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Hanging Up on Leased Lines: Independent Phone Carriers Are Turning to Wireless Technology As Prices Escalate

Posted on: Tuesday, 9 May 2006, 09:02 CDT

By Jon Van, Chicago Tribune

May 9--Consolidation in the telephone industry and the re-emergence of AT&T as the industry's dominant player have dealt a blow to independent phone companies that once leased lines from big companies like SBC, Verizon and BellSouth.

With AT&T on top it almost seems like a return to the days of a monopoly.

But in fact, technology has progressed enough to leave room for independent local exchange carriers like Globalcom Communications, TDS MetroCom and Cimco Communications Inc.

They are looking at new wireless technology called WiMax to connect to customers, replacing the lines leased from AT&T, the supercarrier created by SBC's purchase of AT&T, which now seeks to swallow BellSouth.

"We actually have towers up and are using wireless in Appleton [Wis.]," said Jim Butman, group president of Madison-based TDS. "We're going to use wireless next to reach our customers in Madison."

TDS and other phone services have concluded it eventually will be impossible to compete against a dominant incumbent phone company like AT&T unless they control a network that is completely independent. Government regulators no longer enforce rules requiring incumbent carriers to open their networks and lease elements to competitors at low wholesale prices.

Instead, the government looks for competition to come from independent networks such as those built by cable television operators. This means that the days when consumers could choose among four or five carriers for local wired phone service are over.

In 2000, the heyday of competitive local phone carriers, about 380 facilities-based carriers operated across the U.S. Today about 75 survive.

"The consumer is between the devil and the deep blue sea--the old telephone company and the cable TV operator--with no other choices," said Royce Holland, chief of McLeod USA Inc., a Cedar Rapids, Iowa-based competitive carrier.

McLeod, which serves twice as many residential customers as businesses, is effectively being forced out of consumer markets by regulatory withdrawal of oversight, Holland said.

"In some markets the amount we're charged to lease a line to reach a residence has risen by $10 to $12 per line per month," said Holland. "We're being charged wholesale rates in some instances that are higher than retail rates. We have no choice but to pass those increases through to customers, and we're losing many customers as a result."

For business customers who spend $200 a month or more on phones, McLeod still offers cost competitive services, but Holland anticipates that eventually leasing costs even for the high-capacity lines to serve businesses will also go up. Holland is looking at wireless technology as an alternative to leasing lines from AT&T and other former Bell companies.

The wireless connection would replace the need to have a rented line to reach customers. From switching stations, voice and data communication would travel wirelessly to the customer's premises.

Most competitive carriers that survived the industry shakeout of the past few years offer service only to business customers, and they tend to agree with Holland that the days when they can lease high-capacity lines at low rates are probably numbered.

"Within two years, we intended to go wireless," said John Shave, chief executive of Chicago-based Globalcom.

Like many survivors, Globalcom is privately held. The firm stuck to its Chicago base, growing steadily and shunning opportunities to go into debt and expand into a national carrier.

But even though Globalcom remained profitable during the telecom meltdown earlier in this decade, it has not been immune to shifting competitive and regulatory forces.

"Eight months ago we launched Operation Fresh Start, which is almost like a military operation to reinvent our company," said Shave.

This year Globalcom will roll out Internet protocol-based service with features Shave hopes will win new customers and help usher existing customers into a new level of communications sophistication. These calls would travel digitally over phone lines, much the same way that e-mail operates.

Cimco, which has been in operation 21 years, never owned network facilities until five years ago when Bill Capraro Jr., the chief executive, saw that changing times required it. Cimco is now also moving toward Internet-based technology and looking at wireless, Capraro said.

More importantly, Cimco is moving to provide specialized services such as network management and monitoring that go beyond traditional network connectivity. "I believe that telecom as a single entity--facilities-based or not--isn't a sustainable business model anymore," said Capraro.

Cimco last month opened a $15 million data center to assist its clients with disaster recovery and many other services that extend far beyond connectivity.

AccessOne, another Chicago-based carrier that has shifted its business to build its own network, is also scrambling to reduce its dependence upon AT&T and an old business model that counted on leasing lines at low rates set by regulators.

"We've been in this business since 1993, starting as a bunch of young guys with customer service as our focus," said Brian Barkley, AccessOne chief executive. "We still believe in customer service--we have college-educated agents who answer our phones--but we've changed our business model and are building our own network. It's the most exciting time to be in this business. A smaller company like ours can stop, turn and go in a different direction very quickly."

Small firms face a disadvantage in the regulatory arena facing the likes of AT&T and Verizon Communications Inc., which last year absorbed MCI Inc.

But technological advances provide small players with their own advantage, said Terry Barnich, a Chicago-based consultant who specializes in working with competitive carriers.

"Today you can become a facilities-based carrier for less than one-tenth what it cost a few years ago," said Barnich.

A softswitch that handles Internet telephony costs on the order of $350,000 versus the $25 million that a traditional phone switch would fetch five years ago.

The phenomenal success of Wi-Fi wireless technology in cheaply supplying connectivity over short distances may well be matched by WiMax, a wireless standard intended to cover miles where Wi-Fi was intended to reach no more than 300 feet.

"Wireless presents a real possibility for competitive carriers to solve that problem of covering the last mile between their network and their customer," said Barnich. "Technology is going to allow them to break free of the stranglehold the incumbents have had on them."

jvan@tribune.com

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Source: Chicago Tribune

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