THE REAL STORY ON BELL OUT-OF-REGION COMPETITION

With the gates opening to long-distance entry by the Bell companies in state after state, the beginnings of competition among the big telcos are evident in many places. Nevertheless, don't try to convince opponents of deregulation that this means anything.

The likelihood of the RBOCs ever really competing against each other has become so entwined with the debate over FCC policy assumptions that many opponents of those policies are ignoring or, in some cases, denying the reality of recent signs that such competition has begun. The argument goes: FCC rules fostering facilities-based over nonfacilities-based competition won't benefit the public because the Bells will never compete with each other. But this commitment to the belief that the Bells won't compete obscures the opportunity to make another argument, which is that, as long as the existing rules supporting access to unbundled network elements remain on the books, the Bells will be far more likely to compete with each other than if those rules are eliminated or radically modified.

Recent news stories highlight the widely held belief that inter-Bell competition has not begun. For example, an article appearing July 23 on BusinessWeek Online, cited SBC Communications Inc.'s alleged failure to meet its commitment to compete out of territory as a condition of its merger with Ameritech as evidence the "Bells seem to have kept competition at arm's length since their formation in 1984." The article notes SBC claims it has met the requirements, then quotes TeleTruth, which in March called on Congress to investigate claims SBC had reneged on its commitment. "No one in authority has held SBC accountable for ignoring their commitments and obligations," said TeleTruth founder and chairman Bruce Kushnick at that time.

The perception persists. "Nobody in their right mind could assert SBC has attempted to compete out of region," says Jonathan Askin, general counsel for the Association for Local Telecommunications Services.

In fact, SBC had met the terms of its commitment to launch facilities-based local voice services in 30 markets by the second quarter of this year, says John Winston, assistant bureau chief at the FCC's Enforcement Bureau. "They have complied," Winston says. "That's all I have to say on the matter."

Actually, the number of markets launched to date is 32, says SBC spokeswoman Wendy Flanagan. But she readily admits the marketing effort SBC has mounted so far is minimal compared to what it intends once the conditions are right for competing as a national carrier, which means getting final approval on long-distance service in its territories and a return to more solid ground in the general economy.

"Our first priority was to fulfill our merger commitment, but our goal remains to be a national end-to-end provider of telecommunications services," Flanagan says. "That requires that we have relief from restrictions on providing long-distance services."

In late 2000, SBC began its out-of-territory initiative by offering high-end voice and data services to the enterprise market and targeting the mass market with switched voice. The company changed course in early 2001, when it declared that it was scaling back marketing efforts out of territory and only would offer switched voice pending changes in the regulatory and economic climate. SBC sees the enterprise market as top priority once it's in a position to provide the full suite of long-distance, data and local voice services to customers no matter where they are, emphasizes Flanagan.

"We continue to offer the high-end enterprise services in markets where we were offering them at the outset, but, elsewhere, we've focused on offering just voice for now," Flanagan says. "But as we build out our facilities in these markets we're putting in the equipment that's needed to support the enterprise service requirements."

SBC won't say how many voice services customers it has in the 19 states plus Washington, D.C., it serves outside its operating territories. "There may be as many as several hundred thousand customers in any given market at this point," Flanagan says. SBC has installed its own switches in these markets and operates over its own metro infrastructures, although it relies on use of incumbents' local loops for last-mile delivery. Flanagan says the marketing effort is limited to Yellow Pages advertising and promotion of services via the SBC Telecom Web site.

SBC's reluctance to serve the lucrative high-end market for ATM, frame relay and other advanced services until it wins clearance on long distance contrasts with the strategy in play at Verizon Communications Inc., which has launched facilities-based enterprise services in Dallas, Los Angeles and Seattle in direct competition with SBC and Qwest Communications International Inc. Here again a merger commitment is involved, although Verizon officials say this is not the motivation for a strategy that makes good business sense and fits in with the carrier's long-term growth plans. Verizon's move into these cities, which began a year ago with Dallas, was intrinsic to the GTE merger plan. GTE offered a foundation on which to build facilities extensions into the central urban areas because it had operations on the fringes of many big cities, says Kevin Ireland, Verizon's enterprise solutions group spokesman.

"This tends to be a lower cost approach to getting into these markets than would be the case if we were building from scratch," Ireland says. "We're currently assessing what additional cities to go into and hope to announce some more soon."

Not everyone is convinced Verizon is doing anything but meeting a merger commitment. There also is a perception the FCC again is allowing a carrier to skate by without really meeting the requirements. ALTS, for example, protests the commission's willingness to allow Verizon to count $90 million of a $150 million preliminary investment in bankrupt DSL CLEC NorthPoint Communications Inc. toward the Bell's commitment to spend $500 million on out-of-territory services within 36 months of the merger. Verizon made the investment as part of an intended acquisition but subsequently backed away from the buyout.

"There's no getting around the fact that Verizon's pullout from its plan to acquire NorthPoint brought NorthPoint down, which eliminated one of the major potential competitors to the RBOCs," Askin says. "Yet Verizon gets credited for investing in out-of-territory competition in that deal by the FCC." Verizon may have satisfied "some absurdist literal reading of its merger commitment," Askin says, however, the way the investment has been interpreted "has made a mockery of the FCC process and the bargain that Verizon struck."

One thing is clear: Verizon means business in the markets it has launched so far. Networks in all three markets use DWDM technology to support delivery of a broad portfolio of Internet access, managed data, ATM, frame relay and SONET-protected services that can be bundled with long distance, Ireland notes. "Local switched voice will be the last thing we offer," he says. "What we're doing is driven by market demand, and our goal right now is to grow our market reach by expanding our customer base, not just plop in a voice switch to meet a merger commitment."

Once the company is established in the high-end market, it will be in a position to leverage that presence into the smaller business and consumer markets, with voice services as part of the service mix, assuming the local regulatory conditions and market demand are in line with that strategy, Ireland says. "Also, down the road, given the pace of improvement in voice over IP technology, we may find there's no need to install circuit switches, which will allow us to move into voice by leveraging the data infrastructure we already have in place," he adds.

While the starting point for competing out of territory is markedly different from SBC, Verizon also sees long-distance entry as crucial to full-scale aggressive pursuit of a national service strategy. "Once we're approved for long distance in all our states, we'll go after the bigger companies who need national fame relay, national ATM and other types of connectivity," he says. "We already are approved in six states, and the rest are just around the corner."

Verizon has experimented with a variety of approaches to establishing its infrastructures out of territory. They began using a leased fiber from Metromedia Fiber Network Inc. in Dallas and moved to a mix of leased and owned facilities in Seattle and finally to strictly owned facilities in Los Angeles. "L.A. has proved to be our most successful model so far and is well ahead of the others from a sales standpoint," Ireland says. The company has installed high-capacity video switching and transport equipment to accommodate demand from media concerns, he adds.

With Qwest well established as a competitive carrier outside former US West territories, the only Bell company not competing in other Bell markets is BellSouth Corp. And, BellSouth spokesman Jeff Battcher says that's the way things will be for the foreseeable future. "We're concentrating on our markets in the nine states we presently serve," Battcher says. While the company now is locked into that strategy, "things in this industry change so fast, it's hard to say if that will always be the case," he adds.

Battcher says the possibility of competition from Verizon and SBC is of no great consequence in influencing BellSouth's agenda. "We're accustomed to competition and don't look on them as especially different," he says.

As for Qwest, BellSouth has a close relationship that emphasizes cooperation rather than competition, Battcher notes. BellSouth uses Qwest as its wholesale provider for long-haul transport and local access out of territory and has a "teaming" agreement with the carrier in markets where BellSouth hasn't yet entered the long-distance business. There, when Qwest comes in to offer long-distance services, BellSouth provides local connectivity services as part of the package. The deal works in reverse in Qwest's home territories.

Soon Qwest and BellSouth will be competing with each other for long-distance customers in BellSouth's territories, which means the close marketing affiliation likely will go away. What that will mean to BellSouth's willingness to go into local markets as a local service provider out of its current territories remains to be seen.

While three of the four Bell companies say expansion into other markets is key to their long-term strategies and point to current out-of-territory efforts as proof of those intensions, many observers claim the last thing these companies want is to open the door to all-out competition among themselves.

Instead, the detractors say, any small measure of inter-Bell competition is meant to persuade FCC regulators that policies undermining nonfacilities-based competition will clear the way for facilities-based competition among the giants left standing in the wake of the telecom meltdown.

"There's no hope for competition among the big players," flatly states Mark Cooper, director of research at the Consumer Federation of America. "The only thing they'll do is buy each other out."

Cooper cites FCC Chairman Michael Powell's comments when he first took over as FCC chairman, in which Powell said, "I fundamentally disagree with the idea that deregulation is something to be handed out only after competition is found to exist," as the driving philosophy behind a policy initiative that inevitably leads to "the remonopolization of the industry." Powell, who recently was quoted in The Wall Street Journal as saying the telecom industry was in a state of "utter crisis," bears some responsibility for contributing to that crisis, Cooper says. Powell proposed rules "that would enable the dominant firms in the cable and telephone industries to lock out competitors," Cooper asserts.

Regulatory issues aside, there's every reason to be skeptical about any flowering of competition among the Bells in light of their falling fortunes in the current downturn, says Allan Tumolillo, COO at Probe Research. Tumolillo says the recent hit the Bells took in the stock market has increased the odds significantly that the worst-case telecom scenario outlined in a recent Probe report would come to pass. The Bells lost almost $70 billion of their market capitalization (about 25 percent) between June 28 and July 22, when stocks in general were in freefall, Tumolillo notes. They have lost nearly 60 percent of their market value since reaching five-year highs in mid '99, he adds.

Tumolillo says the "catastrophic" scenario would occur if one of the four RBOCs is forced into bankruptcy and there's no other company strong enough to replace it. "I put the chance of that happening at 10 percent in the report, but now we're seeing signs of pain that might be raising the chances of this happening," Tumolillo says. "If, for example, one of these companies were even accused of accounting fraud, its stocks could drop precipitously."

"Our first priority was to fulfill our merger commitment, but our goal remains to be a national end-to-end provider of telecommunications services."SBC spokeswoman Wendy Flanagan.

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