The House that Deregulation Built

Posted: 11/1998

The House that Deregulation Built
Telcos Target MDUs with Integrated Services

By Peter Meade

An
increasing number of telecommunications service providers are targeting the residential
multiple dwelling unit (MDU) market for the same reasons some warriors prefer bombs over
bullets: One shot makes a greater impact.

Those lining up their crosshairs on the MDU target include interexchange carriers
(IXCs), regional Bell operating companies (RBOCs), competitive local exchange carriers
(CLECs), satellite communications providers and cable television (CATV) companies. The MDU
market, defined by The Yankee Group Inc. as any vertical or horizontal grouping of
households of five or more units that are managed or owned by a central entity, is
dominated by traditional rental apartment buildings. The Boston-based research house also
broadens the category to include condominiums, cooperatives, townhouses and planned
communities.

"I can’t imagine anyone involved in any facet of the [communications] industry,
even if it was for just a few units, not wanting to be involved in this fast-growing MDU
segment," says Bruce L. Egan, vice president for Indetec International Ltd., a
consulting firm based in Del Mar, Calif. "Concentrating on densely populated areas is
the fastest way [for service providers] to build a dominant presence with the least amount
of effort and expense."

Research from The Yankee Group concurs: By the end of 2000, about 50 percent, or 10
million, of the MDU households in the United States should have some choice regarding
their telephone service provider.

"I’d be hard-pressed to find a better consumer market for the delivery of
telephony, Internet access and video services," says Brian Adamik, vice president of
consumer research for The Yankee Group. "After years of little competition in this
market, we are on the brink of some major changes that are turning MDUs into a highly
attractive market segment."

Just 15 or so years ago, MDU owners were limited only to the local telephone and CATV
companies for providing services. In the past two years, real estate companies, property
owners and management organizations have begun to smell opportunity in the unfolding
scenario promised by the Telecommunications Act of 1996.

"They are beginning to understand how they can help themselves differentiate their
property offerings in a very competitive MDU market while helping telecommunications
providers and entertainment service providers achieve their business plans," Adamik
says. "The building owners also receive revenue sharing for their efforts while being
able to offer their customers value- added services."

According to Adamik, the MDU market had not taken off previously because of three
factors:

• A lack of capital among the first generation of MDU service providers made it difficult
  for them to deliver on their promises of integrated services. After spending so much on
  creating enticing marketing campaigns and signing property owners to big, up-front
  commissions, providers were strapped for cash when it came to delivering on their
  promises.
• They further were hindered by relying on the wrong technology, Adamik says. "The
  technology on the video side was quite klutzy," he says. "Because many of the
  first-generation service providers came out of the private cable business, they were
  relying on satellite master antenna television (SMATV). Cable providers, meanwhile, needed
  to improve their channel capacity and reliability, he adds.
• Inferior billing and customer care then caused many property managers to doubt the
  long-range viability of their MDU service providers, Adamik says. "This issue, more
  than any other, continues to plague many service providers that wish to address the MDU
  market," he says. "There are enough issues of their own for property managers to
  be concerned with. They do not want to hear that there are errors in the telephone bills
  or get calls when the cable is out."

Some of the first-generation MDU players, such as Chicago-based OnePoint Communications
Corp. and Cable Plus, Bellevue, Wash., may be able to reinvent themselves and stay in the
game, Adamik says. OnePoint, for example, recently signed a deal to provide bundled
communications services to more than 60,000 apartments operated by the Apartment
Investment and Management Co., Denver. But Adamik says it is more likely that the market
will be reshaped and revitalized by much larger organizations, such as LECs and IXCs.

"Telcos see MDUs as a hot market where they can quickly take advantage of the new
networks they have put in place," says John Rinks, vice president and general
manager, satellite communications, for Ortel Corp., an Alhambra, Calif.-based provider of
in-building distribution systems for digital satellite services. "Signing up MDUs
represents the fastest route for grabbing a large number of new customers, while at the
same time either stealing customers from cable or stopping them from signing up."

Bell Atlantic Corp., Southwestern Bell Corp. and GTE Corp. all have signed up as
"master systems operators," meaning they will provide digital cable along with
telephony services in selected markets. Bell Atlantic, in particular, has emerged as an
early leader in the MDU sweepstakes by announcing that it would make television service
available to more than 2.5 million MDU residents in Boston, Philadelphia, New Jersey, New
York and Washington by the end of the year.

The incumbent LEC (ILEC) has put itself in some good company with this ambitious
project. The new service, which offers more than 200 channels of satellite-delivered
programming from DIRECTV Inc., El Segundo, Calif., and U.S. Satellite Broadcasting Co.
Inc. (USSB), St. Paul, Minn., represents a real rival for traditional franchise CATV
providers and an attractive alternative for consumers.

A rooftop dish delivers digital cable with local TV signals coming from an additional
antenna. Residents pay $5.99 for a set-top box plus monthly programming charges. DIRECTV,
for example, offers 57 television and 31 music channels for $29.99 per month. USSB’s
multichannel programming starts at $10.99 per month with pay-per-view movies at $2.99
each.

"This could be a home run for Bell Atlantic," says Jimmy Schaeffler, chairman
and CEO of the Carmel Group, a Carmel, Calif.-based consulting firm. "If it moves
fast and takes advantage of the digital edge that DBS [direct broadcast satellite]
currently has over analog cable, this service should give DBS a strong boost toward adding
subscribers in record numbers."

There are only 20,000 MDU subscribers with DBS today, according to the Carmel Group.

SBC Communications Inc. also is on the ball, says The Yankee Group’s Adamik. The Bell’s
"SmartMoves" program pays a commission to apartment building owners who sign up
their structures for services that include DIRECTV.

"Watch out for the RBOCs," he says. "They all have such programs."
Ameritech Corp.’s MDU Program has particular potential because 25 percent of its
residential customers live in MDUs, according to The Yankee Group. The Bell also has
chosen to sell its offering through sales agents, who most likely will be more zestful in
their approach than other sales channels. US WEST Inc., at the same time, is using third
parties to sell its One Step MDU program.

Aside from television programming, the Bells are limited only to offering local
telephony at this point, but the day will come soon when they will tie long distance to
the package. Expect AT&T Corp., MCI WorldCom Inc. and Sprint Communications Corp. to
be players too, but none of the big three long distance carriers have a cogent MDU
strategy right now, Adamik says.

While AT&T has not yet shown its hand in the MDU market, its acquisition of CLEC
Teleport Communica-tions Group Inc. makes the communications giant a sure bet for offering
integrated local, long distance and Internet access to MDUs, he says. TCG already is
versed in delivering such services and AT&T’s consumer strategy could benefit from
some new blood. The same holds for the newly paired MCI WorldCom, which includes proven
MDU-provider Metropolitan Fiber Systems.

Other long distance carriers shouldn’t ponder the prospects too long because others,
such as upstart wireless CLEC Teligent Inc., already are in gear. The Vienna, Va.-based
company has moved into the commercial MDU market by signing on to provide
telecommunications services to U.S. RealTel Inc. sites nationwide.

While the pact initially targets only 51 office properties, it will expand to more than
200 properties. "Our agreement allows Teligent access to hundreds of business tenants
in properties across the country," says U.S. RealTel President Jordan E. Glazov.
"The agreement gives Teligent access to additional properties so it can provide new,
state-of-the-art communications services."

Teligent plans to offer the tenants local and long distance service as well as
high-speed Internet access and other data services over its digital wireless network.
Services are provided by Teligent installing a small antenna on the building rooftops. The
CLEC then uses existing or newly installed inside wiring to connect the antenna to
customers’ telephone equipment, personal computers, data networks or videoconferencing
equipment.

This "outpost" strategy should repeatedly prove effective, says Tom Nolle,
president of CIMI Corp., a Voorhees, N.J.-based consulting firm. "Once you establish
one high-density outpost, you move along offering similar services to adjacent structures
and so on."

It would not be a surprise that Teligent is targeting newer structures. While older
MDUs can be a challenge to retrofit for rebirth as a "smart" property, new
buildings allow for a "cleaner" process, says The Yankee Group’s Adamik. With
new construction, service providers can negotiate and work with builders in the early
stages to lessen the difficulty of installing the proper wiring and gear.

When fiber is installed in these buildings instead of traditional copper,
high-bandwidth services become an immediate reality, says Russ Wyatt, manager of market
development for access systems at Reltec Corp., a Bedford, Texas-based provider of MDU
gear. Data transmission rates of as high as 100 megabits per second (mbps) and 750
megahertz (mHz) for broadcast video and voice services are immediately possible and can be
delivered over a single fiber. Putting a fiber distribution system in a new building lets
owners provide today’s–and tomorrow’s–bandwidth services right now, he says.

So savvy service providers will keep a keen eye on the construction market for such
opportunities. More than 170,000 new apartments were completed last year, according to
information from The Yankee Group and the National Multi-Housing Council in Washington.

Being in the right part of the country gives service providers a better chance of
capturing more MDU market share. "Where is the action?" Adamik asks.
"Surprisingly, it’s not in the Northeast." According to The Yankee Group, some
70 percent of all MDU households are in one of 12 states, with nearly two-thirds of the
top 12 households in one of the top five states. (See Table on page 78.) While New York
does play runner-up to leader California, the MDU hotbeds are spread out in geographic
pockets.

It is important that service providers that want to play in these areas understand the
position of property owners. "Carriers can’t expect to always get exclusive or carte
blanche access, "Adamik says. "Owners can’t bet the whole building on you. After
all, you’re just ancillary revenue–just like the washing machine vendor."

In addition to the leeriness of the property owners, service providers should not
expect all residents to embrace their service, either. "I’m not convinced this is
workable in all situations," says CIMI’s Nolle. "Events such as kickbacks to
building owners or holding callers captive to a particular carrier will run amok with the
Public Utility Commission."

Instead, he favors an approach where residents are offered a deal similar to what
travelers face in hotels. A building may be served by a preferred carrier, but callers
should have the option to use their own selected carrier, Nolle says.

Image: Top 12 Residential MDUs by State

No matter what, the services to MDUs must be world-class. "While this is a
growing, viable market, it is not a get-rich-quick situation," Adamik says.
"Property owners talk [to each other]. They are not babes in the woods. They are
savvy and sophisticated."

These factors make the ability to provide Internet access a must-have in any MDU
service provider’s arsenal. According to The Yankee Group, most telecommunications-centric
MDU providers are trying to deliver a 10baseT Ethernet solution, while others are testing
a classic local area network (LAN) configuration or exploring the possibilities of digital
subscriber line (DSL) technology.

Cable companies also are worthy adversaries as they start the deployment of integrated
services to MDUs. They also are used to battling DBS and SMATV. While SMATV may represent
the biggest threat right now, Adamik says its inferior technology and channel capacity
makes it a prime target for other access methods while DBS continues to suffer from a lack
of local programming.

"SBC’s and Bell Atlantic’s alliances with DIRECTV could eventually have the
biggest impact on the MDU market," he says. "But both must find ways to overcome
the distribution problems that AT&T faced when it held an interest in the
company."

The long distance carriers’ wait-and-see stance regarding the MDU market will not last
forever, according to Indetec’s Egan. "They’re just trying to get a better
understanding of the market before they attack," he says. "And they will. Bet on
it."

The IXCs are getting ready internally, but it is in their best interest to stall as
long as they can until the RBOCs get approval to enter the long distance market, Adamik
says. The time can be used to beef up their lackluster consumer local service and Internet
access efforts.

"The major IXCs recognize that RBOC entry is coming soon," Adamik says.
"As a result, IXCs are scrambling to prepare. MDUs are the most obvious and
cost-effective, large-scale consumer entry point."

Peter Meade is Executive Editor of PHONE+ Magazine.