Out There - Harvesting Rural Markets

Posted: 07/1999

Harvesting Rural Markets
Small Telcos Plow Into CLEC Business Where Others Fear To Tread
By Gail Lawyer

Politicians and telecom pundits long have predicted that local telephone competition will not make it to the thousands of small, rural towns that dot the countryside. But after seeing what's occurred in the last year or two, it seems that several enterprising rural local exchange carriers (RLECs) haven't listened to the rhetoric.

These progressive RLECs have proven themselves worthy adversaries as they establish their own competitive LEC (CLEC) divisions and taken on the bigger incumbents.

There are about 1,300 incumbent LECs (ILECs) in the United States, with the largest six--the Bell companies and Irving, Texas-based GTE Corp.--controlling almost 90 percent of the total lines. The overwhelming majority of telcos, though, have less than an average of 4,200 lines in their territories, according to research published by Legg Mason Wood Walker Inc., a Baltimore-based investment firm (see "Sowing the Seeds of Rural Competition" chart, below).

Some RLECs are seeing their line counts expand exponentially as their CLEC organizations grab market share in neighboring territories controlled by the Bells, GTE or one of the other large independents.

These rural CLECs are not just cream-skimming the profitable business customers in fourth- and fifth-tier markets. In many cases, they're overbuilding entire local networks and going after residential customers as well as the small businesses that thrive on Main Street, USA.

Hickory Tech Corp., Mankato, Minn., is one of the best examples of what a rural CLEC can accomplish. The company has telco operations scattered around south central Minnesota and northwest Iowa. When Denver-based US WEST Inc. refused to sell its property in Nicollet, Minn., Hickory's CLEC, Crystal Communications, decided to build an entirely new network there in partnership with the city government. After only six months in operation, Crystal boasted capturing 90 percent of the Nicollet's 400 access lines. The majority of those lines were residential.

But Crystal isn't just a thorn in US WEST's side. "We're an equal opportunity aggressor," says Bob Alton, Hickory's president and CEO.

Crystal also competes in three other cities. One is Janesville, Minn., a Rochester, N.Y.-based Frontier Corp. exchange in which Crystal overbuilt the network and now serves about two-thirds of the town's 700 lines. In the Sprint Corp. franchise of New Richland, Minn., Crystal has started to compete for the town's 1,000 lines using unbundled network elements (UNEs).

In Janesville and New Richland, the focus is primarily on residential service. But in the third market, Crystal is aiming only at business customers initially. That city is St. Peter, Minn., where Alton says the company has presubscribed 250 business lines already.

Another "equal opportunity aggressor" is CFW Communications Co., Waynesboro, Va. Under the brand CFW Intelos, the company jumped into New York-based Bell Atlantic Corp., Sprint and GTE markets in the third quarter of 1998. CFW's CLEC serves the Virginia cities of Charlottesville, Harrisonburg and Staunton, which all surround CFW's telco territory.

Most of CFW's competitive landline offering is aimed at business customers, says Carl Rosberg, the company's president and chief operating officer. But he notes the company is testing wireless local loop services that may be the answer to serving the residential market economically.

Another rural CLEC, R&B Communications Inc., is focusing on the business market in the telco territory of its hometown location of Daleville, a bedroom community located just outside of Roanoke, Va. To reach customers, R&B uses fiber that it and other small telcos deployed in the 1980s to connect to long distance companies' points of presence (POPs) in Roanoke. In addition, R&B has partnered with Atlanta-based Cox Communications Inc. Cox, the cable franchisee in Roanoke, provides its fiber infrastructure to R&B.

R&B supplies the traditional package of local, Centrex, long distance and Internet services offered by other rural CLECs. The company uses its multichannel, multipoint distribution service (MMDS) license to provide wireless cable and 10 megabits per second (mbps) high-speed Internet access. Digital subscriber line (DSL) is another technology R&B plans to deploy by the third quarter of 1999.

CTSI Inc., a CLEC owned by Common-wealth Telephone Enterprises Inc., Dallas, Pa., is another of the many rural competitors expecting to roll out DSL services in the coming year in both its CLEC and traditional telco territories. In its network architecture, Commonwealth uses a combination of host and remote terminals that keeps the distance between the central office (CO) and end user relatively short. About 90 percent of all lines the company is targeting or currently serves fall within the magic 18,000-foot range that is optimal for DSL service.

In the two years since CTSI began competing, the company has netted 52,000 access lines in its CLEC territory, which covers the Pennsylvania cities of Harrisburg, Lancaster, Reading, Scranton, Wilkes-Barre and York. Currently, the company is preparing its bundle of unlimited local calling, vertical services, 10-cents-a-minute long distance and Internet access for launch throughout three counties in southeastern Pennsylvania.