Posted 09/2000
Why Utilities Should NOT Get into the Telecom Business
By Fred A. Joyce
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Fred A. Joyce, Principal, |
Since 1990, there has been an abundance of discourse in the electric power and utility arena about diversification and moving into new revenue-generating opportunities, including the brave new world of telecommunications.
What has not been as widely publicized are the potential downsides facing utilities entering the telecom business. Many utilities have been ill-prepared to enter the highly competitive world of telecommunications as a carrier.
Numerous utilities have attempted to become competitive telecom carriers and failed. Our research indicates that a relatively small number of electric utilities have moved beyond providing pole or tower space to other carriers for the deployment of fiber networks. Most utilities have become "telecom landlords," working with various carriers to develop dark fiber agreements, fiber swaps and revenue sharing. In many cases, these agreements are considered successful when a utility gains both revenue and fiber, plus the carrier obtains a low cost alternative to direct bury or directional boring under roads, easements or other pubic rights-of-way (see "Getting off the Ground"). Others have utilized assets such as power poles and towers for the deployment of wireless infrastructure for cellular and PCS antennas in exchange for significant monthly rent for these cell sites.
With few but notable exceptions, utilities have experienced significant difficulties, not to mention heavy financial ramifications in their effort to reinvent themselves as telecom service providers.
First, consider the marketplace utilities are entering. These utility enterprises typically come into a market to compete with the CLECs, and often the IXCs and even the cable TV franchisee. Today, in markets such as California or Massachusetts, hundreds of CLECs are registered with the state public utility commissions. This situation further complicates the marketplace for new entrants as they sort out and identify all the potential competitive threats. Then we have the cable TV "over builders" such as WideOpenWest LLC (www.wideopenwest.com), which are competing against the incumbent cable companies.
And, often, utilities have failed to think through their business plans thoroughly. Market research was oftentimes based on, "we believe there is a market," or, "we feel that providing telecom services to our community would be beneficial."
For example, one small rural electric cooperative wanted to bring in telecom services to its relatively remote western plains community. The network was built with miles of new fiber along rural highways and roads. So far so good, right? But then the company's planners realized that they had neglected to contact many end-customers and sell these services to them. Clearly a market assessment was not formulated, or their perspective of the market was based on the view from 10,000 feet and not on a ground level view, which the CLECs generally pursue prior to network design and deployment. Other small town examples include cities that have built what we call "island networks." These are small town-based networks that link schools and government locations, but are not connected to the outside world via long-haul IXC fiber. They have great local connectivity, but as far as a link to the Internet or the nationwide backbone, the town is still "off-net." The locals then realize that building a fiber ring around the town would be beneficial, but what about the backhaul to the nearest major market for connectivity to the rest of the world?
So what's a utility to do?
We recommend that they thoroughly consider the market they're looking at. Do the required homework, including market research and assessments. Utilize highly qualified, experienced outside telecom consultants. Obtain market and competitive intelligence on existing and potential competitors. Leave no stone unturned before deploying any resources for a telecom venture.
Better yet, stick with the "landlord" option, and work with all the existing and future potential carriers entering the local market. Be creative, and avoid the pitfalls of overvaluing rights-of-way assets and missing the window of opportunity, as many utilities continue to do.
Fred A. Joyce is principal of Joyce Telecom Group LLC (www.joycetelecom.com), an independent consulting firm specializing in local telecom competition. He can be reached at (719) 630-8656 or fred@joycetelecom.com.
