Home / Special Report / Even in the new open market,
obstacles impede many competitors

Even in the new open market,
obstacles impede many competitors

Six months have passed since Rochester opened its local telephone market to competition, the first U.S. city to take this plunge.
So how has phone service changed for companies like Alliance Automation?
“Nothing’s happened,” says Richard Willbrant, chief financial officer for the midsize manufacturer.
No pesky sales calls? No flood of marketing literature? No promotional deals?
Nothing.
Something is happening, though customers feel only tremors from the earth-shaking changes in local telephone service.
The transformation began Jan. 1 when Rochester’s former phone monopoly became Frontier Corp., a holding company with two subsidiaries–Rochester Telephone Corp. and Frontier Communications of Rochester Inc.–that market local telephone service.
In addition to peddling local dial tone, the Rochester Tel subsidiary also sells wholesale phone service to competitors –including its sister company Frontier Communications–who then repackage and resell that service to customers.
Rochester Tel remains the default provider; rivals must woo customers away with promises of better service, lower costs or the convenience of a bundled package–the one-stop shopping concept offering local, long-distance and other telecom services from a single vendor.
Since January, a panoply of players–from heavyweights like AT&T Co. to smaller firms like ICS/Executone Telecom Inc.–have jumped into the market. And while “partnering” and “cooperation” are the buzzwords du jour among this group, beneath those niceties are undercurrents of tension that often burble to the surface.
“Everything has not gone exactly as we thought it would,” I.C. Shah concedes.
Like other competitors, the president of ICS/Executone has plenty of gripes about the way this market is evolving.
“I don’t think we’ve really seen deregulation in the marketplace (here),” Shah maintains.
AT&T agrees.
“Rochester Telephone has been saying all the right things about making it easy to compete,” spokeswoman Robin Sayre says. “But we haven’t yet seen any fundamental changes.”
Their main beef, competitors say, stems from the ultra-slim margin between Rochester Tel’s wholesale and retail prices. The 5 percent margin gives competitors room for only pint-sized profits.
“We can’t possibly recoup our costs from that,” AT&T’s Sayre says.
AT&T and others also grouse about the lengthy procedure required to transfer a customer from Rochester Tel to another service provider.
For example, AT&T completes an eight-page form for each customer it recruits. After faxing the information to Rochester Tel, AT&T then cools its heels–for far too long, Sayre says–until the form is processed and the new customer can be added to AT&T’s rolls–and revenues.
Though AT&T powered into the area earlier this year–and has captured roughly 2 percent of the market, according to CEO Robert Allen–the firm has stopped doing active marketing until some of its concerns are addressed, Sayre says.
Among other things, AT&T wants electronic access to records currently maintained by Rochester Tel that hold service updates and information about AT&T’s customers.
The long-distance giant also seeks a substantial decrease in the wholesale rates Rochester Tel charges, “so competitors have the chance to get their feet in the door,” Sayre says.
The state Public Service Commission–the regulatory agency that approved the open market plan and oversees its implementation–addresses any problems that might arise, spokesman Edward Collins says.
But the PSC has not done a status review of the plan, he adds, and will not do so until early next year.
“It’s still way too early,” Collins says.
Shah says the PSC was so thrilled to hold court over the country’s first open market that they overlooked some serious problems with the Rochester plan.
Indeed, potential competitors like ACC Corp. have backed away from the market. ACC chose not to compete because of issues such as miniscule profit margins and the “awful” procedures required to sign on customers, says Richard Ottalagana, general manager for ACC National Telecom Corp., a subsidiary that offers local service in Syracuse, Buffalo and Albany.
How does Frontier respond to these complaints?
The past six months have brought a few bruises, officials admit.
“You know, when we embarked on this whole experiment of an open market, when we set it up, we thought we had a structure that made sense,” says Jeremiah Carr, Frontier corporate vice president and CEO of Rochester Tel.
“What we quickly found was that our competitors and our partners were operating in ways we didn’t expect. As a result of that, in order to meet our wholesale requirements, we were struggling.”
For example, Carr says AT&T came into the market more strongly than expected, which caught both AT&T and Rochester Tel by surprise.
“All of a sudden we had to add a number of resources to that (wholesale) side of the business to handle the order activity, and we did that fairly quickly,” he says.
Carr denies that Rochester Tel treats its competitors with bias.
“I will do for any of our partners, our competitors, what I do for Frontier Communications or Rochester Tel,” Carr says. “We do not do anything more slowly for other people. We’re in the business of providing service, because we know there’s a tremendous opportunity from the standpoint of revenue gain, of operating-income growth.”
Rochester Tel has nothing to gain by playing favorites, Carr insists, because competitors are customers, too. And most agree that as more players enter the market, the line between friend and foe becomes increasingly blurred.
Time Warner Communications is a case in point.
The cable company, with its own fiber-optic and coaxial network, has the potential to deliver a painful punch when it rolls out local service later this year.
Already the firm provides limited phone service; market trials are continuing and limited deployment will start by the third or fourth quarter of this year, says Mark Lipford, vice president of telephone operations.
With a built-in base of more than 500,000 cable customers, Time Warner poses a serious threat to Rochester Tel’s residential business. The cable company is gearing up its marketing arm in preparation for the new venture; last month, it dropped the name Greater Rochester Cablevision Inc.–both the cable and telephone businesses will operate as Time Warner Communications.
And to coordinate its PR push, the firm recently hired Liz Vega, former news anchor at WROC-TV 8, as vice president of communications. Vega will head up a new department to handle public relations and regulatory affairs for the Rochester operation.
Time Warner is positioned to lure resellers from Rochester Tel as well. In May, the Wall Street Journal reported that AT&T and Time Warner were negotiating to combine forces and offer long-distance and local service.
Yet Lipford points to non-competitive aspects of Time Warner’s relationship with Rochester Tel.
As co-signatories of the open market plan, Time Warner views itself as Rochester Tel’s partner, he says. Time Warner also is a customer; last month, it signed a three-year deal for Rochester Tel to provide operator and directory-assistance services for its local phone operations.
Another competitor, MFS Communications Co. Inc., takes a similar stance.
“(President Royce Holland) always says your competitors are going to be your partners and your customers, and it’s true,” says Jeffrey Campbell.
Campbell heads up MFS Telecom, a subsidiary that sells private-line telecom services to large businesses in Rochester. With an extensive fiber-optic network, MFS Telecom also leases its lines to resellers, as Rochester Tel does with companies like AT&T.
Campbell says the MFS network is comparable in size to Time Warner’s. The cable company’s fiber-to-hub sites serve roughly 800 nodes in the Rochester area, according to a recent article in the trade publication Cablevision.
Blurring the lines between competitor and customer can be tricky, Campbell admits.
“You have to be cautious, I think, but you have to keep in mind the end objective, which is providing the solution for the (consumer),” he maintains.
“Especially in the business community, you have to give options. And you’re leaving out options if you limit yourself and only look at what you have. You have to look at what everybody has, how you can put it together for the best solution.”
What this all means for business and residential customers remains to be seen.
Willbrant of Alliance Automation thinks the local market will follow the path of long distance, which was deregulated in the early 1980s.
“It took awhile for competitors to really penetrate that market,” he notes. “I think that will happen for local service, too.”

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