Talk to any competitive local exchange carrier (CLEC) executive, and he or she is bound to tell you what a wild ride it's been during the 1990s. From regulatory battles in the states and all-out war on Capitol Hill to road trips for initial public offerings (IPOs); the ups and downs on Wall Street; the logistics of building facilities, planning service offerings and executing marketing campaigns; and working with or litigating against incumbent telcos, there's never been a dull moment.
In the three years since the federal Telecommunications Act of 1996 made it possible to provide alternative local telephone services nationwide, a multitude of new carriers have been born. Hardly a day goes by that we don't see announcements from CLECs about the cities in which they'll soon be providing service, or hear from the Bell companies that competition is prevalent enough to let them begin offering long distance services. But beyond these grand proclamations, how much competition really exists?
In 1999, we hope to answer that question. Throughout the year, X-CHANGE magazine will visit cities large and small, from coast to coast. Each month we'll focus on a different market to give our readers a taste of what's happening related to local competition. We'll talk to incumbent telcos and competitors of all types. And, most importantly, we'll hear from the end users about the choices available to them and their experiences with telecom providers.
This month we start in Grand Rapids, Mich. Granted, it's not a major market with several competitors, but Grand Rapids has played an important role in the development of competition in the state and throughout the country. The city has a rich telecom history, resulting from reformist state regulators and legislators, as well as a group of entrepreneurs that began providing competitive local dial tone almost a full year before the Telecom Act passed.
From Grand Rapids, we'll venture to Los Angeles in February. Other points on the map include Baltimore; Chicago; Cleveland; Dallas; Denver; Raleigh, N.C.; San Francisco; Tampa, Fla.; and the grand dame of competition, New York.
So, sit back, strap on your seatbelt and enjoy the trip.
Can You Help Me with Directions?
If you're providing service in one of the cities and want to provide information for a market study, contact me, Gail Lawyer, at (703) 567-5167 or glawyer@erols.com.
Ed Krzeminski is in a quandary.
It's mid-October, and even though the first snow has yet to fall in Grand Rapids, Mich., he's already thinking about spring. As telecom administrator for the government of the City of Grand Rapids, it's his decision, come next spring, whether the city will rebid its contract for local telephone services.
|
GRAND RAPIDS, MICHIGAN
Population: 1,021,200 (Grand Rapids MSA) Known for: Home of Amway and several office furniture wholesalers/retailers Largest Businesses: Meijer Inc., a discount retail chain, with 11,075 local employees; Steelcase Inc., an office furniture company, with 9,500 local employees; Spectrum Health, a health care services provider, with 8,000 local employees; Amway Corp., a retail product distributor, with 5,352 local employees. |
Should he rebid the contract in a few months, or extend the current deal, signed with Brooks Fiber Properties Inc. three years ago? If he does the rebidding in early 1999, he will be able to choose only between Ameritech Corp., the incumbent Bell company that's now merging with SBC Communications Inc., and MCI WorldCom Inc. (formerly WorldCom Inc.), which purchased Brooks a year ago this month. Wait another year, Krzeminski believes, and he might have a third option--US xchange LLC, a new competitive local exchange carrier (CLEC) based in Grand Rapids, which he expects to begin offering local service in 1999.
Krzeminski knows well the benefits of competition--lower rates, innovative service offerings and, perhaps, better customer service. For several years now, the city government has been reliant on competitive providers, which have offered better value on some services than local incumbent Ameritech. By choosing GTE Corp. for private branch exchange (PBX) services, the city saved $400,000 over the course of the 10-year contract. And, in just the first year of its three-year contract, Brooks cut about $80,000 off the city's local dial tone expenditures, while upgrading services to a fiber backbone. Ameritech, though, hasn't lost all of the city's business; it still relies on Ameritech to provide "911" and payphone services.
In the History Books
The number of local telephone service providers competing for business and residential customers in Grand Rapids might not be as large as in major markets such as New York or San Francisco. But in this metropolitan area about 30 miles east of Lake Michigan, customers can boast that they were some of the first in the nation to have a choice of local phone providers.
"Grand Rapids started it and set the stage for everything that's happened in Michigan," says William Celio, director of the communications division at the Michigan Public Service Commission (PSC).
The first inkling of local competition in Grand Rapids came when long distance provider TeleDial America (which was purchased by LCI International Inc. in 1996) decided to create a competitive access provider (CAP) called City Signal. City Signal's founders included Larry Vander Veen, now regional director of local service operations for MCI WorldCom in Grand Rapids; Brad Evans, president of another CLEC called Phone Michigan, which provides service in the Michigan cities of Flint, Bay City, Saginaw and Detroit; and Ronald Vanderpol, founder of US xchange.
These executives envisioned that City Signal would build fiber networks to connect business customers directly with TeleDial, bypassing the local incumbent Ameritech and the access charges it assessed. Eventually they hoped to add a switch to the network and provide local exchange service.
While City Signal built up its CAP business, the state legislature passed the Michigan Telecommunications Act of 1992, which established the early standards for local competition. In April 1995 City Signal's wish came true. It became the first company in the state to offer alternative dial tone services to business and residential customers over its own facilities. Later that year, local competition got another boost when the state amended its telecom legislation to include specifications for interconnection, among other things.
|
Certifications of Potential Competitors in Grand Rapids* |
|||
| CLEC | Date Approved | Tariff | Interconnection |
| ACI | Aug. 28, 1996 | No | No |
| A.R.C. Networks Inc. | April 4, 1997 | No | No |
| AT&T Corp. | Nov. 8, 1995 | Yes (Ameritech only) | Yes (Ameritech only) |
| Brooks Fiber Communications Inc. | Oct. 12, 1994 | Yes | Yes |
| Coast to Coast | Jan. 8, 1997 | Yes | Yes |
| Dakota Services Ltd. | Pending | No | No |
| Focal Communications Corp. | Pending | No | No |
| Frontier Telemanagement Inc. | July 10, 1997 | Yes | No |
| Group Long Distance Inc. | Pending | No | No |
| GTE Communications Corp. | Dec. 12, 1997 | No | No |
| KMC Telecom Inc. | April 4, 1997 | No | Yes (Ameritech only) |
| LCI | April 26, 1996 | Yes (Ameritech only) | Yes |
| LCI International Telecom Corp | Feb. 28, 1997 | Yes (Ameritech only) | Yes |
| Level 3 Communications LLC | May 11, 1998 | No | No |
| Long Distance of Michigan Inc. | Dec. 12, 1997 | No | No |
| MFS Intelenet | Nov. 14, 1996 | No | Yes (Ameritech only) |
| MCImetro Access Transmission Services Inc. | June 5, 1997 | No | No |
| MIDCOM Communications Inc. | April 24, 1997 | No | No |
| Millenium Telemanagement Group LLC | May 7, 1997 | No | No |
| NorthPoint Communications Inc. | Pending | No | No |
| NOW Communications Inc. | Pending | No | No |
| Sprint Corp. | Nov. 26, 1996 | No | Yes (Ameritech only) |
| Sterling Int'l Funding (dba Reconex) | Pending | No | No |
| TCG Detroit | April 4, 1997 | Yes (Ameritech only) | Yes (Ameritech only) |
| Tel-Save Inc. (dba The Phone Co.) | Aug. 25, 1997 | No | No |
| UniDial Communications Inc. | Pending | No | No |
| U.S. Telco Inc. | Case Withdrawn April 22, 1998 | ||
| US xchange of Michigan LLC | Nov. 7, 1997 | No | Yes (Ameritech only) |
| USN Communications Midwest Inc. | Feb. 5, 1997 | No | Yes |
| US West Interprise America Inc. | Pending | No | No |
|
Source: Michigan Public Service Commission, current as of Sept. 9, 1998
* This list represents companies that have applied for or received certification for all Ameritech and GTE territories in Michigan, or specified Grand Rapids in their application. However, this does not mean that all of these companies will be providing service in Grand Rapids. Also, since receiving certification, some of the above mentioned companies have merged. |
|||
Eight months after initiating its competitive local service, Brooks, a larger CLEC based near St. Louis, purchased City Signal. Brooks continued to run the Grand Rapids network, and many others around the country, until WorldCom purchased it in January 1998.
Over the years, the company that is now MCI WorldCom has targeted an area in and around Grand Rapids of about 350,000 access lines served by 22 central offices (COs). MCI WorldCom's fiber network now spans a 25-mile radius around Grand Rapids into other small communities, such as Holland and Zeeland. During this time, WorldCom watched as resellers such as AT&T Corp. and USN Communi-cations Inc. came and went, and realized it could not make a profit without its own local facilities.
MCI WorldCom's main adversary in Grand Rapids is Ameritech, the baby Bell that serves five states in the Midwest. When it became evident that competition was coming, Ameritech devised a plan of its own. In early 1993, Ameritech filed its "Customer's First" plan, which outlined how it could get permission to provide long distance service by proactively working with competitors. Before Ameritech's plan could be approved, the federal Telecommunications Act of 1996 was enacted and stopped Ameritech's plan dead in its tracks.
|
"Grand Rapids... set the stage for everything that's happened in Michigan." -William Celio, director of the communications division at the Michigan Public Service Commision (PSC) |
But part of Customer's First still lives on, and has a presence in Grand Rapids. The plan called for Ameritech to create a separate business unit to deal with competitors who wanted to resell the telco's services. From that a wholesale services group called Ameritech Information Industry Services (AIIS) was born. Since 1993 AIIS has created two customer service centers to handle reseller orders in its five-state territory. The first was established a few years ago in Milwaukee to serve resellers in Illinois, Indiana and Wisconsin. The second AIIS center is in a suburb of Grand Rapids and serves Michigan and Ohio.
"This center is an example of what we've attempted to do to ease the transition to this new environment," says Harry Semerjian, vice president of corporate planning for Ameritech. "It has enormous capacity to handle resale and unbundling orders every day. But right now we're nowhere near capacity, in part to the fact that AT&T dropped out of the market."
The building in which the Grand Rapids AIIS service center is located used to house Ameritech's enhanced business service (EBS) center. EBS was moved to Detroit when Ameritech reorganized its operations. Customer service for residential users in Grand Rapids also is handled out of Detroit, or in some cases, Kalamazoo.
On the Home Front
While many competitive providers only focus on the more lucrative business sector when entering the local market, City Signal did not. The young CLEC was required to provide services to residential customers as part of its licensing agreement with the Michigan PSC. In 1995, the company began a telemarketing campaign for residential service, but found that its telemarketing staff was overwhelmed by the response.
"We started to do some aggressive stuff, but after that it kind of fell over. We haven't been real aggressive on it," says Bernie Schmidt, MCI WorldCom's vice president of sales in Grand Rapids. MCI WorldCom still serves about 7,000 residential customers in the metro area, according to Schmidt.
Other attempts to market competitive local services to residential customers also have fallen flat. AT&T tried to become a local reseller in the Grand Rapids area in early 1997. Within a year, AT&T pulled the plug on its local service marketing efforts because it was unprofitable and too complicated to offer.
"Besides losing money, we had problems trading orders with Ameritech," says John Heath, an AT&T spokesman. AT&T continues providing service to customers who signed up, but does not take new orders. Heath would not say how many customers AT&T currently is serving in Grand Rapids.
Residential customers, though, have not been forgotten altogether. Century Telephone Enterprises Inc. (CenturyTel), a diversified communications company based in Monroe, La., debuted a wireless personal communications service (PCS) six months ago that is designed to compete with traditional landline service, says Christopher Pieri, PCS sales manager for CenturyTel. The ZONE service costs $39.95 a month, and includes 1,000 minutes of airtime plus custom calling features (see sidebar).
Blazing Trails
Being a trailblazer in local competition, especially in a city that has a population of just more than 1 million, didn't come easy for City Signal. Not only was City Signal at the forefront of the legal and regulatory battles related to opening the local markets, it also was at the center of learning how to interconnect with telcos. On top of that was the size of the market.
"Grand Rapids, being a Tier 2 market, is smaller and has less concentration of buildings. It's been a capital issue, and [affected our] ability to concentrate on our customer base," Vander Veen says.
Yet despite being a smaller, more spread-out market, competitors still feel that Grand Rapids is ripe for the picking.
"Grand Rapids has always been a progressive city," Vander Veen says. "If you have a legitimate product, the business and the community here recognize value. They recognize when people are serious about doing business with them. They don't jump at every new thing that comes along."
Plus, many in the community admit that residents there are frugal, clipping coupons and pinching pennies when they can. And the businesses in Grand Rapids aren't so different from the residents. "Companies here are engaged in businesses where every penny counts--auto parts manufacturing, office furniture. There are real opportunities to get at some hardheaded business people who say, 'If I can save a few bucks, I'll save it.,'" says Ameritech's Semerjian.
No Great Losses
But even after four years of competition, Ameritech has kept the lion's share of the market. Just how much market share Ameritech has lost is not publicly available. Neither MCI WorldCom nor Ameritech would disclose market share or other operational statistics, which they say is either proprietary or not tracked on a city-by-city basis. State regulators do not track local market share data, either.
Ameritech's advantage, obviously, is its incumbency. "We strongly leverage the fact that we're the home team," Semerjian says.
But customers don't necessarily buy that argument, nor do they feel that there is any "hometown" company they can purchase services from. "Ameritech really went after the political thing, saying that they were the local phone company. But they're not, they're based in Illinois. And Brooks isn't the local phone company either, because they were bought out by WorldCom," Krzeminski says.
| Competitive Mileposts in Grand Rapids | |
|
1990 |
|
| JULY | City Signal debuts competitive access service |
|
1992 |
|
| JANUARY | Michigan Telecommunications Act of 1992 goes into effect, creating a process for certification of local telecommunications competitors |
|
1993 |
|
| FEBRUARY | Ameritech files its Customer's First plan |
|
1994 |
|
| OCTOBER | City Signal receives license to provide service to business residential customers |
|
1995 |
|
| APRIL | City Signal turns up first local customer |
| DECEMBER | Michigan Telecommunications Act of 1995 passes, which among other things establishes interconnection rules |
| 1996 | |
| JANUARY | Brooks Fiber Properties Inc. purchases City Signal for approximately $60 million |
|
1997 |
|
| MARCH | AT&T Corp. begins offering resold local service |
| 1998 | |
| JANUARY | WorldCom Inc. purchases Brooks for approximately $2.4 billion |
| JANUARY | Ameritech opens up its Ameritech Information Industry Services office in Grand Rapids to provide wholesale services to competitors in Michigan and Ohio |
| APRIL | AT&T suspends marketing of local service because it says it's not profitable |
| JULY | CenturyTel begins commercial offering of ZONE local wireless service |
Acquisitions of local carriers by large corporate outsiders have created some negative perceptions in Grand Rapids.
"By going to larger carriers, the service level isn't as good as it used to be," says Daniel Wood, director of information technology (IT) services for Nationwide Truck Brokers (NTB), a transportation company that serves retail chain the Meijer Corp. "We could call Brooks where the switch is. Now the Brooks stuff is housed with WorldCom's down south. Everything was like a Ma and Pa shop, very service-oriented. But when they started doing stuff on a larger scale, it was tough to maintain that relationship with the customer."
NTB has been using WorldCom services for almost seven years. NTB purchased two T1s, one for local telephone access, the other for dedicated communications between NTB and Meijer. The trucking company also maintains six lines from Ameritech for backup communications.
Brooks isn't the only one suffering from negative end-user perceptions. Ameritech also is facing criticism. While readying to be acquired by SBC Communications, Ameritech has been trying to consolidate its internal operations so it can more deftly compete. Krzeminski says that his dealings with Ameritech's customer service center in Detroit have been "horrific." Sometimes, he says, he's been put on hold for up to 20 minutes.
The mergers and changes in local market-entry strategies also could be the reason why MCI WorldCom and Ameritech seem less aggressive in their sale efforts, industry watchers believe. "[The] competitive LEC market in Grand Rapids has hit a plateau and it's now ramping down," says Celio of the Michigan PSC.
The reasons are many, he believes. For one, there is the loss of AT&T on the resale side. But perhaps most importantly, mergers involving the companies serving Grand Rapids have forced the carriers to be sucked into national and global strategies of their new parent companies, rather than being focused on what's happening to customers in their own back yards.
On the Horizon
While Grand Rapids is not the largest of markets, it still could support more than one challenger to the incumbent Ameritech, Vander Veen believes. To hit a break-even point, Vander Veen says a competitor will need to pick up at least 10,000 lines. But he notes that as more competitors come in the margins will tighten up and make it more difficult for new entrants to make a profit.
One new company though, may use its home-court advantage to woo new customers. US xchange, headquartered in downtown Grand Rapids, seems to be setting the stage to provide local services there. And its chairman, Vanderpol, is very familiar with the market because he was one of the founders of City Signal.
US xchange refused to discuss its plans to provide service in the city. But last August, the company began offering Internet access for business and residential customers. A press release at the time of the Internet service announcement indicated that the company would "soon provide a full range of phone services as part of its fiber optic cable network project." Rumors around Grand Rapids suggest that by February US xchange will be ready to give MCI WorldCom and Ameritech a run for their money.
AT&T, too, could revive its local services in the Grand Rapids area, but this time over its own facilities. Two strategic moves in 1998 have the ability to bring AT&T closer to returning to Grand Rapids. Early last year, AT&T purchased Teleport Communications Group (TCG), a CLEC that provides local dial tone and data services to business customers. TCG currently does not offer local services in Grand Rapids, but it "will be expanding," Heath says. He would not confirm if Grand Rapids is one of the markets TCG is targeting in its future development plans.
AT&T's other entry option is through Tele-Communications Inc., a cable television provider. AT&T is in the process of acquiring TCI, which has cable franchises throughout the Grand Rapids area. AT&T could upgrade TCI's cable plant to bring local dial tone to the residential market. "That's the quickest, most profitable way to provide competitive residential service," Heath says.
AT&T still is awaiting the approval of several governing bodies for its purchase of TCI, and the company has stated it will take millions of dollars to upgrade current cable plant to be able to handle two-way voice and data communications.
In the ZONE
Cereal, Cellular and CenturyTel
By Gail Lawyer
First it was Corn Pops, now it's ZONE. Grand Rapids has a history of making its populace guinea pigs for new products and services. Decades ago, kids across the city would taste new cereals packaged in white cardboard boxes to help manufacturers determine which products they would market nationwide. Now the products being tested have gone high-tech.
Last March, Century Telephone Enterprises Inc. (CenturyTel), a Monroe, La.-based communications company with cellular and personal communications services (PCS) licenses in Grand Rapids, began testing a wireless service that it believes is destined to replace traditional landline service at home.
Called the ZONE, the service offers subscribers wireless service for a flat-rate monthly charge. The palm-sized cordless phones can be used at home, at the office and on the road when in the "zone," which is the company's PCS coverage area.
The basic service plan costs $39.95 a month and includes 1,000 minutes of calling, as well as features such as Caller ID, call waiting, three-way calling, voice mail and message-waiting indicator.
"When pricing it, we compared it to local [landline] service," says Christopher Pieri, PCS sales manager for CenturyTel. Pieri says the company studied usage patterns on landline phones and determined that very few customers talk more than 1,000 minutes a month. If the user goes out of the zone, the calls are handed off to the local cellular network and must be charged to a credit card. Or, customers could choose a $54.95-a-month plan that includes ZONE service plus cellular coverage. Usage of the cellular network costs an additional 25 cents a minute.
About 100 Grand Rapids residents, including about 35 CenturyTel employees, tested the ZONE service for roughly two months. Commercial availability began in July, and about two-thirds of the test participants continued the service. Pieri won't share the current total of customers signed up for the ZONE, but he notes that the service is growing about 30 percent a month.
Initially the service was aimed at residential customers who wanted a second line in their homes. But after the trial, Pieri notes that there is almost an even split between business and residential users. Several customers, including a stockbroker and a single mom with two kids, have replaced their wireline home phones with the wireless ZONE service, Pieri says.
ZONE phones can be purchased and service activated at CenturyTel retail stores or at kiosks set up in three Grand Rapids-area Wal-Mart stores.
