CAPs strive to be regional service carriers
To gain market share in the fierce rivalry for local telephony services, competitive access providers have opted to continue deploying fiber-optic networks to meet their future telecommunications requirements.
By installing more fiber, competitive access providers look to offer additional and diverse services to their business customers, and thereby energetically contend in the local exchange telephone market during this decade and beyond. According to the Federal Communications Commission, the local exchange telecommunications market is expected to amass $150 billion by the year 2000.
With fiber installed to the doorway of major businesses nationwide, competitive access providers are well positioned to expand and grow into local or regional exchange carriers in the United States.
As information technology has expanded, the market demand for telephone and data communications and services among business organizations has grown as well. During the 1990s, data communications in particular is expected to be the primary driver of the telecommunications market, more so than voice.
While competitive access providers still offer the business community alternative access to the interexchange carriers, they also provide them with fiber-backup networks. These networks have become a major advantage in the competitive business arena.
However, the primary products--$87.5 billion in 1993--in the telecommunications market encompass services, not special access. The business market served by competitive access providers is dominated by broadband data requirements, interactive video services and state-of-the-art technology for handling mission-critical applications.
To this end, competitive access providers are looking to provide businesses with fiber networks that can handle high-speed data transmission services, such as asynchronous transfer mode and local area network interconnectivity, as well as switched local service, such as private branch exchange and Centrex, an off-site PBX-type service, and the latest synchronous optical network transport technology. The main benefit in the business arena for competitive access providers is that offering enhanced services is not restricted by the regulatory environment.
Driving fiber deployment
As the landscape for competition and services in the local exchange market continues to evolve, so do the technological, economic and regulatory drivers for the deployment of fiber by competitive access providers.
Right from the beginning, 10 years ago, competitive access providers selected optical fiber technology for their network infrastructure because of its superior transmission capability. This selection proved rewarding in delivering voice services and equally worthwhile in sending business-related data, which is more sensitive to errors than voice. The bit error rate of a copper DS-1 circuit, for example, the transmission standard at T-1 (1.544-Mbit/sec) speeds, is 1 bit error per 1 million bits. Over fiber, it is 1 bit error in 1 trillion bits, says Royce Holland, president at MFS Telecom Inc. in Oakbrook Terrace, IL.
Moreover, optical fiber does not require as many repeaters to drive a signal over long distances as does copper. For example, fiber can drive a signal for 25 to 30 miles before a repeater is required, compared to 400 to 500 feet for copper. Using less equipment in a transmission line increases network reliability and decreases transmission errors.
In terms of annual network downtime, fiber-optic networks average a maximum downtime of five minutes per year versus 26 hours per year for copper, as traditionally claimed by the regional Bell operating companies, says Holland. Additionally, fiber is installation-friendly because only two to three feet of cover is needed for trench burial.
To date, competitive access providers have installed more than 10,000 miles of optical fiber and report their networks are still growing, even doubling in some cases. "There is no other way to deliver broadband transmission services in bulk other than optical fiber," states Francis Dzubeck, president and chief executive of Communication Network Architects, a telecommunications consultancy in Washington, DC.
Even though competitive access providers have grown dramatically since their inception a decade ago, obstacles still impede their market growth and additional deployment of optical fiber.
The easing of the state, city, county and municipal regulatory environment has aided competitive access providers in the growth of their business and has encouraged them to expand into more markets by deploying more fiber. However, the national and state regulatory environments still constrain the competitive access providers and favors the regional Bell operating companies. For example, only six states permit local dial tone service; 44 states do not.
Another obstacle concerns connectivity to buildings. Competitive access providers do not have the same access to rights of way or access to buildings as do the local telephone companies. To bring fiber into a building, for example, a competitive access provider must petition the manager of that building for permission. In many cases, competitive access providers could negotiate to gain building access but the process is time-consuming and costly.
Susan McAdams, assistant vice president of government and corporate affairs at Electric Lightwave in Vancouver, WA, views impediments such as obtaining rights of way, municipal franchises or rights to enter buildings as competitive hurdles. "In the past, the assumption was that the monopoly was a utility provider and wasn`t questioned by the building owner," she says. "However, now that there`s competition, the individuals that control access to a building, for example, see the potential to raise revenue," she adds. Competitive access providers argue they do not get equitable treatment in this market segment.
At the state level, competition is often restricted to certain markets. These restrictions vary from state to state, especially in offering local dial tone. This situation means competitive access providers can provide only a narrow range of services over the same facilities, compared to those offered to the regional Bell operating companies. "Less revenue sometimes makes it difficult to justify deploying new fiber," says McAdams.
Nationally, only a congressional act can help change the national regulatory environment that still fundamentally protects the monopoly of the local exchange carriers. The competitive access providers are optimistic that new national telecommunications legislation will be passed this year.
However, until federal legislation levels the telecommunications playing field, the competitive access providers see more advantages and more successes in approaching regulatory issues on a state-by-state basis.
In Florida, a state that has not been a leader in making telecommunications changes and has supported FCC rulings, companies such as Intermedia Communications of Florida Inc. in Tampa has lobbied for change, according to Barbara Samson, senior vice president at Intermedia.
"We don`t have a lot of resources to lobby in the state or in the Congress, but we do have a full-time person and lobbyists devoted to this effort and to help us prepare for upcoming legislation," she explains. Samson notes that Intermedia is a member of a competitive coalition looking for regulatory relief in the telecommunications industry.
Another impediment to the deployment of fiber by competitive access providers is high costs. Market economies dictate a price of between $35,000 to $70,000 per mile to construct a fiber-optic network in a major metropolitan area.
To cope with that high figure, many, but not all, competitive access providers depend on private investors, who must be convinced of the need for additional capital to enter new markets. "Not only is it a challenge for us to convince our private investors to come up with more capital, but also, raising capital becomes a barrier for new companies that want to enter the local telephone market," says Gary Lasher, president at Eastern Telelogic Corp. in King of Prussia, PA.
To date, the competitive access providers have and still do overwhelmingly prefer to own their own fiber loops versus leasing existing facilities to serve their customers. However, competitive access providers reportedly assess each market individually, and will lease rather than build when it is more economical. "It is not necessary to own the fiber. The key in being a competitive access provider is being able to provide service and manage the existing infrastructure," says Samson.
Owning the fiber, however, gives competitive access providers pricing control. In a leasing arrangement, competitive access providers are forced to base pricing, in part, on the leasing costs, over which they have no control.
Earnest competition in the local loop will exist when competitive access providers can provide local dial tone services to customers, as well as issue telephone numbers. The beginning of such competition is underway in California, New York, Massachusetts, Illinois, Maryland and Washington.
A leading U.S. competitive access provider, Teleport Communications Group of New York, located on Staten Island, provides dial-tone services in Chicago, New York, Boston and San Francisco. It is currently active in 21 major cities nationwide and by 1995 expects to be active in an additional 35 cities, according to Robert Annunziata, president and chief executive at Teleport.
On the West Coast, Electric Lightwave is the first competitive access provider west of the Mississippi River to be granted dial tone service. "Since obtaining dial tone in the state of Washington, we`ve re-envisioned our company as a regional communications provider," says McAdams. This company is working in five cities and has targeted an additional 24 cities for expansion during the next four years.
In today`s telecommunications networks, synchronous optical networks are being installed between large digital switches for distributing high-end services. For example, asynchronous transfer mode switches are connected to Sonet rings to handle high-speed data transmissions. Currently, Sonet networks are not being connected to local switches; over time, though, industry analysts expect Sonet equipment to propagate further down into the telecommunications network.
Not only are most competitive access providers` networks Sonet-based, but also many competitive access providers have installed digital switches and have increased switched services. Intelcom, for example, currently in 29 markets with plans to build fiber rings in 55 markets by the end of 1995, has all Sonet-based networks. The company also has installed nine AT&T 5ESS major central office switches nationwide.
Once competitive access providers install switches, they no longer consider themselves as alternative access providers but rather as alternative local exchange carriers, able to offer local services as well as local access.
In business markets, competitive access providers have established two important relationships that have driven the deployment of fiber. One relationship is with the interexchange carriers, or long-distance telephone companies; the other is with medium- and large-sized business corporations.
Most, if not all, competitive access providers are business-interrelated with multiple interexchange carriers. They provide the local link between customers and the long-distance carriers. Because local connections are too expensive to build, the independent service vendors buy the local links from local providers, such as the regional Bell operating companies or competitive access providers.
Eastern Telelogic Corp. provides local loop and point-of-presence to point-of-presence facilities to 18 ISVs a business relationship president Lasher says is key to his company`s business. "Not only do the ISVs represent about 25 percent of our business, but we would not build new fiber rings in cities without them," he says.
From a business standpoint, it is easier for the competitive access providers to work with the ISVs, and have them resell the competitive access providers` local services, than it is for the competitive access providers to knock on every business door. "We brand our service in the ISVs` name. It allows us to grow faster," says Bill Maxwell, president at Intelcom Group Inc. in Denver. For Intelcom, 85% of its special access service is purchased by the ISVs and billed to end users by the ISVs. The remaining 15% is ordered directly by end users and billed by the local exchange carrier.
Not only does the relationship between the competitive access providers and ISVs drive the service pace and time to market, but special access accounted for $3.5 billion of a $90 billion telecommunications market in 1993.
For the ISVs, competitive access providers are an attractive alternative to the regional Bell operating companies because of their state-of-the-art fiber networks. The regulatory environment has slowed the deployment of fiber by the regional Bell operating companies; and as a result, the Bell companies have less fiber deployed in their networks compared to the competitive access providers.
The only competitive access provider to venture overseas for business, MFS Telecom, is deploying optical fiber networks in the United Kingdom. The company has invested between $25 million and $50 million in infrastructure there. It has fiber rings connecting major buildings in central London and has installed digital switches. The company`s United Kingdom facilities are linked to the United States via leased lines.
Obtaining its national telecommunications operators license in the United Kingdom in 1993, MFS` move into the overseas market was driven by its existing U.S. customers, primarily financial customers, who needed access to major European financial centers. "Our London network looks very much like our networks in the United States," says Holland.
With the United Kingdom classified as the most competitive and deregulated telecommunications market in the world, telecommunication providers compete on a level playing field. "There is no distinction between local and long-distance players and there is no such thing as a special access market in the United Kingdom," adds Holland. In London, for example, MFS offers basic local dial tone, national long-distance service (as a reseller), international long distance, high-speed data LAN interconnectivity in the United Kingdom as well as between the United Kingdom and the United States using asynchronous transfer mode and local private lines.
During the past few months, MFS has turned on services in Frankfurt and in Paris. However, these services are provided over leased lines because the regulatory environment of those countries does not allow new infrastructures to be built by foreign companies. But regulatory liberalization on the European continent is taking place. In fact, according to MFS` Holland, the European Union Service Directive, which currently includes 12 countries and is likely to gain additional members in 1995, has targeted January 1, 1998 as the time when all telecommunication services will be opened to competition.
"Technologically, the telecommunications infrastructure on the continent is a mixed bag, some copper, some fiber. It represents a great opportunity for the deployment of fiber," comments Holland.
MFS is looking to extend services to major cities in western Europe. Then, perhaps in 1996, the company will focus on providing telecommunications service to the Pacific Rim, in places such as Tokyo and Hong Kong. "Our mission is to provide global, end-to-end, full communication services to the business community," declares MFS` Holland.
The U.S. regulatory environment for the telecommunications industry has been slow to change, although it has changed substantially since the deregulation of AT&T. In part, deregulation has encouraged competitive access providers to deploy fiber and thus increase investment returns. The competitive access providers believe there is room for competition, and that the state and local regulatory climate will change over time.
In the 1970s, the telecommunications equipment market became competitive; in the 1980s the long-distance market opened up; and, in the 1990s, there is momentum on the local exchange front where competitive access providers play. For example, as of September 1992, not one state allowed competitive access providers to install a digital switch and provide local dial tone. Based on an FCC decision at that time, six states have opened up local dial tone to competition.
Internationally, the regulatory environment is changing as fast or faster than in the United States. The post, telegraph and telephone regulatory bodies in Europe, up to this time had little competition and deployed little optical fiber. Now, they are rapidly deploying fiber and, in some countries such as the United Kingdom, competitors are getting national telephone operator licenses.
For fiber deployment in the residential market, most competitive access providers, or for that matter, most local providers, believe it is still too expensive. Additionally, connectivity into the home is already provided by the regional Bell operating companies with copper and by the cable-TV companies with coaxial cable. In fact, as potential providers of the information highway infrastructure to the home, competitive access providers, cable-TV operators, regional Bell operating companies and utility companies are experimenting with new technologies that use existing media to get in the front door of the home market.
Competitive access providers evolved from the deregulation of the telecommunications industry in 1984. These companies supplied bypass or alternative access services to long-distance carriers and business customers, offering choices in a market that for 100 years were not available. In addition, competitive access providers also furnished service security to corporations, as part of an organization`s information systems disaster recovery plan, in the form of redundant network capability.
More important, bypass vendors offered business customers state-of-the-art fiber-optic technology and service that, at the time, could not be offered in nearly the same capacity by the regional Bell operating companies, their competitors.
Without brand-name recognition and entering a market that was accustomed to the best telecommunications infrastructure in the world, competitive access providers had to climb a steep road to win the trust and trade of big businesses.
Ten years and 25 multiregional competitive access providers later, the benefits of alternative access are outweighing its risks. The goals of most competitive access providers are set on being alternative local exchange providers to the regional Bell operating companies, in the same way the long-distance market has multiple providers, such as MCI, Sprint and AT&T.
Lynn Haber is a freelance writer based in Boston.