The Bell As CLEC

Posted: 12/1999

The Bell As CLEC
SBC To Move Into 30 New Markets
By Ken Branson

SBC Communications Inc., San Antonio, Texas, is the first of Ma Bell's orphaned children to burst through the boundaries imposed on it by the courts in the breakup of the former Bell System. Its merger with Ameritech Corp., Chicago, has been approved by the Federal Communications Commission (FCC) on the condition it roll out service to 30 new markets within 30 months of the merger's closure.

What challenges and opportunities does this wealthy, aggressive company pose to other competitive local exchange carriers (CLECs) in its 30 intended cities?

"It depends on how serious they are about their move," says Ken Hoexter, vice president-CLEC at Goldman Sachs Inc., New York. "If they make their move to just show they're there--one collocation per market to meet minimum standards--then it really doesn't matter to CLECs. If they are going to start buying companies, then, obviously, there's an opportunity to get new valuation metrics for the group."

Hoexter says he thinks a minimum standards approach is the more likely, if only because the Ameritech acquisition is new, and because SBC will be focused on its digital subscriber line (DSL) rollout. However, Tim Harden, vice president and general manager of networks at SBC, claims his company is in the CLEC game to win, not just to show.

"The national local strategy was part of the SBC vision before the FCC adopted it," Harden says. "So the fact that it was in the order was never part of the reason. The economic barrier for collocating, we've studied it, and we think we'll have the economic reason to go well beyond the FCC minimums."

Harden says SBC will resell incumbent LEC (ILEC) lines as an entry tactic in some markets, but its goal is to be facilities-based in all 30 markets. He says facilities-based means "smart build." That is, SBC will collocate its switches with those of the local incumbent and lease transmission.

Where SBC will differ from other CLECs, Harden says, is its target market. Not for SBC is the laser-guided, cream-skimming, ILEC-maddening raid on high-end corporate customers; not for SBC is the subtle come-on to small and medium-sized businesses ignored by their local ILEC. Harden and his colleagues aim at the mass market--though Harden reserves the right to define "mass." For him, the lumps in that mass--residential service, small and medium-sized business, and large corporate customers--are all distinct targets, and Harden expects to go after them.

"This is not 30 separate CLECs. This is a nationwide CLEC," Harden says. "There aren't a lot of nationwide CLECs that can link their processes and systems coast to coast.

"This is both a voice and data play," he says. "We'll have a full suite of data, including DSL, IPVPN (Internet protocol virtual private network), in addition to DS1 and DS3. Additionally, from a voice standpoint, we'll have Centrex type services." For residential service, SBC will use resale at first, and where appropriate, unbundled local loops.

Seventy percent of the people working on the CLEC rollout will be new employees, Harden says. A company spokesman adds emphatically that "the hiring we'll be doing of new employees is not because of mindset, but because of the demands of growth."

SBC has released a tentative list of 30 markets it plans to enter, but the company's spokespeople stress the final decision on each market has not been made.

SBC's Expansion Into 30 Top Markets Nationwide

SBC expects to enter Boston, Miami and Seattle within the first year. Within the first 18 months, the company has targeted Atlanta; Baltimore; Bergen and Passaic counties and Newark, N.J.; Denver; New York; Orlando, Fla.; Philadelphia; Phoenix; Portland, Ore.; the Tampa-St. Petersburg area, Fla.; and Washington. Within 30 months, SBC says it plans to enter Buffalo, N.Y.; Charlotte, N.C.; Louisville, Ky.; Memphis, Tenn.; Middlesex County, N.J.; Nassau and Suffolk counties, N.Y.; New Orleans; Norfolk, Va.; Pittsburgh; Raleigh-Durham, N.C.; Salt Lake City; and West Palm Beach, Fla.

Ameritech may be a big bite to swallow, but analysts point out it's not the first king-sized meal SBC has consumed. Confined to dust-bowl dial tone at divestiture in 1984, and known for years as the most conservative of the regional Bell operating companies (RBOCs), SBC has consumed Southern New England Telephone Co., New Haven, Conn.; Pacific Telesis Inc., San Ramon, Calif.; and 25 percent of Telefonos de Mexico S.A., Mexico City.

Harden says the hard work of systems integration is nearly done. "On the system side, although this is a pretty significant challenge, we've been looking at it for over a year and feel we can pull it together," Harden says.

Beyond saying that SBC Telecom--as SBC has branded itself, though its legal name remains unchanged--will offer a full suite of facilities-based services with a new suite of employees, Harden and his colleagues have been reticent about strategy. SBC may turn out to be the biggest, richest, new kid on the block, but it is still the new kid on the block. All the markets SBC has identified have had CLECs skimming the local cream and carving the local niches for years. They know each other's strengths and weaknesses, know the local ILEC's strengths and weaknesses and know their local public utilities commissioners. Can SBC really mean to show up in these markets cold? No doubt, some of its new hires will be people now laboring for CLECs. Rather than hire such people one at a time, might it not be easier for SBC to buy their companies, lock, stock and DSLAM (DSL access multiplexer)?

Indeed, it might, says Hoexter of Goldman Sachs, and a fine thing that would be, he believes. "If they make an acquisition, it would be positive to the group because it's a reaffirmation of the need for competitive facilities in those markets," he says.

Not only do all the markets SBC has targeted have CLECs, but many of them have at least one active data CLEC selling DSL service. In Boston, all three national data CLECs--Covad Communications Co., Santa Clara, Calif.; NorthPoint Communications Inc., San Francisco; and Rhythms NetConnections Inc., Englewood, Colo.--are present, along with Network Access Services Corp., a regional data CLEC from Sterling, Va. SBC, through its Pacific Bell subsidiary in California, has already concluded an agreement to buy DSL services from NorthPoint in California.

The data CLECs, then, would seem to be natural allies or acquisitions for SBC as it assumes its competitive role. "We will build, buy, or align ourselves, as required," he says.

That leaves CLECs in SBC's target market with the happy prospect of a new customer or ally, and the rapturous possibility of being bought. The only downside appears to be raiding from SBC of the street-wise staffs of such companies, and that's a burden all CLECs contend with all the time.

For CLECs inside SBC's territory, there are other possible affects of the merger on CLECs operating in SBC and Ameritech's home ground. Tangibly, the FCC requires SBC to offer CLECs 32 percent discounts to resell its services, work with its competitors on a uniform electronic interface to its operations support systems (OSSs), and streamline the collocation process for CLECs. All these conditions arise from real issues of long standing--and not just with SBC. One CLEC official, who asks not to be named, says he thinks reselling, provisioning and collocating may become easier with other ILECs, since they will now have to deal with a CLEC with long experience on the ILEC side of the fence.

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