Bell Atlantic fortifies fiber garrisons
The Telecommunications Act of 1996 encourages an aggressive communications network and service strategy for the Bell operating companies, in general, and Bell Atlantic, in particular. This strategy is illustrated by Bell Atlantic`s recent fiber investments in West Virginia and Delaware and its proposed merger with Nynex (see page 1). These investments demonstrate a strategic deployment of fiber and facilitate the offering of innovative additions to "plain old telephone service" (see Lightwave, May 1996, page 1).
For example, fiber network nodes provide the springboard for rapid entry into video and other in- and out-of-region offerings--including wireless and data--that leverage the telephony backbone. This strategy shows growth spurred by competition, which benefits the entire industry.
The Telecom Act dictates that each Bell company must work out interconnection deals to unbundle equipment and carriage elements of its network. Such deals will spell out repayment of costs to the telephone company, plus a reasonable profit. Because the telephone companies must reach such a deal in each state, they will lose their traditional rate of return guaranteed under the old law. New service provider entrants are expected to challenge the Bells` methods of accounting for older systems, and they could build their own fiber systems.
Under the Telecom Act, service provider inaction--either political or economic--would be hazardous because the accounting of "guaranteed" profit would be drastically lower, and universal-service fund provisions are to be paid according to market share.
A loss-leader provider who provided a state with new fiber, however, would not have to pay the Bell companies their rate plus profit for those facilities; nor have to pay as large a universal-service subsidy, to the extent the investment was tailored to meet universal-service needs. New fiber, therefore, would win points when it came to establishing credits against the universal-service fund and in interconnection pricing arbitration.
Even if such competitive two-wire builds did not occur at first, the regulatory climate would be harsh for the Bell company that did not invest. States would be wary about being left behind. The universal-service obligation and credits system could be a way for states to mete out punishment if they do not see investment in both business and social welfare sectors.
Fortunately, the new federal law is pro-competition, and this accounting morass can be avoided even in rural and so-called second-tier states. These smaller states will also benefit from fiber investments and service changes happening in neighboring states.
For fiber and equipment markets, Bell Atlantic`s West Virginia and Delaware fiber deployments are good indicators that investment is underway. Special-project innovations in schools, hospitals and libraries there will create more niche opportunities. One lesson may be that formerly second-tier states are now strategically important, and they are in line for high-technology dividends.
Delaware has been aggressive in promoting high-technology telecommunications in its state legislation before the enactment of federal reform. Cross-border business callers, particularly in the northern part of the state, are key customers for Bell Atlantic. Looking to states like New York, which provided a model of reform for the federal law, it is understandable that Delaware passed its Telecommunications Technology Investment Act (TTIA) in 1993, when the competitive future of telecommunications became an agenda item.
Bell Atlantic`s rapidly accelerated investment in fiber under the state`s plan--78% since the TTIA took effect--represents wisdom in the face of another Bell threat from Nynex. Competitive threats like this are more, not less, important in negotiating merger terms.
These fiber networks and their ability to offer advanced features--especially perks for traditional telephone-service customers--are essential protections of market position. Because of their smaller size and populations, West Virginia and Delaware may provide targets for initial invasions into the local loop.
West Virginia shows steady growth in network investment, with an 8% increase, on average, in fiber miles per year. Delaware has seen a more dramatic recent jump, due in part to passage of the TTIA.
Strategically, Delaware and West Virginia are "flanking states" because it might be easy for competitors to gain entry into their local loops and then use that opening to cross the borders into areas of adjoining states with long-distance offers. Competitors might try this strategy as a kind of "cream-skimming" in wealthier suburbs and business districts.
In that scenario, a Bell operating company risks getting stuck with the less profitable and rural lines and being forced to fight states over subsidies. By signing a quick deal in West Virginia or Delaware, even on unfavorable terms, a competing invader might be able to consolidate a fast gain in states willing to encourage entrants.
The long-distance access component of cross-border calls is a key prize for Bell operating companies, competitive access providers and long-distance providers alike. For West Virginia, in particular, residential and small business market customers may see sizable cost reduction from competition.
Access charges from cross-border calling (e.g., to Pennsylvania, Maryland, Ohio and New York) from West Virginia and Delaware have probably kept state subsidy systems afloat. For example, consider that Ameritech gets Illinois or Ohio approval (deals are likely), and then an invading Bell company offers long-distance to Ameritech`s "home turf" customers calling West Virginia, as well as the other way around. For GTE, or a competitive access provider, this could happen soon. No longer would an infrastructure provider have to pay the same access charges. This change in the law`s structure results in a two-way long-distance combination, which is the threat. In this manner, the law plays off the competitive interests of the Bell operating companies in the form of a race to liberalize markets. Strategically, it will pay Bell Atlantic to fortify more-lucrative areas in these states and open them up quickly, rather than waiting for a slow erosion of market power.
What`s more, the Telecom Act has dialing parity restrictions that prevent rural customers from paying more to call the city than the same exchange would cost the other subscriber in reverse--from the city to the rural area. It is possible that calls within local access and transport areas may be subject to the same competitive shift as calls between these areas, making it more essential than ever to circle the wagons and surround the larger urban centers, as West Virginia`s plans appear to indicate.
This is especially true when Ameritech could be packaging digital broadcast satellite (DBS) to try and lure cable customers in rural areas into a telecommunications/ cable package, with an added discount for "friends and family" type calls.
Of course, Bell Atlantic is on the offensive in these and other states, and video and wireless communications may be its forte. Its fiber-ring networks will provide a pathway into lucrative cable-TV and DBS markets. Fiber deployment is essential to Bell Atlantic`s core strategy in the local loop: First, leverage a unique, broad market position by enhancing traditional business and residential telephone service capabilities. Second, use the same infrastructure to support the broadband (video) offerings. In the new era of greater competition, this is a sound investment. q
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Bart Taylor is an attorney and telecommunications writer based in Baltimore, MD. He can be reached at (410) 889-8861 (telephone and fax) or by e-mail at email@example.com.
"The long-distance access component of cross-border calls is a key prize."