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Data-Focused Next-Generation Telcos Join High-Capacity Trans-Pacific Cable Network

Channel Partners

October 1, 1998

21 Min Read
Data-Focused Next-Generation Telcos Join High-Capacity Trans-Pacific Cable Network

Posted: 10/1998

Data-Focused Next-Generation Telcos Join High-Capacity Trans-Pacific Cable Network

By Ken Branson

Breaking the old boys club, next-generation telephone companies are among the 33
companies pooling their resources to build the $1 billion Japan-U.S. Cable network, the
latest–and, in terms of capacity, largest–of several transoceanic cable projects.

Backers include such companies as AT&T Corp., Sprint Communications Co., WorldCom
Inc./MCI Communications Corp., British Telecommunications PLC, Cable & Wireless PLC,
Japan Telecom Ltd., Kokusai Denshin Denwa Co. Ltd. (KDD), Pacific Gateway Exchange Inc.
and Nippon Telephone & Telegraph (NTT). However, they also include next-generation
telcos such as Level 3 Communications Inc., Internet service providers (ISPs) such as
PSINet Inc., and emerging multinational carriers such as Pacific Gateway Exchange Inc.

The presence of new players in the planning and building of the Japan-U.S. Cable
Network is a sign of the times, according to those involved in the project.

"It’s basically the emerging and growing demand of Internet traffic, that’s what
the owners are buying (space in the cable) for," says Lou Krcelic, manager of
submarine cable systems at Sprint.

"You’ve seen [the movie] ‘Field of Dreams’?" asks Colin Williams, president
and CEO of Level 3 International Inc., a subsidiary of Level 3 Communications and one of
the "new entrants" participating in the project. "Well, it’s the same thing
here: If you build it, they will come. We’re building terabit terrestrial systems, and we
need the extra capacity."

The Japan-U.S. Cable Network will go into service with a capacity of 80 gigabits per
second (gbps), but will be upgradable to 640gbps–eight times the capacity of any cable
system currently in operation or construction. Its route includes two mainland U.S.
stations, a Hawaiian station and three stations in Japan.

The cable, scheduled for completion in the second quarter of 2000, will be a
21,000-kilometer, self-healing synchronous optical network (SONET) ring, beginning at
Point Arena in northern California, crossing at Kahea Point, Hawaii, and running through
three Japanese stations–Ibaraki, Shima and Murayama–before returning to California at
San Luis Obispo, about 300 miles south of its point of origin.

The Japan-U.S. Cable Network marks a departure from what is sometimes called "the
club system" in building transoceanic cables.

Arbinet Debuts Real-Time LCR Ticker

By Khali Henderson

Lending credence to the long-held theory that bandwidth is becoming a commodity, New
York-based Arbinet Communications has unveiled a real-time LCR (least-cost routing)
International Rate Ticker on its website, www.arbinet.com. The patent-pending ticker
quotes Arbinet’s lowest rate to global destinations available to the carriers that are
connected to the Arbinet Global Clearing Network.

"This is a public pointer to being able to buy bandwidth on the fly [and] that
bandwidth is becoming a commodity like people said it was going to be for years,"
says David Cooperstein, a telecom analyst with Forrester Research, Cambridge, Mass.
Cooperstein says similar exchanges are going to start popping up, first in spot markets
and then in all markets as technology to easily transfer bandwidth from one user to
another allows.

"If you look at what [Arbinet is] offering today, it is still the markets that are
not necessarily the most popular markets out there," he says. "Essentially, it’s
going to start with small, over-provisioned markets, but over time as the technology
improves, then you might see downtime being bought on a route, for example, like Los
Angeles to New York as the big backbones get built out."

"What’s exciting for our clients is that the Arbinet Global Clearing Network …
is the first real-time mechanism to ensure carriers that they are getting the best price
and quality route to suit their specific needs," said Alex Mashinsky, Arbinet’s
founder and chairman.

The LCR Rate Ticker provides the first public access to AGCN, which currently operates
with over 50 carriers and processed more than 10 million minutes in July.

The LCR Rate Ticker is in its initial stages; a subsequent release due out in fourth
quarter 1998 will provide search-by-destination capabilities. Ultimately, Arbinet has
plans to build a large public display ticker in Manhattan’s "Switch Alley."
While the company says it is close to selecting the building, it has not disclosed the
expected location.

BT Buys MCI Stake in Concert

British Telecommunications PLC (BT) reached an agreement in August with MCI
Communications Corp. to buy MCI’s 24.9 percent equity stake in Reston, Va.-based Concert
Communications Services for $1 billion. The sale comes on the heels of the proposed
joint-venture agreement between BT and MCI rival AT&T Corp. AT&T will be a
nonexclusive distributor of Concert services.

The sale will be completed following the anticipated merger between MCI and WorldCom
Inc. The agreement grants MCI the right to continue offering Concert services on a
nonexclusive basis for up to five years after the merger. Contracts for Concert services
signed with MCI prior to the end of a two-year period will continue to be supported by MCI
for three additional years.

In addition, Concert will continue to honor, on an interim basis, MCI’s subdistributor
and supply agreements for Concert services in the Americas, including its distribution
agreement with Canada’s Stentor Alliance. Stentor has been offering Concert services in
Canada since 1995.

MCI and BT formed Concert, a voice, managed data and Internet services provider (ISP),
as a joint venture in 1994. The enterprise granted BT the opportunity to exercise its
purchase rights if there should be a change in ownership of the company.

AT&T "Cover Charge" Not Likely to be Copied

By Khali Henderson

In a hotly criticized move, AT&T Corp. has set a precedent that experts say is not
likely to be copied by instituting a $3 minimum fee for new residential customers using
one of its long distance calling plans. The charge is needed to cover $300 million the
company says it loses annually in providing service to customers that spend less than $3
per month.

"While it is true that in the past when AT&T raised or lowered rates others
have followed, it might not be the case this time," says telecom industry analyst
Jeffrey Kagan of Kagan Telecom Associates, Marietta, Ga.

Catherine Goodson, a spokeswoman for No. 3 long distance carrier Sprint Communications
Co., says the company has no plans to follow suit. However, she says the company does
include monthly recurring charges for some of its residential calling plans. Sprint Sense
customers, for example, are charged a $5 minimum fee.

Analyst Kagan observes that few carriers have the number of low-volume users of
AT&T, reducing their perceived need to implement a minimum fee. Additionally, he says,
the public relations beating AT&T is receiving as a result of the cover charge is not
one its competitors likely will risk.

In a press release, consumer advocate Samuel A. Simon, chairman of the
Telecommunications Research and Action Center (TRAC), called AT&T’s charge "an
unconscionable abandonment of residential telephone consumers." TRAC’s estimates, he
says, show that consumers will end up paying from $873 million to $1.4 billion each year
for not making long distance phone calls.

TRAC and the United States Telephone Association (USTA), the trade group representing
local telephone companies, have called for regulators to intervene on behalf of consumers.
"It seems incredible that AT&T can proclaim that this rate increase is being
imposed to achieve fairness for all its customers. This bold action by AT&T cannot go
unnoticed by the FCC (Federal Communications Com-mission) and Congress," says USTA
spokesman Lawrence Sarjeant.

AT&T’s monthly minimum is charged to customers when the long distance charges are
less than $3, and they will only pay the difference. The charge applies to new customers
on the company’s basic schedule effective Aug. 21. Current customers are exempt from the
minimum even if they move, although it will apply to anyone who changes his calling plan
on or after Jan. 1, 1999. Low-income customers–whether new or existing–also will be
exempt from the minimum by enrolling in a new Lifeline Program.

AT&T’s ill-timed announcement came just days after the Consumers Union and Consumer
Federation of America asked federal regulators to force long distance companies to lower
residential telephone bills to reflect more than $2 billion in reductions in access fees
paid to the local exchange carriers (LECs).

Long distance carriers said that, in fact, rates had dropped and defended their
practice of passing through preferred interexchange carrier (PIC) and Universal Service
Fund (USF) charges. Auditor Pricewaterhouse-Coopers confirmed that prices paid by customer
for AT&T’s long distance service declined by $460 million more than reductions ordered
by regulators in what AT&T pays to the local telephone companies for access.

In a statement, Sprint said it had lowered daytime rates by 60 percent with its
introduction of Sprint Sense Anytime. It also notes it will recover from customers 92
percent of PICC and 69 percent of USF fees charged to it by the local telephone companies.

Meanwhile, local telephone companies are citing AT&T’s charge and alleged lack of
rate reductions as an argument for their entry into a long distance market, where they
claim that "effective competition does not exist."

Survey: Nearly Half of Consumers Would Switch Local Phone Service

In a survey of 14,000 households nationwide, consumers indicated if faced with a
competitive alternative for their local telephone service, 42 percent would switch
providers, according to J.D. Power and Associates’ "1998 Residential Local Telephone
Service Satisfaction Study."

The study notes that customers of independent carriers–Citizens Communications Co.,
Sprint Communications Co., GTE Corp. and ALLTEL Corp.–were most interested in switching.
This is not surprising, say researchers, since increased intent to switch is highly
correlated to lower levels of customer satisfaction. Most independent carriers ranked
below the industry average in measures of customer satisfaction. BellSouth Corp.,
Cincinnati Bell and PacTel earned the highest customer satisfaction ratings.

Since 1997, however, there have been significant improvements in satisfaction ratings
assigned to independent carriers, the study notes. Researchers attribute this rise to the
ability of these carriers to bundle multiple telecom services. Given the opportunity, they
say, four in 10 consumers would purchase all their telecom services from one provider,
with local and long distance carriers the preferred choice.


Image: Overall Customer Satisfaction Index Scores
(1998)

Other carriers not included due to small sample sizes.Source: J.D. Power and
Associates 1998 Residential Local Telephone Service Satisfaction Survey

Telmex-Sprint Venture Challenged

By Jennifer Knapp

Having overcome challenges to its newly granted international operating authority,
Telmex-Sprint Communications LLC still faces what may be a greater challenge in overcoming
Telmex’s poor brand reputation among its targets–more than 20 million members of the
Mexican-American community.

The U.S. Federal Communica-tions Commission (FCC) denied on Aug. 21 a petition filed by
competitor AT&T Corp. and supporters, MCI Communications Corp. and Americatel Corp.,
for a stay of the venture’s international operating authority. The FCC decided the
economic loss cited by the carriers constituted "competitive harm," but did not
meet the criteria for the "irreparable harm" needed to grant the stay.

The FCC had approved Aug. 7 Telmex-Sprint’s Section 214 application to provide long
distance services between the United States and Mexico. Petitioning the FCC for stay of
its 214 approval, AT&T cited disappointment that the dominant Mexican telecom company
"continues to drag out negotiations to lower its domestic interconnection
charges–already the highest in the world." In addition, AT&T expressed concern
that U.S. consumers continue to pay high settlement rates to Telmex.

Telmex dismissed AT&T’s actions as a "last-ditch legal maneuver to avoid
competing with us in the United States." Telmex notes that AT&T and MCI have been
offering telecom services in Mexico for more than a year, capturing almost 30 percent of
the market share in that time.

According to a Reuters’ report, Telmex has since agreed to reduce access fees it
charges long distance rivals, including AT&T.

The regulatory obstacle hurdled, the greater challenge for the joint venture, formed
between Telefonos de Mexico S.A. de C.V. and Sprint Communications Co. in 1995, will be
battling Telmex’s apparently poor brand reputation.

"Sprint-Telmex may need to overcome the Mexican carriers’ abysmal service record
with some customers," says Jilani Zeribi, research analyst with Current Analysis.
"However, Telmex has invested an enormous amount [of resources] in customer service
and marketing since the country was deregulated and we believe the joint venture will be
able to overcome this hurdle."

Derek Gietzen, president and CEO of Genesis Communications International Inc., San
Diego, which targets the same market as Telmex-Sprint, says the company does not foresee
any dramatic impact on its business from the new venture.

When Genesis learned of the company’s original Section 214 filing Feb. 27, 1997, it
conducted a survey of its customers and asked if they would consider buying services from
Telmex in the United States, Gietzen says. "We came to the conclusion that if they
are going to use the Telmex endorsement, that doesn’t really give them a lot of good will
with customers," he says.

New Protocol Bridging PSTN-IP Networks Could Face Challenges

By Peter Meade

A new communications protocol has been released that promises to bridge the gap between
the public switched telephone network (PSTN) and Internet protocol (IP)-based networks,
speeding carrier and subscriber development of new IP-based voice and data products and
services. While developers expect compliant offerings to come to market as early as the
end of the year, analysts are less optimistic, saying acceptance of the protocol–the
product of one carrier and a handful of vendors–by uninvolved standards bodies and
service providers is hardly a foregone conclusion.

Called the Internet Protocol Device Control (IPDC), the specification promises to bring
customers the benefits of the lower-cost IP network without having to modify their
PSTN-enabled telephones, facsimile machines or dialing access codes.

The IPDC is contained in six documents developed early in the summer by the Technical
Advisory Council (TAC), a consortium of communications hardware and software vendors
spearheaded by IP-based network provider Level 3 Communications Inc. Led by Chairman Isaac
Elliott, Level 3’s senior director of voice network engineering, TAC includes
representatives from Ascend Communications Inc., Cisco Systems Inc., Ericsson Inc., Lucent
Technologies Inc., Northern Telecom Ltd. (Nortel), Stratus Computer Inc. and 3Com Corp.

The protocol, which currently provides a seamless integration between Level 3’s
IP-based network and the PSTN, was developed in just 60 days. Creating an invisible
connection between the PSTN’s circuit-switched technology and packet-switched IP networks
will speed the development of new IP-based voice and data products and services, he says.

The IPDC specification details how traditional telephone networks will connect with the
emerging IP-based networks, according to Level 3 spokesman David Powers. The link occurs
at what TAC calls a "media gateway," which may be a voice over IP (VoIP)
gateway, modem bank or circuit cross-connect that sits at the network edge. The media
gateway communicates with a media gateway controller, which manages the gateways by
determining whether the call is data or voice and how it needs to be routed.

The major innovation the IPDC specification promises, Elliott says, is the newly found
ability for a carrier such as Level 3 to permit its subscribers to purchase their own
media controllers to create or buy their own applications or features.

If the protocol has a shortcoming, it is that the TAC in general–and Level 3 in
particular–did not include any other carriers in the development process. "Having no
other carriers or ISPs (Internet service providers) offering input leaves a gaping hole in
the spec," says Jilani Zeribi, a research analyst with Current Analysis Inc., a
Sterling, Va.-based consultancy. "I understand Level 3 needs quick results, but other
carriers will have to comment later on, and this could cause delays then."

A draft of the IPDC specification has been delivered to two standards organizations,
the Internet Engineering Task Force (IETF) and International Telecommunication Union
(ITU). Level 3’s Powers says the spec has a good chance of gaining rapid acceptance
because, unlike many others, IPDC "is a market-driven protocol," not one that a
standards body is trying to push on skeptical vendors and/or users.

But market-watcher Zeribi is less optimistic. Aside from possible delays in gaining
acceptance from the standards bodies due to input from other carriers, he says multiple
specifications may arise from efforts backed by other carriers and/or ISPs.

Level 3 and its comrades have a lot riding on a quick acceptance from the IETF and ITU,
Zeribi says. After all, the Omaha, Neb.-based carrier has announced it will have customers
on its network by early next year, with its global network completed by 2001. Having
IPDC-compliant software and hardware can only speed the process.

Stratus Buy Raises Ascend Profile in Carrier Circles

By Jennifer Knapp

With its proposed acquisition of Stratus Computer Inc., Ascend Communications Inc. is
in league with the "big boys" as a provider of traditional telecommunications
solutions. The marriage of Ascend’s data networking solutions with Stratus’ signaling
system 7 (SS7) and operations support system (OSS) units promises integration of voice and
data networks for the companies’ clients.

The deal, a $822 million stock-for-stock exchange, is subject to regulatory and
shareholder approval.

"The acquisition of Stratus gives Ascend more of an opportunity to further
penetrate [the interexchange and regional Bell operating company] markets, which was not a
strength of theirs in the past," says Chris Nicoll, senior analyst, carrier
infrastructure at Current Analysis Inc. Ascend’s established customer base, which includes
Internet service providers (ISPs), "now will be able to offer the traditional telco
service that the big boys like Nortel (Northern Telecom Ltd.), Siemens (AG) and Lucent
(Technologies Inc.) offer," he adds.

The merger also will bring Internet protocol capabilities to larger telco
infrastructures based on minor infrastructure adjustments instead of complete network
overhauls.

Tantamount to the success of the Ascend and Stratus merger will be the divestiture of
Stratus’ nontelecom units. While no potential buyers have been announced, sale of these
units needs to be addressed immediately, Nicoll says. "A possibility exists for a
lack of focus for [the company] if they can’t quickly divest themselves," he says.

SmarTalk Faces Class Action

A class-action suit has commenced in the U.S. District Court for the Central District
of California on behalf of individuals who purchased common stock from SmarTalk
Teleservices Inc., a prepaid calling card provider based in Columbus, Ohio, during the
period July 31, 1997, to Aug. 10, 1998.

Certain officers and directors of the company have been charged with violations of the
Securities Exchange Act of 1934, including alleged misrepresentation of financial results,
which served to artificially inflate the price of SmarTalk’s stock.

In response, SmarTalk’s independent accountant, PricewaterhouseCoopers LLP, currently
is reviewing accounting figures supplied by the company regarding 1997 acquisitions and
restructuring. A completion time for the review has not been determined.

Independent Telephone Systems Sues WorldCom
International telecom services provider Independent Telephone Systems Inc., New
York, claims WorldCom Inc. failed to honor a contract signed between the two companies, in
which ITS was to receive unlimited telephone time and T1 telephone circuits from the
carrier.

WorldCom insists the contract was not negotiated with an authorized representative, and
offered to renegotiate the agreement at higher rates.

A lawsuit filed by ITS against WorldCom seeks to recover damages in excess of $60
million for services ITS resold to customers in Asia.

NEON, Network Plus Reach Dark Fiber Agreement
In a 20-year, $10 million indefeasible right of use contract with Waltham,
Mass.-based NorthEast Optic Network Inc., Network Plus Inc., a Quincy, Mass.-based
provider of local, long distance and data services, has purchased high-capacity dark fiber
on a fiber route linking New York; Boston; Nashua, N.H.; Springfield, Mass.; and Hartford,
Conn.

Williams Buys, Sells Network Capacity
In efforts to complete its 32,000-mile fiber optic network by 2001, Williams has
completed a series of agreements including the acquisition of a 350-mile stretch of fiber
from the telephony unit of MediaOne linking Jacksonville, Fla., and Miami. The company
also has lit the Houston, Atlanta and Washington segment of its fiber optic network, bring
the total miles lit to 16,000.

Williams also completed transactions with Frontier Corp. for use of 12 strands of fiber
throughout Houston, Atlanta, Miami and Tampa, Fla., and with Bridgeville, Pa.-based
Hyperion Communications for dark fiber capacity that will enable the local exchange
carrier (LEC) to expand into seven new states and Washington.

Tel-Save Stockholders Sue
Purchasers of Tel-Save Holdings Inc., New Hope, Pa., stock have filed a lawsuit
against the carrier and certain of its officers in the District Court for the Eastern
District of Pennsylvania.

The suit alleges Tel-Save and the named officers violated the Securities Exchange Act
of 1934 by advancing funds to marketers that could not be repaid, causing the inflation of
reported expenses and income, and in turn, stock prices during the period Aug. 14, 1997,
to May 22, 1998. Tel-Save would not comment on the suit.

Payphone Compensation Complaint Levied by Ameritech

In yet another face off between local and long distance carriers over payphone
compensation fees, Ameritech Corp. has filed complaints with the Federal Communications
Commission (FCC) against MCI Communications Corp. and Frontier Corp.

Ameritech claims MCI and Frontier owe the regional Bell operating company (RBOC) more
than $13 million for long distance calls originated on Ameritech payphones between Oct. 7,
1997 and March 31, 1998.

Bell Atlantic filed similar claims against MCI and Frontier in mid-July, to which the
long distance carriers replied that they will pay compensation to Bell Atlantic when they
are sure the costs of payphones are not being recovered more than once.

The ramifications of the Ameritech charges are identical to Bell Atlantic’s, says
Claire Hassett, spokeswoman for MCI.

"[Ameritech] has not removed from their payphone rates certain payphone service
costs and access charges that they were required to do by payphone deregulation,"
Hassett says.

Supporting MCI’s position, Frontier says it, too, is waiting for assurance that double
cost recovery is not occurring.

"We believe that policymakers expected that these costs would be removed from
general intrastate rates with a ‘corresponding price adjustment’ before payphone
compensation was triggered," says Michael Shortley, senior attorney and director,
regulatory affairs for Frontier.

Teleglobe Enters Italian, French Telecom Markets

Teleglobe Inc., McLean, Va., recently received authority in Italy and France to
establish facilities and provide services to Italian wireline and wireless carriers,
Internet service providers (ISPs), resellers and business customers. The company also
received "10123" for dial-around access in Italy and "1610" for
dial-around in France.

In addition, Teleglobe has reached a marketing agreement with StarMedia Network, a
Latin America-based online network, to sell telecom products and services via the Internet
under the name "Galafon powered by Teleglobe." The companies initially will
offer prepaid calling cards to StarMedia website visitors.

ADDS MOVES CHANGES

The Competitive Telecommunications Association, Washing-ton, has elected Riley
Murphy and Larry Malone to its board of directors. Murphy is executive vice
president, legal and regulatory affairs, for e.spire Communications Inc., Annapolis
Junction, Md., and Malone is senior vice president, global sales and marketing for New
York-based Viatel.

IXC Communications Inc., Austin, Texas, has promoted Shirish Lal from director,
strategic planning to vice president, strategic planning. Lal joined IXC in 1996. In
addition, IXC named Kerry Pickens and Paul Raveill vice presidents of sales
for wholesale telecommunications services in the western and eastern regions of the United
States, respectively. Pickens joins IXC from Sprint Communications Co. and Raveill from
Resurgens Communications Group Inc.

Miami-based New Millennium Communications named James K. Mellon president of its
new subsidiary, Nexxt Millennium Carrier Services. Mellon joins Nexxt from his position as
European regional manager at AT&T Corp.

TMC Communications, Santa Barbara, Calif., appointed Charlie Naulty vice
president of sales. Naulty joins TMC from IXC Communications Inc., where he was a carrier
executive for two years.

Teleflex Systems, Boca Raton, Fla., has named Bill Folchetti as project manager
and Phil Corby as strategic accounts manager. Folchetti joins Teleflex from
Telecommunications Service Center of Tampa, Fla., and Corby most recently worked at Daleen
Technologies.

Telscape International, headquartered in Houston, has elected former U.S. Congressman Jack
Fields to its board of directors. Fields represented Texas’ 8th Congressional
District in the House from 1981 to 1997, retiring as chairman of the House
Telecommunications and Finance Subcommittee. Since 1985, Fields had served on the
subcommittee, which addressed the affairs of international telecommunications and the
Federal Communications Commission, as well as the telephone, cellular, cable and broadcast
industries.

As a member of this subcommittee, Fields was instrumental in the enactment of the
Telecommunications Act of 1996.

ALTS President Resigns, Returns to Private Sector

By Gail Lawyer

After five years leading the Association for Local Telecommunications Services (ALTS),
Heather Burnett Gold has resigned to join one of the competitive local exchange carriers
(CLECs) her association represented. In mid-September Gold became vice president of
regulatory affairs at Tampa, Fla.-based Intermedia Communications Inc. Gold will remain in
the Washington area, where she will handle legislative and regulatory activities that
impact Intermedia.

Gold presided over ALTS during one of the most tumultuous periods for facilities-based
CLECs. "Heather has been a tirelessly devoted entrepreneur in building ALTS into one
of the most respected industry associations during a difficult and complicated legal and
regulatory environment," Steven G. Chrust, chairman of ALTS board and vice chairman
of WinStar Communications Inc., told PHONE+. During her tenure, ALTS played a pivotal role
in breaking the monopoly in the local exchange. The association had an active voice in
creating initiatives that eventually were incorporated in the Telecommunications Act of
1996. ALTS also was active in developing pro-competitive policies at the state level.

With her new position at Intermedia, Gold returns to the private sector after several
years in association management. Prior to ALTS, she served as vice president of industry
affairs at the Competitive Telecommunications Association (CompTel). Before joining
CompTel, Gold held a variety of management positions in regulatory affairs at companies
such as National Telephone Services Inc., Allnet, GTE Corp., Sprint Communications Co. and
Satellite Business Systems.

ALTS is now seeking a new president to replace Gold. Chrust predicts the search will
take only a few months.

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