Poised at a new era, telecom players express optimism

Less than a decade ago Rochester was hailing itself as a budding telecom alley. It was a time, however, when the U.S. telecommunications industry saw itself as marked for phenomenal growth but was in fact on the verge of a near total meltdown.
Nationally and in Rochester, telecom recovered albeit slowly. Now local telecom experts and executives say the transformed industry is on firm footing.
In 1999, a deregulated U.S. telecom market was seen by many in the industry and by telecom stock analysts as on a sure trajectory to reach stratospheric heights. A wave of apparently successful telecom startups washed over the late ’90s U.S. telecom market. Up and coming ventures included new long-distance carriers such as MCI Corp. and competitive local exchange carriers that could focus on the most profitable business customers without being burdened by irksome regulations that fettered incumbent carriers.
Still, the so-called Baby Bells-firms formed by of the court-ordered break up of AT&T Corp.’s national regulated monopoly-remained powerful and well-financed.
At the time, Rochester was not the only metropolitan region to lay claim to some variant of the telecom alley sobriquet-an obvious reference to California’s Silicon Valley. But insofar as it could draw on a wealth of homegrown telecom talent, Rochester believed it had at least as much reason to count itself in the running for the title as the Phoenix/Scottsville area in Arizona and Santa Rosa, Calif., which were touting themselves as telecom corridors, or Catawba County, N.C., which dubbed itself Telecom Valley.
Much of the industry and analyst exuberance turned out to be overheated, however. Starting in 2001, once-hot telecom stocks tumbled drastically and a number of the new CLECs went into bankruptcy. A wave of consolidations followed as the industry rode out a roughly four-year slump. Some 350 U.S. CLECs extant in 2000 now have been winnowed to 75.

Local impact

Rochester telecom firms were not entirely unaffected. Prominent telecom bankruptcy reorganizations during the industry’s dark, early 21st century days included Choice One Communications Inc. and Global Crossing Ltd. Even so, area telecom executives see Rochester’s telecom alley as still leading to a fairly bright future.
“We are at the beginning of a new growth era,” predicts David Rusin, CEO of American Fiber Systems Inc., a Brighton-based firm that has installed and runs fiber-optic networks in Atlanta; Minneapolis-St. Paul; Kansas City, Kansas; Kansas City, Miss. and six other U.S. metropolitan markets.
Though the U.S. telecom market is “much settled down compared to its explosive late-’90s hot growth stage, Rochester is still a telecom alley,” says Ann Burr, Frontier Communications Corp.’s top local official, senior vice president and general manager.
Now headquartered in Stamford, Conn., Frontier is the successor to Rochester Telephone Corp., the area’s regulated incumbent local carrier, which in pre-deregulation days ranked as the country’s fifth largest independent local phone company.
Whatever did not kill telecom ventures in the industry’s 2001 meltdown only made them stronger, says John Purcell, CEO of Fibertech Networks LLC. And a number of Rochester-area ventures did manage to survive.
Based in Brighton, Fibertech has fiber-optic networks in six New York state mid-size metropolitan markets, including Rochester, and operates in metropolitan areas in more than a dozen Northeast, Southeast and Atlantic Seaboard states.
Telecom firms currently based or operating in the Rochester region in addition to Frontier, an employer to some 1,700 locally, include the Perinton-based Paetec Holding Corp., which this year marked its expansion to a coast-to-coast CLEC and employs over 750 here. One Communications Inc., a more than $800 million CLEC that is successor to the Rochester-based Choice One Communications Inc, has more than 500 local workers.
New Jersey-based Global Crossing Ltd., which acquired Frontier in the late ’90s and sold off Frontier’s local carrier operations, still employs 500 here. And a host of smaller locally based telecom ventures employing anywhere from five to 100 or more also remain. The most recent tally by the U.S. Bureau of Labor Statistics put Rochester-area telecom industry employment at more than 5,000 in 2005, a year when telecom was just starting to move out from under the cloud it went under in 2001.
“If you are still standing, you are successful,” Purcell says. “It means you survived the nuclear winter of 2002 that took down dozens of companies, including one as large as MCI.”
He adds: “It means you survived the days when no commercial bank would even talk to you about credit; it means you survived the two years of economic chaos that followed 9/11 and it means that you have fewer competitors left standing to fight against.”
Many see Frontier, which embraced deregulation early and published an Open Markets Plan to invite competitors into its territory in the early 1990s, as the source of much of this area’s telecom industry strength.
The long-distance company ACC Corp., started by Frontier veteran Richard Aab, was one of the first. Aab recruited bright young Frontier executives such as Arunas Chesonis. After ACC was sold and eventually became part of AT&T Corp., Chesonis started Paetec, while Aab started the North Carolina-based US Lec Corp., which merged with Paetec last year to create a more than $1 billion CLEC.
Also recruited from Frontier to ACC was a quartet of young executives who went on after the ACC sale to Choice One. All left Choice One after it merged with two other CLECs to form One Communications but are still working in or heading telecom start-ups in this area. American Fiber System’s Rusin and Fibertech’s Purcell also are Frontier veterans.
“Competitive telecom was born here, and many folks from those days are still working here,” says Paetec chairman and CEO Chesonis. “I believe that any Rochester company with regional or national operations is in a good position to succeed.”
Rusin also sees plenty of opportunities.
“Internet access demand is growing at 100 percent a year, optical transport at 50 percent a year and last-mile access, driven by data uplinking, is growing at 50 percent a year,” he says. “These three categories are basic staples of the industry and a good indicator of growth.”

Industry shift

The future might not be uniformly bright for everyone, however.
The industry is rapidly moving to an Internet-based integrated voice and data model, which requires high-speed fiber-optic connections, notes consultant William Hughes, CEO of Brighton-based HPA Consulting Group Inc.
Wireless devices and cell phones are also increasingly popular, especially with younger users, who mainly communicate through voice or text messaging via cell phone, he adds.
“Historical products such as wired (land) lines are rapidly declining,” Hughes says. “Younger Americans don’t need land lines. As competitive alternatives from cable companies to wireless companies flourish, the (traditional) telephone industry is becoming obsolete.”
He says the regulated companies, however, still have to provide service to “low- margin rural properties while the competition skims the more lucrative larger clients.”
Few are more attuned to Hughes’ point than Paul Griswold, president and CEO of Finger Lakes Technologies Group Inc., a Victor-based unregulated voice and data provider with a Finger Lakes and Rochester-area fiber network.
“Incumbent local exchange carriers are in the worst position (in the telecom industry) from a regulatory standpoint, and rural local exchange carriers fare the worst,” Griswold says.
He also heads Ontario & Trumansburg Telephone Cos., a family-owned regulated rural telephone company providing some 11,000 access lines mostly to residential customers in rural areas and semi-rural towns and villages along the Rt. 96 corridor south of Rochester.
Unregulated CLECs such as Paetec or Time Warner Telecom can cherry pick customers, serving only the most profitable business clients. But incumbent carriers such as the Ontario & Trumansburg companies-actually two separate regulated carriers that have been owned and run in tandem by Griswold’s family since the early 1900s-are increasingly forced to concentrate their declining business of providing land-line service on less profitable customers.
“From the small independent telco perspective, times are getting tougher,” Griswold says. “Our telcos saw a significant drop in access lines last year. The current generation is born with a cell phone and they don’t even realize what a wall phone is.”
Griswold has so far managed to offset the rural phone companies’ decline with new business from the Finger Lakes Technology Group, which he and his brother William, who at the time was running the Ontario and Trumansburg firms, began as an ISP in 1995. Still, Griswold sees the rural phone companies as facing an increasingly difficult future.
Cable company incursions as well as cell phones are cutting into traditional carriers’ business, Griswold says. And as these trends continue, small independent incumbent carriers-already an endangered species-are likely to vanish or at the very least be forced into substantial consolidations.
Though Frontier as an incumbent carrier faces many of the same issues, Burr remains relatively sanguine about its prospects going forward. The Rochester area is its largest market, but the company in all has more than 2.5 million customers in 24 states and is the second largest U.S. rural local exchange provider.
“We remain the largest telecommunications provider in the (Rochester) area and work every day to stay focused on keeping customers,” Burr says.
In the Rochester residential market, Frontier has in recent years faced stiff competition from Time Warner Cable Inc., which has coupled its popular Road Runner broadband service with cable TV and digital voice-over-Internet-protocol phone service in a bundled package.
Frontier’s counter offer: bundled phone, satellite TV and DSL high-speed Internet. In the business arena, Frontier several months ago introduced a VOIP-based virtual PBX service. In all, Burr says, the company has introduced 22 new products since 2005 and increased its penetration of the high-speed market.
The Rochester market is intensely competitive, Burr concedes. But competition, she says, is “good for consumers and good for business” and not feared by Frontier.
One note of uncertainty for the region’s telecom industry could lie in the larger economy. Could spillover from a turbulent real estate and mortgage market, mushrooming energy costs and tightening credit markets derail telecom? Local experts and telecom executives think not.
“Generally speaking, telecom companies are well positioned to succeed in tough economic times,” Paetec’s Chesonis says.
Hughes goes further, suggesting that factors casting a pall on the wider economy could even help telecom.
“As energy prices continue to escalate,” he says, “travel alternatives such as virtual meetings and virtual offices will become more desirable.”
Hughes predicts home offices will grow in an effort to reduce energy costs.
“These changes will accelerate the demand for additional broadband facilities, and that is a good thing for the telecom industry,” he says.
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06/20/2008 (C) Rochester Business Journal