Down to the wires

With telecom, everything’s in flux, even the rates to use the old copper network

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by Robert Burke

In this age of Internet telephony, Wi-Fi and lightning-fast fiber-optic networks, the old-fashioned copper phone lines laid decades ago by Ma Bell seem like an anachronism. But for some Virginia-based telecoms, the link to homes and businesses provided by those copper wires is important to future growth.

For instance, Richmond-based Cavalier Telephone can deliver digital television over copper lines. “We’ve figured out some technology that’s really cool, that you can bring over those old copper wires,” says Francie McComb, vice president for regulatory affairs. Other telecom providers, including Reston-based XO Communications and RCN Corp. of Herndon, are also depending on those “last-mile” lines.

The lines are owned by regional telecom giant Verizon, one of the Baby Bells born in the 1984 breakup of the old AT&T monopoly. The Telecommunications Act of 1996 — intended to spur competition — requires Verizon to lease the copper network to competitors at below-market, wholesale rates. Verizon petitioned the Federal Communications Commission last year to release it from that obligation in Virginia Beach and five other major East Coast markets — Boston, New York, Philadelphia, Pittsburgh and Providence, R.I.

Harry Mitchell, director of media relations for Verizon’s mid-Atlantic region, says the lower rates were envisioned as a transitional tool — needed until competition could develop. Eleven years later, he says competition is ferocious, particularly in markets such as Hampton Roads. A recent Verizon study shows that 99 percent of its customers there have five or more connection choices, in addition to Verizon. “That’s huge,” says Mitchell. If Verizon succeeds in moving its copper network to a more market-based model, smaller telecoms would still have access. “But they would have to sit down with us and negotiate the rate.”

The result, McComb says, will be higher rates for business and residential customers alike. “We’re going to fight … tooth and nail,” she says. Verizon’s move, she argues, “could undermine consumer choice.” Cavalier serves 90,000 phone lines in the markets affected by Verizon’s FCC petition.

Telecom is a tough and volatile business for customers and providers alike, and the latest battle between Verizon and its smaller competitors highlights that reality. In today’s market there are competitors coming from every direction, armed with new technologies and trying to steal customers with their own triple play of broadband Internet, telephone and digital TV. And as more people drop residential landlines, the business market holds the most potential for profit, particularly as more companies look to conduct business from mobile locations.

For customers, the challenge is sorting out the dizzying number of options and then finding a provider that won’t go out of business. Consider the example of SunRocket. The Vienna-based Internet phone service provider went under in July, abruptly shutting off phone service to its 200,000 customers.

Cavalier, though, is heading in a different direction. Late last year, in one of the many mergers in the telecom industry, it bought Reston-based Talk America in a $251 million all-cash deal. The acquisition gives Cavalier about 85,000 business customers and 550,000 residential customers in 20 metropolitan areas. Consequently, the battle with Verizon carries some risk, McComb says, because of the uncertainty over what it could cost to access the copper-line network if Verizon prevails. The FCC has delayed action on the petition until December.

Besides the fight over access, there’s another issue. The telecoms challenging Verizon also want the FCC to change the rules for how it handles “forbearance” petitions such as the one Verizon has brought. Under current rules, forbearance petitions are automatically granted after a year. Critics say that doesn’t allow enough study of whether the petition would undermine competition, thus sweeping away one of the key provisions of the act itself.

“The process is out of whack,” says Heather Gold, senior vice president for government relations for XO Communications. Her firm — which serves small and midsize businesses — predicts its lease rates paid to Verizon could rise as much as 200 percent for some circuits. “The person who gets hurt is our consumer … It really hits the core part of the market.”

Others, however, would argue that market forces are better than government regulation. Eli Lehrer, a senior fellow at the Washington-based Competitive Enterprise Institute, says lifting the regulation on copper networks makes sense. “There’s certainly a market for the competitive use of these lines, and … it’s more efficient for the company who built them to rent them out rather than let them go unused,” he says.

Baby Bells like Verizon are investing in fiber-optic and moving away from copper networks, which is not a bad thing, adds Lehrer. “Ultimately, this technology is just not going to produce long-term profits.” Besides, nobody is laying new copper wire anymore. The Lansdowne development in Loudoun County, for example, “doesn’t have a single inch of copper cable anywhere. It’s more important to keep the hands off the new technology. I think copper is too far gone.”

How much this fight means to Virginia telecoms depends on the company, says Cindy Whelan, an analyst with Sterling-based Current Analysis. “XO has an extensive long-haul network, but what they don’t have is much in the way of metro facilities,” she says. “That’s where they need Verizon.” Carriers like Cavalier, or the wireline service of Waynesboro-based nTelos, operate more in a rural market, she says. “They have their own facilities and their own networks and it would have a lesser impact.”

In fact, nTelos’ status as a rural provider of both wireless and wireline services puts it in an interesting spot. Its biggest growth area is in its wireless service, says company spokesman Mike Minnis. In the second quarter it saw a net increase of 8,000 in the number of wireless subscribers to about 391,000, and operating revenues were $124 million, up 14 percent compared with the same quarter in 2006.

To push its wireless business even higher, nTelos this summer signed a three-year deal worth up to $88 million with Alcatel-Lucent to upgrade its wireless network in Virginia, West Virginia, Kentucky, Ohio and North Carolina.

In addition, it extended until 2015 a lease agreement with Sprint Nextel, which uses nTelos’ wireless network to market its own wireless products. That deal guarantees the company $9 million in monthly revenue once the network upgrade is done.

For nTelos, that’s a nice advantage, to have an existing network in a region that national wireless carriers don’t want to invest in just yet. But Minnis says nTelos’ challenge for marketing its own service is “to try and overcome the perception that if you’re just a regional provider then you don’t have all the bells and whistles that the national carriers like Verizon or AT&T have.” Minnis says customers shouldn’t notice any difference — nTelos wireless service works anywhere you can get a signal. “It may be on Verizon’s network, or it may be on Alltel’s network, but you won’t know the difference,” he says.

Yet, nTelos’ wireline service is feeling a little pressure. A recent filing with the Securities and Exchange Commission noted that it is losing local phone service customers at a rate of about 2.9 percent annually. Most of the recent losses are due to customers switching to wireless or just dropping second lines, but the company also expects to see competition for telephone customers from cable provider Comcast late this year and in early 2008.

The company’s been making some splashy marketing plays, such as handing out dollar bills with an nTelos ad stuck to it. As the exclusive wireless provider for Virginia Tech football, the company also has launched television commercials with Tech football coach Frank Beamer.

Minnis says nTelos won’t be first with new technology, but it will adopt what works best and charge less. “We feel like we’re making some headway … but every day is a new day to compete.”

That’s the mantra for telecom these days. With regulatory changes and stiff competition, even providers are struggling to find a clear signal on where the market might move next.

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