Special Focus: Competition coming to the local loop

Nearly two years into the Telecommunications Act of 1996, the nation's largest cities are becoming cradles of telephone competition.

Cities such as New York, Chicago and San Francisco already enjoy fresh choices for local telecom services, and more choices are on the way. Indications are that this increasing competition ultimately will offer significant savings for major corporate customers.

The savings will come because upstart telephone companies are muscling into markets by offering cut rates. Their services are similar to those offered by incumbent local exchange carriers (ILEC) but their prices are about 10% less, according to George David, publisher of the Center for Communications Management Information (CCMI), in Rockville, Md.

The price difference will rob ILECs of some of their business, and they will be forced to res-pond with lower prices, according to Simon Reeves, senior communications analyst with Decision Resources, Inc., in Boston.

Plenty of companies are lining up to challenge the ILECs and force prices down.

Nationwide, more than 60 competitive local exchange carriers (CLEC) have registered with state regulatory commissions. More are in the regulatory pipeline, seeking legal CLEC status that will let them forge interconnection deals with ILECs.

It will take until year-end before enough alternative services are available to cut into ILEC revenues, Reeves says. But the process already has started.

Telecom boutiques

The new wave of competition comes on top of more limited offerings that have been around for years. The alternative carrier market was driven by now well-known service providers such as MFS Communications Company, Inc., which was bought by WorldCom, Inc., and Teleport Communications Group, Inc. (TCG). Those carriers initially specialized in bypassing ILEC networks and have expanded to offer data services as well.

But many of the upstart competitors focus on more limited markets. Much as MFS and TCG did in their infancy, today's newcomers are coming in city by city with just a few offerings.

For example, Focal Communications Corp. has set up shop in two cities, New York and Chicago, with plans to be in 10 cities by the end of 1999. It only offers analog and digital dial-up services and only sells to corporate customers.

"That market is small in terms of numbers of customers, but it's large in terms of dollars," says Robert Taylor, Focal president and CEO.

Focal's lower rates and fast service attracted Rob Doell, manager of network services for Gooitech, Inc., a Shaumburg, Ill., wireless electronic commerce firm.

Gooitech bought two Primary Rate Interface ISDN lines from Focal as part of an expanding need for dial-up access to its corporate LAN. It saved on per-minute charges and per-month line fees, and there was no installation fee, Doell says.

Focal also is faster to change orders and provide quotes for additional services, he says.

While it was risky to go with a young, unproven company, it was worth it to explore beyond the local ILEC, which is Ameritech Corp., he says.

"It gives you the flexibility to do what you want to do," Doell says. The risk was minimized because the two ISDN lines represented new services and did not affect existing services Gooitech buys from other carriers, he notes.

Other carriers are taking the opposite tack from Focal's. They offer a broad range of services, hoping that customers will be attracted by having their local and long-distance voice services, data services, Internet access and Web hosting supplied by a single vendor.

Allegiance Telecom, Inc., a CLEC based in Dallas, plans to do just that in 24 major cities, according to Royce Holland, president and CEO of Allegiance. He hopes that diversity, not just price, will lure customers. "Being competitive is very important. You don't necessarily have to charge less than the competition, but the more services you can push at a customer over the same wire, the better off you will be," Holland says.

Go where the money is

Allegiance and other CLECs are targeting the largest cities because of the revenue opportunities. "It costs the same to put a switch in New York City as it does in Dayton, Ohio. But you can fit all the market in Dayton into the World Trade Center and still have room left over," Holland says.

As a result, corporations in smaller cities will have fewer choices and will have to wait longer for competition to develop. In some states, no CLECs have filed tariffs, the documents that describe the services phone companies offer, according to Christopher Heiler, a research analyst with CCMI.

Other factors beyond pure economics are slowing the spread of competition. ILECs are not always as cooperative as they might be (NW, Dec. 8, 1997, page 1). Some challenge every CLEC application, dragging out the time it takes to win CLEC approval.

In addition, ILECs own the phone wires that run to customers' homes and businesses. Ordering those lines for use by a CLEC can be a nightmare, Holland says.

Take control

Within two years, CLECs will make significant inroads into ILEC local business, meaning that better deals are just around the corner, Reeves says.

Heiler recommends that users sign only short-term telecom agreements, so they can take advantage of lower prices to come. In the meantime, it is worthwhile to try out new carriers on a small scale to gauge the quality of their services.

Many of the new carriers entice customers with talk of lower prices, but the customer should check for hidden fees, he says. For example, a carrier that offers a lower monthly rate might have a higher access charge for long-distance calls or an elevated connection fee.

Customers who want to switch carriers to improve services should look for a competitive carrier that has its own network. Switching to a CLEC that simply resells ILEC services might be less expensive, but the service runs over the same network, so quality will not improve, Heiler says.