Posted: 01/2001
Service Providers Jockey as Rules Shift
Balance of Power
By Whitney T. Weller
But far from allowing these regulations to sideline them, incumbents remain strong, driving even newer regulations that enable them to build new infrastructures for delivering broadband services.
Telecom regulations are not new. Since the dawn of wireline telephony services, the government has issued regulations to protect the weak from the strong and the public from monopolistic practices.
In many ways, regulations have given rise to the tremendous market opportunities we see today. For instance, the same regulations that enabled the Bell system and AT&T Corp. (www.att.com) to gain the stronghold on the U.S. market also have enabled the carefully engineered standards those companies have pioneered throughout the years.
These standards and the public access to technology the Bell Laboratories invented during the monopoly and regulated years laid the foundation for fledgling telecom service companies and enabled spin-off technologies to develop and take hold.
But the same kind of regulation style that nurtured public and competitive access to telecom technology also engendered today's competitive market.
As we have seen with the breakup of the Bell system in 1984, the industry has struggled with the restrictions placed on service providers.
Regulations related to the unbundling of services are a good case in point. For example, the November 1999 FCC 99-238 ruling on network unbundling produced a different landscape for service providers. This ruling ushered in sweeping changes that untied the hands of ILECs and IXCs, giving them the ability to offer broadband services. Prior to this ruling, existing regulations--put in place since the 1984 breakup--restricted ILECs from using their market dominance and control over the physical infrastructure to hold back CLECs.
Regulations were written to allow equal access for CLECs and IXCs to the customer base served by ILECs.
By giving CLECs and IXCs access to physical connections to customer locations within the ILEC service area, regulations relating to the unbundling of telecommunications services attempt to strike a balance between large and small, new and old.
The regulations prohibit larger IXCs from offering long-distance IntraLATA services until they can demonstrate that CLECs and IXCs have equal access to local customers in their traditional service areas.
LATAs are the 196 geographical areas within the United States in which local telephone companies may offer local or long-distance communications services. As part of the breakup of the BOCs, CLECs and IXCs can lease ILEC facilities currently not in use at reasonable rates.
ILECs that have such spare capacity are required to lease it to whomever requests the facility. This means that CLECs and IXCs can and do request the use of anything from copper pairs to fiber optic cables not currently in use by the ILEC.
As a result, IXCs and carriers' carriers now have the opportunity to realize the revenue benefits that come from dealing directly with customers. To take advantage of these opportunities, many carriers are collocating new breakthrough equipment in so-called telecom hotels--buildings located at the center of commercial hubs and rented by businesses that sublease space to emerging carriers for use as PoPs or access points.
The new breed of multiservice equipment collocated in these hotels can take huge amounts of bandwidth from a single fiber and use it to sell services directly to end users. By providing a single, multifunction solution, this equipment saves the time and costs of aggregating and managing multiple equipment platforms. By enabling low-cost, highly differentiated services, this new breed of equipment gives CLECs and IXCs a competitive edge over service providers using legacy equipment.
In contrast, many ILECS responded to the regulations by placing as many existing facilities into service as possible and curtailing investments in new ones unless bandwidth demand forced them to do so. Unfortunately, the growth of the Internet led to skyrocketing customer demands for broadband services and left ILECs without adequate facilities to keep pace. The resulting long wait for broadband service delivery from ILECs drove customers to the faster, leaner CLECs that were able to move quickly to respond to their demands of rapid delivery of high-speed bandwidth services.
Because they are newer carriers, CLECs can build their infrastructures from the ground up--optimizing them for delivering broadband services. In doing this, they gain an edge by aggressively adopting newly invented, high-speed bypass technologies such as DSL, DWDM and new multiservice platform technologies. CLECs can offer last mile connectivity to new-age IXCs as well as to high-demand users, while turning a profit and reducing costs to customers.
At a clear competitive disadvantage, ILECs worked for regulations that would level the playing field. FCC ruling 99-238 accomplished this by allowing ILECs to provide non-unbundled services as long as the physical infrastructure is not shared by their regulated businesses and does not use legacy access facilities.
As a result, ILECs now can build out new infrastructures dedicated only to delivering broadband services--much as CLECs had been allowed to operate without the requirement to unbundle the facilities. The change means communities served by ILECs can benefit from investment in new facilities, and those ILEC investments will be protected from CLEC use and competitive encroachment.
While regulations can tip the balance of power from one player to another, they also can present opportunities for rival carriers to form alliances that can result in greater profits for both. These alliances can protect all parties from the vagaries of the regulatory world by banding together a block of providers with common interests. By forming carrier-to-carrier alliances, for example, CLECs and ILECS can connect corporate bandwidth powerhouses with large corporate consumers of broadband services.
An example might be the acquisition of MediaOne Group (www.mediaone.com) by AT&T, which joined a long-distance carrier and an ISP and cable provider. The resulting entity is a traditional IXC and a new CLEC that provides a worldwide network and direct access to the LATA customer base.
The Qwest/US WEST alliance is another example of a carrier's carrier cooperating with an ILEC to get access to the local customer base. The ultimate aim of these alliances is the ability of service providers to offer the most comprehensive communication packages in their regions for the lowest prices.
Driven by FCC rulings on non-unbundled services and insatiable demands for Internet and broadband services, incumbent carriers have begun several nationwide programs. These programs are aimed at providing broadband access for next-generation services including storage area networks (SANs), application service networks (ASNs), interactive data warehouse services (DWS), and multimedia streaming services (video on demand, advertising, streaming audio, media stream customized for the local market, etc.), among others.
The programs include Sprint Corp.'s (www.sprint.com) Integrated On-demand Network (ION), and SBC Communications Inc.'s (www.sbc.com) Project Pronto. ION provides for interactive multiservice terminals at customer locations that are connected to local Sprint CLEC PoPs using fiber and broadband. Project Pronto provides a broadband IAD connected to the local service PoP using fiber and broadband. Also, WorldCom Inc.'s (www.wcom.com) Generation program provides for fiber, wireless and broadband services delivered directly to customer premises or any mobile location where the customer might be.
Because the new rulings give these carriers the flexibility to function as CLECs, each is evolving toward becoming an integrated service provider. Each is registering with the FCC as a CLEC. Such re-registration frees these entities from the constraints of existing regulations. As a result, the newly formed entities have committed to massive programs to build out next-generation infrastructures that will support a whole new generation of broadband services such as high-definition TV and conference services.
In each case, ILECs and IXCs--now CLECs in their own right--are planning to leverage their knowledge of telecom and data technologies to propel them into new markets within the United States and throughout the world.
Clearly, regulations are a fact of life in the telecommunications industry. Even though these regulations can tip the scales in favor of one carrier or another, the effects are almost always temporary. To stay successful, carriers must be prepared to meet the challenges these regulations raise, either through alliances or alternative strategies.
One thing is certain in the checks and balances of the regulatory process: The system always will return to a competitive model.
Whitney T. Weller is the director of business development for Astral Point Communications Inc. (www.astralpoint.com) in Chelmsford, Mass.
ROUNDTABLE
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