Competitive Nightmares Taking Shape
Depending on which technology master you serve, telecommunications competition is either the dream you've always hoped for, or the nightmare that has you sitting bolt upright in the middle of the night.
In the two years since telecommunications was overhauled via legislation, true competition has been largely nonexistent. But beneath the surface, companies are preparing themselves to take part in an all-out war.
The telcos plan to deploy ADSL in an attempt to corner the datacom market, supported by vendors who are working to make the technology deployable in a majority of the telcos' copper plant.
The recently completed LMDS (local multipoint distribution system) spectrum auctions put several companies in a position to offer voice, video and data using new wireless technology.
America's deep-pocketed utilities are grappling with deregulation forces that promise to spur strategic alliances as they branch out from power distribution to the unknown world of telecommunications.
Turn on the light and put your imagination on hold (for now). What follows is your competitive "wake up" call.
It used to be that when someone talked of competition to cable TV, it meant one thing: DirecTV, that space-based "death star" that promised to swoop in, sign up 10 million subscribers and give the cable industry a run for its money.
Since then, the cable industry has been largely successful in fending off the DirecTV threat, helped by regulations that bar satellite providers from beaming local-market programming to their subscribers, as well as stiff competition from Primestar, the c able-owned DBS company.
But the war isn't over yet. Even though the DBS market has already experienced some level of consolidation and serious erosion of margins on hardware as prices plummeted from competitive posturing, more and more satellites are being launched — almost wee kly — into space. Each launch by such companies as Iridium or Teledesic (or a host of others) sets into orbit another piece of an interconnected constellation of communication satellites, some of which might be used for video, while others potentially st and in the way of cable operators gaining ground with telephony and/or data transmission.
In addition, the Federal Communications Commission just completed the largest-ever auction of spectrum for a local wireless communication service, known as Local Multipoint Distribution System, or LMDS. Such a system, consisting of a network of microcells, has more than enough bandwidth to easily send hundreds of video channels, telephone calls and deliver access to the Internet simultaneously.The space race
The Teledesic Network and Iridium both plan to use Ka-band low Earth orbit (LEO) satellites to provide worldwide communications. While both have their business plans centered around the provision of voice service, there is plenty of bandwidth to offer da ta, and perhaps video as well.
Teledesic, through its constellation of 288 satellites, is attempting to replicate in space the quality and reliability of a terrestrial fiber optic network to bring "affordable and interactive broadband communication to all areas of the Earth, including those that could not be served economically by any other means," according to the company's position statement.
Backed by wireless pioneer (and former cable operator) Craig McCaw and Microsoft founder Bill Gates, Teledesic plans to cover 95 percent of the Earth's landmass, giving millions of users simultaneous access to a massive broadband pipe that is free of the annoying delays typical of many satellite-based communication networks.
With all those satellites, broadband users will have access to an incredible two-way, 64 megabits-per-second network that utilizes fast-packet switching to keep customers connected. The service is expected to go into commercial mode sometime around 2002.
Iridium is on a much faster track. To date, 56 of the 66 satellites that will make up the Iridium network have been placed in space. Three more launches were scheduled to occur by mid-May to complete the constellation.
The project is being funded by an international consortium, and Motorola — whose engineers proposed the concept — signed a $3.4 billion contract to become the prime contractor. Each of the 66 satellites costs $62 million to construct and weighs a half - ton. Commercial deployment of voice, data, fax and paging services to handheld devices around the world is slated to begin September 23 of this year.LMDS: Lurking in the background
But perhaps the greatest potential threat to traditional cable TV operators will be those who bid and won licenses in the recent LMDS auction. While the much-anticipated and oft-delayed auction didn't live up to the revenue projections some expected, the 128-round auction will net the government a bit more than $578 million.
All told, the FCC will issue licenses for 483 basic trading areas with a total of 1.3 GHz of spectrum per trading area. Two licenses for each area will be available: one for 1.15 GHz (block A) and another for 150 MHz (block B).
The auction actually resulted in 104 bidders winning a total of 864 licenses. A total of 379 A licenses were sold, covering 90 percent of the U.S. population, and 485 B licenses were sold, covering 99.5 percent of the population. Unsold licenses will be r e-auctioned later, according to FCC officials.
With that much bandwidth available, LMDS can certainly deliver a wide variety of services. What remains unclear, however, is whether a provider can make money offering services that are similar to those that already exist, over a network of towers that so me analysts suggest will cost at least $500,000 for the first two-way cell, which covers five to 10 square miles. Additional cells are expected to cost much less because they essentially consist of little more than receivers and repeaters.
To date, the only existing LMDS operator is CellularVision of New York, which pioneered the technology and actually launched commercial cable TV-like service in Brighton Beach. There, customers pay $19.95 a month for a basic package of 31 cable stations, about 30 percent less than basic service from CableVision and Time Warner. The 12,000 customers CellularVision purports to have use tiny roof-top (or window-mounted) antennas, and set-top boxes connect their TVs and personal computers to the network.
Although CellularVision apparently intends to continue operating in New York, it did not pursue licenses to operate elsewhere. Instead, it plans to offer other LMDS operators advice and consulting services for a fee.
As for potential, the service could be the breakthrough technology that allows a single provider to easily offer the full suite of communication and entertainment services, according to analysts. Some reports suggest LMDS could be a billion-dollar industry in five years.
Of course, that will depend on the LMDS license winners actually coming to market with real services. Already, on the hardware side, there has been a shake-out. Texas Instruments and Hewlett-Packard, which both developed LMDS systems, sold them (to Bosch Telecom and Lucent, respectively).
The other question is financial wherewithal. Big-name telcos and cable companies were barred from buying licenses for fear they'd simply stockpile the licenses without building the networks. Some observers doubt that small companies will be able to raise the necessary capital to build the networks, however.
Despite the fact that LMDS can send video and voice signals, most people are betting on LMDS as a high-speed data play. LMDS can be used to interconnect local area networks, create campus area networks and serve as a medium for asynchronous transfer mode and Sonet. With an asymmetrical pipe that can operate at 1.5 Gbps downstream and 200 Mbps upstream, even during peak hours, the system would yield 7 Mbps downstream and 1 Mbps upstream per household, according to research performed by Hew-lett-Packard.
Outside the U.S., interest in LMDS is high. Countries that simply don't have a modern telecommunications infrastructure see wireless as an affordable means of leapfrogging into the 21st century.
— Roger BrownMore telco partnerships?
Two years after the Telecommunications Act of 1996, the reality of the marketplace hasn't quite caught up to the hype of unleashed competition the landmark legislation promised.
But for those keeping a close watch on the MSOs, telcos and especially the utilities, things are just starting to warm up in a number of ways.Utilities shifting gears
As little as two years ago, there was a lot of talk within the energy generating community about customers taking control of their energy consumption (demand-side management) on two-way networks with nifty control units in the home or office. But that's changed.
"The electric utility industry," says Jim Heisey, general manager for utility automation at C3 Communications Inc., "has evolved away from a push on demand-side management. The regulators themselves have de-emphasized that and have begun to emphasize deregulation of the electric industry.
"They're now telling the utilities they have to change things so that there are competitive offerings in the market. The logic goes, if the energy marketplace is competitive, the efficiencies will naturally follow."
This ongoing shift in emphasis has had a big impact on a lot of companies, including Heisey's. C3 was formerly CSW Communications Inc., a subsidiary of Central and South West Corporation. In 1996, the company was in the midst of a wide-ranging trial in Laredo, Texas.
The trial had CSW working with a gaggle of vendors on its own bi-directional 750 MHz HFC, CSMA/CD, mid-split network. Eventually involving well over 1,000 homes, customers used an energy control unit to take advantage of off-peak savings on energy, to program home appliances (AC, water heater, etc.), control water heater temperature, and to monitor electricity rates and utility bills at anytime. Plans also called for home security services, Internet access, and possibly cable and telephone service as well.
Yet the political landscape and economics put the kibosh on the trial and steered CSW toward a new competitive strategy. "The Laredo project was launched when demand-side management was a priority among regulators," says Heisey. "The effort proved to be highly successful, largely through a really effective job on the marketing and the customer interaction side of the business.
"(Yet) the technology is still in a pretty early state, dealing with a number of field failures and things that are not as proven as the market would like. The other aspect of that sophisticated network is that it really requires both telephony and cable television services to absorb most of the cost of it."
As the deregulation effort gained steam, CSW changed its name to C3 Communications and put its money on where it saw the utility market going. "What we've done," says Heisey, "is to refocus and not throw the net so broad as to encompass telephony and video services. What we want to do is really focus on the automated metering technologies and related capabilities. Because, as you open up the market to competition, as we're seeing in California for example, it literally requires that you have an automated communications system in place. So, we see that as a fundamental market drive we're determined to be a significant player in."
Heisey says the two prevailing AMR technologies are either telephone-based or wireless. Telephone-based systems usually work best with industrial/commercial clients and in rural areas. Wireless solutions are used in more urban residential markets.A broadband connection?
Yet a wireline broadband solution for such monitoring services still has its proponents.
Scientific-Atlanta's MainGate product line is configured around a broadband framework. The control in the system rests in either the customer's hands or with the utility itself. Utilizing a small portion of bandwidth (approximately 1 MHz in the forward and reverse directions), the system can provide meter reading, tamper protection, outage detection and notification, and energy management applications, among others.
According to Patty Donaldson, vice president of marketing for S-A's control systems, the synergies between cable's broadband capabilities and the utility industry's needs is self-evident. "I think there is a tremendous opportunity for electric utilities and cable companies to partner," says Donaldson. "In fact, I think they're missing a major opportunity.
"The utilities need some type of interactive network to be able to do these energy services. And I certainly can't think of a more robust network with unlimited bandwidth than a broadband network, and it's already in place in many instances. That's a great network to utilize, especially when you're just beginning with a suite of services and you know you're probably going to want to add on to those services as new technology becomes available."
Donaldson admits there are other ways to communicate and perform energy services, such as the paging/telco WAN configuration to provide traditional AMR solutions. However, she says broadband offers an almost real-time connection and unlimited bandwidth.
One cable company, with two now-suspended trials to its credit, believes it's only a matter of time until the cable/utility connection is made permanently. The first trial Cox Communications attempted was in its Hampton Roads, Va. system, working with Northern Telecom (Nortel) and Virginia Power.
"We started out," says Mark Davis, Cox' director of engineering for telephone technology, "with what we call an integrated solution that would take voice, video and data and combine it into one box that would go on the side of the home. And data included Internet access, as well as the CEBus, which was designed to do energy management with an industry standard the power industry uses.
"We actually delivered some prototype boxes to Hampton Roads. We had most of the features working on it. It did cable telephony, it did switched digital video, it did Internet access, it did CEBus."
But market forces said otherwise. Davis reports that the push for standalone appliance solutions for telephony and data services, as opposed to an integrated solution, took hold, and Nortel felt compelled to address those solutions instead and terminated the trial.
Davis says a few months later Cox was approached by Ericsson, which proposed the same integrated solution, but in an ATM format to the home. They took the technology to Oklahoma City, Okla. and had about 20 homes operating with the Ericsson boxes. Then, says Davis, despite being "so close," Ericsson restructured, laid off thousands of employees and dropped the trial.
Other market dynamics, says Davis, have also put the integrated solution on the back burner. The standards-compliant cable modem, the OpenCable effort and continuing advances in cable telephony are quickly making volume-pricing for these technologies a reality.
But Davis believes there's a good chance that an integrated solution will still come about. "We still hear of initiatives going on dealing with integrated voice/video boxes," says Davis. "It's just that it's going to be a little bit more challenging because of these new market dynamics.
"I still think that sometime in our future we are going to have to move to a switched network. The question is, when? You know, (possibly) when we start introducing high definition television to our networks and when (network) requirements go up exponentially again, that could be the time. Now, whether it's switched in a packet form or circuit switched, we don't know. But I think it is in our future sometime."
Does this future integrated solution include utility-related services as well? Davis thinks it's a distinct possibility, "I think so, if it's cost-effective. You know, they spend about 50 cents a meter read per month. That's not a lot of revenue, but if you could do it incrementally with some other service we provide, then I think it would be very easy. It's a win-win for both of us."The telco connection, ETC...
While AMR related services are a big part of the utilities' (and possibly cable's) future, increased profits do not rest on meter reading alone. And Section 103 of the Telecommunications Act is seeing to that. Through this section, previously-restricted public utility holding companies can enter telecommunications and information services (see sidebar) by forming an "exempt telecommunications company" (ETC).
Central and South West Corp., like a growing number of utilities, has used Section 103 to create a number of telecommunications subsidiaries. One of its key creations is CSW/ICG ChoiceCom L.P., a limited partnership between CSW and ICG Telecom Group, a subsidiary of ICG Communications. The partnership between the utility and the competitive local exchange carrier (CLEC) is working to provide consumers with local telephone, long distance and a variety of data communications services in a four-state region that includes Texas, Oklahoma, Louisiana and Arkansas.
"What we're looking for," says Bear Poth, vice president of sales and marketing for CSW/ICG ChoiceCom, "is for new businesses from the perspective of a utility. And with our deal with ICG, it was simply an opportunity to get to what is a very high-growth marketplace where you can create a lot of value."
While they do offer a residential phone product, Poth says the company's primary targets at this time are businesses. Going up against a formidable foe (i.e., Southwestern Bell), ChoiceCom has to get creative with its sales approach.
"We have a real interesting approach," says Poth, "in that we come in and provide a consultative solution. We'll come in and look at a company's phone records and we'll pick apart its phone bill."
While they haven't launched an Internet/data product yet, Poth says they provide Sonet-based, OC-type circuits, as well as regular DS-3 and DS-1 level interconnectivity. And ADSL technologies aren't far off the radar screen either. "Yeah, we sure are (looking at ADSL)," says Poth. "I mean all the CLECs, through their interconnection agreements, have access to copper. So, you have to look at all the different xDSL technologies to see how they will fit in."
Given the company's pedigree, formed by an established, deep-pocketed utility and an aggressive telephone competitor, ChoiceCom's future looks to be a solid, steady one, says Poth.
"The main thing is that we want to continue to go out and capture market share and retain our customers so that they're long-term clients. Right now, Southwestern Bell still has 99 percent of the marketshare. It is not a competitive marketplace. But we're going to do everything we can to get our piece of the pie."What's good for the goose...
As telecommunications factions continue to jockey for competitive advantage, some things are universal for all concerned. The bottom line in the burgeoning competitive marketplace, whether it's an expanding cable company, an entrenched baby Bell, a hungry CLEC or a well-bankrolled utility, is still the customer.
And, while whiz-bang technology is one thing, true competition and marketing saavy is something totally different. And utilities are no different when it comes to learning this lesson.
"Electric utility companies," says C3's Heisey, "have never really marketed or sold to customers. If you think about it, have you ever had a say in how much your utility bill was? The truth is that their only customer has been the electric utility regulators.
"Now, there's this whole thing about opening up the marketplace, offering new services and doing effective customer service. It is a hard time for most electric utilities. They haven't a clue and most of them are arrogant enough to believe that they are already really good at it.
"We believe if you don't really add value, and get yourself in gear and do it soon, you're not going to hold a lot of customers when someone else comes in and offers the same service for 20 percent less."
— Michael LaffertyWhat is an ETC?
One of the most potentially far-reaching provisions of the Telecommunications Act is Section 103, which added a new section to the Public Utility Holding Company Act of 1935 (PUHCA).
Together, the two sections permit previously-restricted public utility holding companies to enter telecommunications and information services markets without prior Security and Exchange Commission (SEC) approval. The utility companies can enter these new markets through the acquisition or maintenance of an interest in an "exempt telecommunications company" or "ETC."
Under PUHCA's new Section 34(a)(1), an ETC is any person (and/or company) determined by the Commission to be engaged directly or indirectly, wherever located, through one or more affiliates (as defined in Section 2(a)(11) of PUHCA), and exclusively in the business of providing one or more of the following:
(A) telecommunications services; (B) information services; (C) other services or products subject to the jurisdiction of the Commission; or (D) products or services that are related or incidental to the provision of a product or service described above (i.e., A, B, or C).