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Evolution of the local phone market

Thu, 10/31/1996 - 7:00pm
Jeffrey Krauss, Waiting for Local Phone Competition and President of Telecommunications and Technology Policy
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By Jeffrey Krauss, waiting for local phone competition and President of Telecommunications and Technology Policy

Today, there are many potential competitors on the horizon, each associated with a particular technology — cellular, PCS, LMDS, DEMS, 38 GHz, optical fiber, and of course, cable TV. But I believe that in the long run, there will be consolidation, and there will be a small number of competitors, each utilizing a mix of technologies. This will be driven by customer demand for "one-stop shopping," the recognition that no single technology can meet all user needs and the need to foster a healthier business climate. FCC policies need to be adjusted to encourage this consolidation, or at least, to eliminate the current notion of "the more competitors, the better."

The players today

Today, the potential local telephone competitors are generally associated with a single technology. The existing local exchange telephone company, for example, serves most customers using twisted pairs of low bandwidth wires, each wire pair dedicated to a single phone line. Companies like Metropolitan Fiber and Teleport serve most of their customers by running digital optical fiber to the customer's location. Cable TV companies employ coaxial cable to the home.

And then there are numerous wireless technologies that will be used for local phone service. Most of these require licenses from the FCC. There are two cellular phone companies in each area. (In most cases, the local telephone company owns one of the two cellular companies, but operates it as a separate business. Pacific Telesis has actually gone so far as to divest its cellular operations into a totally separate company, called Airtouch.)

There will be several PCS operators in each area, such as the Sprint Spectrum service operating in the Washington D.C. area. While there are some business affiliations developing in this sector, so far, they are between a PCS operator and a long distance carrier (AT&T, MCI or Sprint) rather than between PCS and a different local loop technology.

Fixed wireless technologies that can support local telephone service include Digital Electronic Message Service (DEMS) at 18 GHz, Local Multipoint Distribution Service (LMDS) at 28 GHz and the frequencies at 38 GHz (which don't yet have their own name). The major players in these technologies are Associated Communications, headed by former AT&T President Alex Mandl, in the DEMS service; CellularVision in the LMDS service; and Winstar at 38 GHz. But the FCC plans to hold auctions for additional licenses in these services, so additional players will emerge.

Finally, there are unlicensed wireless services that could be used for local loop service. Frequency bands for these include 915 MHz, 2450 MHz and 5800 MHz using spread spectrum technology, and 1900 MHz and 2400 MHz under the new "unlicensed PCS" rules.

What these new competitors will find is that no single technology meets all customer needs. Each technology has both advantages and disadvantages.

Twisted pairs, optical fiber and coaxial cable all require long intervals between placing an order for service and installing the fiber or cable. The phone company has a huge advantage here — it has wire in place already to serve customers almost everywhere. But new competitors have to go through the pain and delay of cutting through streets and sidewalks to serve new customers. Once in place, it's easy to hook up additional customers.

Cellular service is available almost everywhere. Once the local phone companies lower the interconnection fees they impose on cellular calls, which they are required to do under the 1996 Telecommunications Act, cellular service will become much less expensive. But cellular technology is mostly analog and will be for many years, channel bandwidths are narrow, and thus high-speed data is difficult to support. Perhaps PCS will overcome this limitation, but even so, it will take many years for PCS coverage to match cellular or phone company coverage.

The fixed wireless technologies all have the advantage that they can employ highly directional antennas in order to reuse frequencies from one cell to the next. But they require direct lines of sight between transmitter and receiver, which may be difficult to accomplish for some locations. The unlicensed wireless technologies are far from perfect, because if these frequencies become congested, there is a risk of interference. But service to new customers can be provided almost instantaneously—no delay caused by FCC licensing.

A combination of technologies, not a single technology, is the best way to go, because of customer requirements, time factors and physical limitations. Companies that want to compete against the phone company need a broad portfolio of technologies. But so far, the only ones who have learned this lesson are the phone companies themselves. US West and Bell Atlantic are experimenting with unlicensed wireless equipment from Tadiran as a way to quickly install service to new customers when twisted pair capacity is exhausted, and new cables would take months to install.

Current FCC policies fail to encourage joint ventures among technologies that can compete with the phone company. To the contrary, there are FCC policies that limit the number of channels or amount of spectrum that one licensee may control. These policies actually discourage joint ventures.

Current FCC regulatory policies are based on the notion that "the more competitors, the better." But in the real world, a few healthy competitors, with broad portfolios of technologies, will be more effective against the existing phone companies than a multitude of small, weak companies each using a single technology.

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