Posted: 11/1999
The Windy City
Competition Continues to Swirl in Chicago
By Gail Lawyer
| Population: 7,733,876 Known for: The Windy City, home of the Bulls and Bears (but not the Wall Street kind), the Sears Tower, Wrigley Field, Second City comedy troupe Largest businesses: Jewel-Osco, grocery/drug store, 38,796 local employees; Motorola Inc., telecommunications vendor, 25,500 local employees; Ameritech Corp., local telephone company, 22,000 local employees; United Airlines, 19,242 local employees; Advocate Health Care, health care firm, 19,235 local employees Source: Crain's Chicago Business |
The winds off Lake Michigan may hit 60 mph, causing horizontal snow storms while the temperature dips below -20 degrees. However, for competitive local exchange carriers (CLECs) in Chicago, the climate is as warm and welcoming as Waikiki Beach.
"Why Chicago? There's a friendly regulatory environment that helped us," says Frank Cefali, Illinois general manager for Chicago-based Focal Communications Corp.
For years--even before the passage of the Federal Telecommunications Act of 1996--the Illinois Commerce Commission (ICC) has been among the top three state regulatory agencies in advancing local competition policies and fostering entry of new companies into the market.
At divestiture of Ma Bell in 1984, Illinois was the only state given permission to draw its own LATA (local access and transport area) boundaries. Following that, a former ICC chairman prepared a report on the future of local telecom competition in the state, concluding the best way to prepare the incumbent telco for coming competition was to set the prices correctly in the first place.
As a result, the ICC worked for almost a decade at revamping the price structures, relying on geographic deaveraging and developing a metered pricing formula for business and residential customers.
Table: List of CLECs in Chicago Market
"Because we got the pricing right, now under the federal act, Illinois has the lowest UNE (unbundled network element) pricing in the nation," says Terrence Barnich, chairman and president of Chicago-based consultancy New Paradigm Resources Group (Barnich served as chairman and commissioner of the ICC from 1989 through 1993). In downtown Chicago, for instance, an unbundled loop costs just $2.59.
There were other factors in Illinois that spurred the early days of local competition. For one, there was a unique provision in state law that gave the ICC authority to allow competition in specific geographic areas. Barnich came up with the idea for creating a telecom free trade zone in the loop area of downtown Chicago.
Around the same time, executives from MFS Communications Co. Inc. (now owned by MCI WorldCom Inc.) and Teleport Communications Group (TCG, now known as AT&T Local Services) came to the ICC and asked permission to access the central offices (COs) of incumbent telco Ameritech Corp., Hoffman Estates, Ill., to provide switched services. Executives from MFS and Ameritech got together and created the first interconnection agreement in Chicago in May 1996. TCG inked its agreement with the telco in December 1996.
In 1993, Ameritech created a subsidiary, Ameritech Information Industry Services (AIIS), to provide wholesale network services to a wide range of customers, including CLECs, Internet service providers (ISPs), independent telcos and wireless companies.
AIIS, which operates independently of its incumbent telco parent, has been fine-tuning its processes during the last six years in an effort to make the ordering and provisioning of network services by competitive companies run as smoothly as possible.
"I think we know a lot more about our market now. We've learned to be responsive to customers and provide the level of service they find satisfactory," says Kenneth Volz, AIIS's vice president of marketing and business development.
Practice makes almost perfect, according to some of the CLECs providing service in the Chicago area. "We've had a relatively positive experience," says Larry Nettles, director of sales for Frontier Communications, Rochester, N.Y.
Nicholas Lenoci, Jr., vice president for Northern Illinois, Michigan and Wisconsin at McLeodUSA Inc., Cedar Rapids, Iowa, agrees. "They give you a service team, and they're very responsive," he says.
But there's still room for improvement, say competitors.
"The big thing we're focusing on is electronic bonding," says Claire Dunnett, a spokeswoman for Dallas-based Allegiance Telecom Inc.
Allegiance has developed extensive e-bonding systems in New York with Bell Atlantic Corp., and in Dallas with SBC Communications Inc., San Antonio, which is in the process of purchasing Ameritech.
To AIIS's credit, it has been developing a website called TCNet, which introduces certified CLECs to doing business with Ameritech and handles preordering functions, says Volz.
Isn't That Special?
The big issue that seems to be consistently rearing its ugly head is that of special construction charges, incurred by CLECs when Ameritech has no unbundled loops available to reach a specific customer.
"It's water drop torture," says James Hurley, Las Vegas-based MGC Communications Inc.'s president for the Midwest region. Hurley has seen special construction charges of up to $349,000 for construction of two lines.
AIIS's Volz defends the practice. "Our interconnection agreements specify that when an unbundled loop is available, there is a recurring rate. When it is not available, there is a time and material charge associated with it," he says.
Sometimes, CLECs say, the loop is there, even though Ameritech says it's not. For instance, Covad Communications Co., Santa Clara, Calif., wanted to provide digital subscriber line (DSL) service to a customer in Chicago, but Ameritech said a loop wasn't available. "We told the customer to try to order Ameritech's ISDN (integrated services digital network) service," says Bob Grant, Covad's Central region vice president and general manager. Ameritech installed the ISDN service within seven days, proving that a loop was available.
Early Settlers
Promotion of competition by the ICC and support of those competitors through AIIS led to the rapid development of alternative telecom suppliers in the Chicago area.
In 1972, MCI Corp., then known as Microwave Communications Inc., began providing its wireless service for truckers traveling between St. Louis and Chicago. Since that time, the company now known as MCI WorldCom has evolved into an international facilities-based provider of everything from basic dial tone to the most complex data networks. MCI WorldCom's presence in Chicago is now comprised of six switches, including four from the early days of CLEC pioneer MFS Communications Co. Inc. and two from MCImetro, which was also a competitive local provider.
Along with MFS, TCG was an early entrant in the Chicago market. TCG came to Chicago when it purchased a small competitive access provider based in Wisconsin and used the rights of way of one of its investors, cable company Tele-Communications Inc. (TCI, now owned by AT&T Corp.) to build a fiber optic network. TCG's initial network ran 50 route miles from downtown Chicago and eventually extended 500 miles into the suburbs of Naperville and Hoffman Estates, and even into Milwaukee. TCG received CLEC authority in 1994.
In recent history, TCG became the Local Services division of AT&T Corp. after the 1998 merger.
Incorporating AT&T's assets in Chicago, the combined companies' Chicago area network now spans 1,200 route miles.
A New Generation
The acquisitions of early CLECs MFS and TCG spawned a whole new generation of providers.
Chicago-based Focal Communications Corp. was co-founded by two MFS alumni--Robert C. Taylor, Jr. and John R. Barnicle. Focal, which provides the full gamut of local switched services, as well as packages that include long distance and toll-free calling, began offering service in Chicago in May 1997. On the retail side, Focal aims its services at Fortune 500 companies. It also offers services to ISPs and value-added resellers.
This summer, Focal turned up its second switch in the Chicago area to handle the growing demands for its services there.
Allegiance is another company with strong ties to both MFS and Chicago. Company founder Royce Holland was the president and cofounder of MFS, and had several people from MFS follow him to Allegiance. In fact, about 75 percent of Allegiance's employees had worked at MFS.
Allegiance began serving the small and medium-sized business market in September 1998 using the smart build approach. The company collocates in Ameritech COs and uses UNEs to provision services to end users.
McLeod's operation in Chicago also has ties to MFS. Earlier this year, McLeod purchased fiber-based CLEC Ovation Communications Inc. Ovation was founded by Tim Devine, who was an executive with MFS.
Prior to the purchase of Ovation, McLeod was offering only Centrex resale in Chicago. Ovation brought McLeod a fiber network that spanned downtown and extended about 75 miles through the suburbs.
McLeod is targeting businesses of all sizes through direct marketing. "We have a beat cop philosophy," Lenoci says. The company also has developed an agent channel, recruiting local equipment vendors to penetrate additional markets. Currently, 12 agents are enrolled, but Lenoci says the program is going to become more aggressive to attract more agents.
Like McLeod, several other companies got their start in Chicago through acquisitions.
CoreComm Ltd., which serves business and residential customers in Ohio, is on the cusp of adding Chicago to its map through the acquisition of two Chicago-based providers. In May, CoreComm completed the purchase of ISP MegsINet Inc. and bankrupt local reseller USN Communications Inc. "By the end of the year, we expect to start selling. We're now figuring out the integration of USN and MegsINet," says Stefan Eckert, a CoreComm vice president.
Frontier Corp., Rochester, N.Y., is another provider that bought its way into Chicago. Much of the network and many employees came as part of Frontier's acquisition of Allnet.
Frontier tries to provide most of its services using its own network or UNEs; however, it will use resale if necessary. Frontier focuses mainly on providing a bundle of telecom services to business customers of all sizes.
Intermedia Communications Inc. got its start in Chicago with the purchase of Shared Technologies Fairchild (STF), a shared-tenant services provider that has been in service there since 1986. "This was one of their top five markets," says P. Hayes Baird, Intermedia's senior director of strategic marketing.
At the time of the acquisition, STF had 50 buildings under its purvey, which constitutes an addressable market of about 500,000 lines. Using STF's customer base as a starting point, Intermedia is seeking to offer integrated services, including voice, data and Internet access over a single T1. In addition, Intermedia is building a 60-mile fiber network in Chicago and collocating in a couple of prime Ameritech COs.
By Their Own Bootstraps
Other CLECs have chosen to build rather than buy. Bellevue, Wash.-based NEXTLINK Communications Inc. (known as NEXTLINK Illinois in Chicago) got its start in Chicago in February 1998 providing local and long distance to small businesses. Over the last year and a half, the company has built a 150-mile network that covers both downtown Chicago and the outlying areas. As its network expanded, so did the breadth of its customer base and service offerings.
"Voice and long distance is still a cornerstone. But we've moved up market," says Michael Heath, NEXTLINK Illinois' vice president and general manager.
MGC began its Chicago area operations in September 1998. "This is a great business market," says Hurley. So great, in fact, that MGC is provisioning about 10,000 lines a month to small business customers. MGC is also providing residential service to customers that sign up via the company's website. By mid-year, MGC had collocated in 39 COs from Chicago northwest to Elgin, Ill. By the end of 1999, Hurley expects to have equipment in 70 COs.
In the fat pipes category, there is Metromedia Fiber Network Inc. The New York-based company is building a broadband local network throughout Chicago. The downtown portion of the network was completed by mid-1999. The remaining fiber rings throughout the suburbs are expected to be completed by the end of this month.
A Bird's Eye View
Chicago's notoriety as home to three of the world's tallest buildings makes it a perfect spot for wireless broadband providers seeking roof rights with a view.
"We can get on top of one building and see about 40 others," says Lori McCaffrey, the Chicago vice president and general manager for Teligent Inc., Vienna, Va., which is deploying point-to-multipoint wireless technology to provide voice, Internet and data services. Teligent is targeting buildings 25,000 square feet and larger that house a multitude of small and medium-sized businesses. Teligent began offering its services in mid-1998.
Another wireless broadband provider, WinStar Communications Inc., New York, had about a year's lead on Teligent in Chicago. WinStar turned up its switched-based service in April 1997. Currently, the company has four operational hubs downtown and another three outside the city limits. With those four downtown hubs, WinStar can see about 95 percent of the buildings, says Yvonne Schultz, WinStar's local vice president and general manager.
Fumble?
While Ameritech seems to be faring well in a super-competitive market, the DSL market is one aspect in which the telco is behind the times. "This is where Ameritech is dropping the ball. They seem to be unable to get a broadband offering," says Barnich.
This summer Ameritech announced plans to begin offering DSL service, but is only offering it on a limited basis. Within the last year, though, several data CLECs, focusing on delivering all flavors of DSL service, have made aggressive moves into Chicago.
First to market with DSL in Chicago was a local ISP and data CLEC, InterAccess Co., which began rolling out DSL commercially in 1996.
Next was NorthPoint Communications Inc., San Francisco, which began offering service in August 1998. NorthPoint has recruited nine local and five national ISPs that act as resellers of the company's DSL service and has built out into enough COs to cover about 80 percent of the small and medium-sized businesses it wants to target in Chicago.
Shortly after NorthPoint, Rhythms NetConnections Inc., Englewood, Colo., entered the Chicago market. Rhythms has collocated in several COs and is able to serve businesses from Chicago to Milwaukee and Indianapolis.
Covad didn't get its start in Chicago until April 1999, when it launched service in conjunction with three local ISPs. Now, 10 national and regional ISPs are actively selling Covad-powered DSL service in the Chicago area.
Covad has built nearly three-quarters of its Chicago area network. Once it's completed, Covad will be able to provide service to 85 percent of Chicago consumers and 90 percent of small businesses.
Can You Help Me with Directions? If you're providing service and want to provide information for a market study, contact me, Gail Lawyer, at (703) 567-5167 or glawyer@erols.com |
Correction
The switch information listed for Covad Communications Co. in the Denver market study chart in the October issue (located here) incorrectly identified the number and type of switches used by the data CLEC. Covad uses Cisco Systems Inc. switches, but would not disclose the number of switches deployed in Denver.
True Convergence
Cablecos Coax Customers With Telephony, Internet Services
By Gail Lawyer
For Chicago-based 21st Century Telecom Group Inc., what started with the simple notion to compete in the cable TV business has evolved into a shining example of how convergence of telephony, video and Internet access can be achieved. All it took was several years worth of patience, a couple hundred million dollars and a lot of hard work.
21st Century got its start in 1992 when its founder sought approval from Chicago's city council for a competitive cable franchise in Area 1 (see map below). The decision didn't come quickly. 21st Century finally received the council's blessing to compete against incumbent cable company Tele-Communications Inc. (TCI, which is now owned by AT&T Corp.) in 1996.
Map: 21st Century Telecom Group Current and Proposed Service Areas
With $250 million of private equity in hand, 21st Century set out to build a fiber network that would cut a swath from Evanston, Ill., in the north to Hyde Park in the south, and run two miles west from Lake Michigan.
Rather than just providing cable service on its new-fangled network, Robert Currey, who joined 21st Century as president and CEO in 1998, decided the company could get more bang for its buck by adding telephony and Internet access to its cache.
"We are the first to provide true convergence," says Marcus Miller, 21st Century's vice president for market management.
In addition to 190 channels of digital cable, 21st Century provides residential customers cable modem service that allows customers to surf the Net at up to 4 megabits per second (mbps), local telephony that is 15 percent less than Hoffman Estates, Ill.-based incumbent telco Ameritech Corp.'s price of 9.9 cents a minute for long distance.
"We're the first competitive threat against Ameritech on the residential side," says Howard Kitchen, 21st Century's vice president of telephony.
Service for business customers is available through EnterAct, an Internet service provider (ISP) that 21st Century purchased in February. Among the offerings for businesses are dial-up access, web hosting, Internet consulting, virtual private networking (VPN), Centrex, digital subscriber line (DSL) and T1s.
In Area 1, where 21st Century is focusing the majority of its efforts currently, there is a potential of 350,000 households it could serve. At the end of June, Miller reports 21st Century's network was passing almost 160,000 of those homes.
Expansion plans are under way for the greater Chicago area. 21st Century is getting ready to compete against TCI in Skokie and Northbrook, two cities north of Chicago.
In June, 21st Century applied for franchise rights in Areas 2, 3 and 4, to expand its existing downtown footprint and compete with TCI and Ameritech.
With the addition of these potential new franchise areas, 21st Century could be able to provide telephony, video and data services to well over 1 million households in Chicago.
Incumbent cable company TCI--now called AT&T Broadband and Internet Services--is not quite as far along as its competitor when it comes to cable telephony.
Prior to the purchase by AT&T earlier this year, TCI had upgraded some of its Chicago area networks to handle telephony services. The cable network in the Chicago suburbs of Arlington Heights was one of those, and is now among the 10 former TCI markets nationwide in which AT&T is testing and planning an initial rollout of cable telephony services.
In June, AT&T Broadband began offering its converged services, with selective employees as end users while it tested its order entry, maintenance and delivery systems, says Michael Pruyn, an AT&T spokesman. By the end of this year, AT&T expects to do limited marketing of its service to paying customers.
Pruyn wouldn't say how much it would cost AT&T to prime its Chicago area networks, which pass 1.6 million homes. However, he notes that nationwide, AT&T is spending "billions of dollars" to upgrade the cable networks.
