Everywhere Mark Stromberg goes, he runs into CEOs and business executives who tell him the same thing: The competition is on the line.
It happened just the other day. A good friend came to Stromberg, Utah vice president for US WEST, and apologetically laid out the situation. Electric Lightwave Inc. wanted the friend's local telephone business. The company had offered him service at half what US WEST charges.Sorry, the friend said as he told Stromberg of his defection, but business is business. And so it goes, day after day.
The exodus of customers from US WEST may turn from a trickle to a deluge over the next year. Fourteen telecommunication companies are in various stages of setting up shop in Utah, mainly in Salt Lake City, as anyone who's driven downtown lately will attest.
Downtown streets are being torn up over and over, as one company after another installs a fiber optic network. Cryptic acronyms painted in yellow, orange and blue spray paint on many street corners - ELI, TCG, PFI - provide a who's who guide to newcomers on the telecommunications scene.
The companies are taking advantage of new federal and state laws, the Telecommunications Act of 1996 and the Utah Telecommunications Reform Act of 1995, that allow them to compete for customers in the local telephone market.
Both acts have the same aim: create choices for consumers by letting companies compete to provide them with basic dialtone service. Policymakers are counting on competition yielding better prices, higher quality and new, technologically advanced services.
Creating competition, though, is a lot like creating muscle: The process sometimes hurts - no pain, no gain. US WEST undoubtedly will feel pain. And so may small businesses and rural and residential customers. Here's why.
The hang-ups
To enter the Utah market, the new players must pass one and often two hurdles. First, they need a certificate of approval from the Utah Public Service Commission, which judges their capability to provide service. Then, in most cases, the company must negotiate an interconnection agreement with US WEST to tap into or use its existing communication network.
To date, six of the 14 companies have approval certificates from the Public Service Commission. Another six companies, not all of whom are certified, tried but failed to reach agreements with US WEST and have turned to an arbitrator to haggle a deal.
Only Electric Lightwave Inc. has come to terms with US WEST and is currently offering competing service to business customers in the Salt Lake area. It's only an interim agreement, though. The two companies have until December to negotiate final terms.
Competition, at this point, is bogging down where it intersects with the interconnection agreements.
The agreements cover issues ranging from whether consumers can keep their telephone numbers if they switch telephone companies, at what points the companies can hook into US WEST's network and how much new entrants must pay to resell their brand of services over US WEST's system.
US WEST has an incentive to cooperate with competitors. As soon as it lets major long-distance companies like AT&T and MCI into the local market, it gets the go-ahead to compete for intra-state long-distance service, a market worth $70 billion nationwide, according to most estimates.
But US WEST says the Federal Communication Commission created an unlevel playing field when it created guidelines for resolving these issues. Apparently that's a point worth arguing.
The 8th Circuit Court of Appeals in St. Louis agreed Oct. 15 to stay parts of the FCC rules - pricing and "pick and choose" provisions, which let competitors lease parts of an existing system to provide their own service. In January it will hear arguments from US WEST and other Bell companies about the "irreparable harm" they'll experience if forced to abide by the provisions.
Take the issue of reselling services. The FCC rules require US WEST to give competitors use of its network at a discounted rate, ranging from 17 percent to 25 percent, so they can sell their own brand of services over the system.
Stromberg said that is like requiring Delta Air Lines, which flies virtually everywhere, to sell seats on its planes at a wholesale price to competitors, who can then resell the seats at a profit to passengers. The competitors thus avoid having to build their own airplanes or develop routes to distant locations.
"The new entrants can pick and choose the markets where they are going to fly their own airplanes," he said. "That's basically what we've been told. We have to wholesale service below cost and be the provider of last resort at a loss and competitors can pick and choose where they serve. It's as simple as that."
Well, not really.
Boyd Peterson, an analyst with the telecommunications consulting company The Yankee Group in Boston, said Congress and the FCC believed it would take too long and that it is unreasonable to expect every new competitor to build its own network.
"It took 100 years to get to where (the telephone system) is today," Peterson said. "If there were not resale, the only way competition would occur is to build another network on top of the one that exists today. Obviously, that is going to be cost prohibitive."
But some networks are being built, which indicates there is adequate profit to be made in some areas to justify a company's invest-ment in its own system.
Which gets to the second complication in the emerging competitive environment.
Ringing up business
Most new entrants are targeting downtown Salt Lake City and other prime business complexes, such as Research Park and Knudsen Corner at the 6200 South exit from I-215. A few companies plan to bring service to selected areas as far away as Provo and Ogden.
But they're looking for a particular kind of customer: big businesses in high-density areas that are heavy users of telecommunication services.
"Certainly there is a payback there," said John Kennedy, Utah general manager for Electric Lightwave Inc. "That assumes equal competition on a level playing ground and that we're able to make an offering that is primarily composed of better pricing, service and better technology. That is what business users are really interested in."
Some companies, such as AT&T, Sprint and MCI, say they plan to serve residential customers, but no one will be venturing into home markets any time soon. MCImetro spokeswoman Deidre Blackwood said if "everything goes right" - a pretty big "if" - the soonest her company will begin offering service to residential customers is six months.
Meanwhile, the competition is eating away US WEST's business clientele.
"What we're seeing is that competitors are going to enter the marketplace and they are going to concentrate on the 20 percent or 30 percent of the profitable businesses, those customers that really generate the contribution to our bottom line," Stromberg said.
The competitors are cherry picking: They are taking business customers, long-distance service and switched-access connections (the connections between a long-distance carrier like MCI and the local telephone company).
Some defectors says US WEST has no one to blame but itself for that.
Swire Coca-Cola recently switched from US WEST to Phoenix FiberLink for switched-access service.
"We haven't been getting very good service from US WEST," said John Neff, a telecommunication network specialist for Swire.
About once every month or two, the company's telephone lines provided by US WEST go down for as long as an hour at a time, Neff said. Occasionally, during peak demand time, the company has been unable to place outgoing calls because US WEST's system is overburdened.
"We were very excited about giving US WEST some competition so they would know they've either got to provide better service or people will move to other providers," Neff said.
David Lefavor, director of network operations for Westin Hotels and Resorts in Research Park, is another Phoenix FiberLink customer. Westin selected Phoenix FiberLink over US WEST and another competitor based on good, old-fashioned price.
"We wouldn't be here as a private company if there wasn't an opportunity to provide better service at a better rate and an opportunity to make money," said Mark Dobie, city manager for Phoenix FiberLink, which also has an interim agreement with US WEST.
Stromberg understands the incentive.
"They are doing what I would do, knowing what I know about the economic model," he said.
That economic model, based on US WEST figures but which some competitors dispute, shows this. Residential consumers pay $11.48 per telephone line. On average, the cost of providing residential service is $27 to $32 per line, Strom-berg said.
Businesses, on the other hand, pay $26 for a basic line. It costs US WEST on average $15 to $20 to provide a basic business line.
"In a monopoly that was fine, because at the end of the day all of our total costs were accounted for plus," Stromberg said. "Under a monopoly we were guaranteed an authorized rate of return."
That's is, the Public Service Commission either gave it a rebate or demanded a refund on behalf of customers, depending on how the books balanced at year's end.
In the brave new world of competition, US WEST must lower its price for business customers or face losing them. Either way, as that occurs and as it faces competition for in-state long-distance and switched-access customers, both profitable enterprises, something has to give.
And it may very well be that what gives is the price small businesses and residential and rural customers pay for basic telephone service - or for access to service, particularly in newly developed suburbs and in rural areas.
"There is not much of an appetite to raise rates from just over $10 to another $20 to fully recover the cost," Stromberg said.
Instead, US WEST will "re-engineer" itself to fit the competitive environment and spend money strategically - that is, where competition is occurring, Stromberg said.
"It's business 101," Stromberg said. "It's what every other business does in the marketplace. We're not going to invest in areas where we lose money."
The right scenario?
Some competitors disagree with US WEST's scenario about competition driving up prices for residential, rural and small-business customers.
"We don't agree that prices will go up," said Mary Beth Vitale, vice president of local service organization at AT&T. "We've seen competition drive prices down 60 percent in the long-distance market. Prices in the market aren't dictated by what competitors charge. It's what the market will bear, what people will pay."
But US WEST isn't the only entity that foresees a painful transition for non-big-business customers. Stephen Mecham, chairman of the Utah Public Service Commission, worries, too, about the short-term effects of new competition.
"When competition comes in on a piecemeal basis, it creates all sorts of problems we have to deal with," Mecham said. "What you will have for awhile is competition in certain areas and not in others.
"I still believe in the long run everyone, including residential customers, will benefit from this. I do think there will be innovation and new services."
But in the meantime: "The people who remain on (US WEST's) system are the ones who will potentially be asked to pay for (past investments)," Mecham said.
US WEST wants the Public Service Commission to recognize its dilemma and authorize telephone price increases that synchronize price with cost. But, since that won't happen instantaneously, it also wants expanded use of the universal service fund - the fund that has until now ensured there is telephone service in rural areas - to alleviate the need for dramatic price hikes.
US WEST wants the PSC to approve a surcharge on new competitors catering to high-profit business customers and ignoring less profitable markets. According to US WEST, money from the surcharge would go into the universal fund.
At the same time, it wants to be able to draw money from the fund to cover costs of providing service to the less desirable markets, like residential customers.
And the fact is some of US WEST's competitors like that idea, too.
"We're supportive of that on the assumption that all contribute and all can draw on it and that it's run by a neutral third party," MCImetro spokeswoman Blackwood said.
But in the end, it may be the competition reigns supreme, whatever the cost and even if that means losses for US WEST or higher prices for customers in non-competitive areas.
"Rates should be based on cost, and if there are competitive losses, that's what happens in a competitive world," Mecham said.