the burden of providing universal access. So in many ways they often have acted more like a government bureaucracy than a private business. Yet at the same time, they have regulated incomes and have people who have invested in them -- shareholders -- and people who depend on them for salaries. It is easy to understand why phone companies, which had a comfortable position in delivering telecommunications services to government for many years, simply have not wanted that system to change.
"Part of the reason they were able to stave off change for so long is that they do have legitimate public policy burdens as well as an infrastructure which doesn't change [in] the same way that government infrastructure is hard to change," Varn continued.
Varn agreed that a fundamental shift lies at the heart of the battle -- moving from selling circuits to selling capacity and bandwidth. "People want bandwidth that doesn't come with a meter on it," he said. "Phone services are built up around tariffs and metered use. The phone companies just don't seem to be able to think differently and still see how they can make money. That is what has got to change."
But change may come hard. Ironically, TCG -- which submitted the winning bid in San Diego -- was just purchased by AT&T.
March Table of Contents
