Realizing Their Own Worst Nightmare

Posted: 05/1999

Realizing Their Own Worst Nightmare
By Ernest B. Kelly III

Anyone who knows regional Bell operating company (RBOC) mentality knows that one thing
they greatly fear in local service competition is the unbundled network element (UNE)
approach and, in particular, the UNE platform, also known as the UNE-P. Next to losing
customers outright to other facilities-based competitive local exchange carriers (CLECs),
this is the form of competitive entry where they lose the most, in terms of financial
return, customer control and network utilization. It’s also the thing they are fighting
most vigorously against in various regulatory and legal proceedings.

Their fears really have begun to be realized with the recent Supreme Court ruling on
the Federal Communications Commission’s (FCC’s) interconnection order, which endorsed the
UNE and UNE-P approaches laid out in the FCC’s original 1996 interconnection order.

The Telecom Act contemplates local competition coming from three forms: resale, UNEs
and interconnection with competing facilities. It does not favor one over another. In
principle one should not be favored over another. The Telecommunications Resellers
Association (TRA) supports all three. If you’ve got to have local competition, then you
would think the RBOCs would find it far better to have it come from resale rather than the
dreaded UNE-P. It begs the question: Why then have the RBOCs erected so many inhibitors to
full-service resale as to leave it teetering on the brink as a viable competitive option,
particularly for residential service?

Look at the scorecard. AT&T Corp. and MCI WorldCom Inc. were the first to opt out
of resale. Okay, maybe they did it for political purposes, as the RBOCs claim. I doubt it.

What then of the leading CLECs that also are pulling out of resale? Well, maybe resale
was just an early entry strategy and now with facilities in place they are shifting focus.
This is also doubtful as a complete explanation.

But what then of the smaller, total service resellers such as Working Assets Funding
Service, San Francisco, which are now out of it? Or what of full-service resale poster
child USN Communications Inc., Chicago, which crashed and burned so spectacularly?

Where are the local resale success stories? I’m hard-pressed to find them. Virtually
every new entrant into local competition now speaks of some type of facilities-based
strategy when describing his or her company’s business plan. The reason is a company
cannot make money reselling local service at the wholesale discount rates currently
available, especially with the added expense of operational and administrative problems in
dealing with the incumbent LECs (ILECs). In TRA’s last survey, 94 percent of TRA members
reselling local service reported net margins of less than 10 percent. Sixty-five percent
reported net margins equal to or less than zero.

The bottom line drives the competitive equation here. Resale is not working yet as an
economic model for local competition because the margins currently are inadequate and the
hardship for the reseller is enormous. Who do I blame for this? Mostly the RBOCs. Even if
state regulators set discounts, they did so after enormous pressure from RBOCs to keep
them as low as possible. For their cost studies, regulators relied on economic information
produced by the Bells with this end in mind. If the RBOCs want to drive emerging
competition from their own facilities, they are doing a splendid job. The good news is
that they have the wherewithal to do something about this. The question is why (oh why)
aren’t they doing more to promote resale and address the problems?

The simple answer is that they want to eat their cake and have it, too. That is, their
business strategy is to do the minimum to open their market (while claiming that they have
done everything to open them), to hamstring every new market entrant any way that they
can, to win the legal/regulatory battle of attrition with state and federal regulators and
politicians and come out with as much of the old empire intact as possible. So far this
brilliant strategy has produced no successful Section 271 applications to provide
in-region long distance services, and there is little wonder why.

The slightly more complicated answer is that the Bells are lost at sea in a competitive
world and cannot see beyond the next fiscal quarter. Far be it for me, a humanitarian by
trade, to suggest to the titans of monopoly enterprise in the ILEC community what to do;
but then again I am writing this column and I can’t resist.

First, there is a fundamental attitudinal change that needs to start at the top of
these organizations. That would be to recognize resellers as strategic business partners
now and in the future. That can be manifested in two ways. The first would be by reaching
out with new and better resale arrangements that make the business of local resale
profitable. Second is to stop placing hurdles in the way of companies that are trying to
enter local service through resale. With regard to this concern, there can be no doubt
that the Bells, in particular, have found countless ways of making life hard for resellers
trying to enter the local market. Here’s a partial list of ones that have come to my
attention:

• Protracted interconnection negotiations;
• Legal challenges to mediated or arbitrated agreements;
• Noncompliance with agreements;
• Operational support system (OSS) problems;
• Presubscribed interexchange carrier (PIC) freezes;
• Accelerated/undefined/unsubstantiated rejections, particularly for intraLATA (local
  access and transport area) service changes;
• Dropped directory page listings;
• Yellow-page scare tactics for potential customers of resellers;
• Bell win-backs that smack of customer proprietary network information (CPNI) violations;
• Dropped long distance carriers;
• Missed or delayed installment dates;
• Lost orders;
• Constant foot-dragging;
• So many fees and penalties we have lost count;
• Denial of assumption of existing contracts; and
• On and on and on.

The RBOCs have done damage to the business relationships they have with their
resellers. They have erected barrier after barrier to entry. Yet it’s not too late to turn
this around. In my mind, however, it has to start at the top. There has to be a clear
message coming from the CEOs of these organizations through or around the lawyers who
wield so much influence and dominate the agendas. So to paraphrase a rather famous and
historic cry of the recent past, I say to each Bell CEO, individually, and with all due
respect: Mr. Ackerman, (Notebaert, Seidenberg, Trujillo and Whitacre), tear down that
wall!

Here are some suggestions on how you might do that: First, arbitrarily negotiate or
renegotiate better discounts for your resellers. If you don’t like that for basic dial
tone, at least do it for features such as call waiting, call forwarding, caller ID, etc.
Let resellers make more money in the areas where you make it. Allow the resale of voice
mail and inside wiring contracts at wholesale discounts. Allow the resale of high-speed
digital subscriber line (xDSL) service at wholesale discounts. Don’t unfairly limit the
time frame for making available resale and interconnection agreements for adoption in
whole or in part. Stop assessing "glue fees" for reassembling UNEs. Allow the
assumption of existing contracts without penalties. Move to volume and term discounts and
win-back bonuses to provide incentives for your resale customers. Lower access charges.
Make OSS more user-friendly.

These are only a few ideas. Surely working with your customers, you can come up with
others. In other words, start treating resellers like your best customers, which is what
they would like to be.

What happens if you don’t? First, be assured that these competitors are not going to go
away. Then don’t be surprised if your resale customers (now and forever) take their
current and future traffic onto UNE-Ps or other facilities as soon as they can. Once that
starts happening, you will see yourself losing market share faster than AT&T did in
long distance. In that regard, one can only wonder what might have happened if AT&T
had taken an aggressive pro-resale stance in the early ’90s. Heck, it might have been able
to salvage a lot of market share in this decade. But like mother like son, huh?

Ernest B. Kelly III is president of the Telecommunications Resellers Association (TRA), the Washington-based trade organization representing resellers of telecommunications services. He can be reached at +1 202 835 9898.