Monday, March 14, 2005

What's Spooking The ILECs

It's Christmas in March for the ILECs, the Incumbent Local Exchange Carriers. These are the phone companies that have squatting rights on local phone service, mostly because they are the children of Ma Bell. So, what did they get for Christmas from FCC Santa? They get to keep most of their toys and not have to share them with those pesky new kids, the CLECs or Competitive Local Exchange Carriers. What they really wanted was to go back to being the only children. But the other kids get to stay in the neighborhood. Worse yet, those other kids just might be getting new and better toys!

Here's what's happened. As part of the ongoing deregulation of the telecommunication business, the government has been moving toward a free marketplace where everybody can compete with everybody else. First, competitors were allowed into the long distance business to go up against AT&T. In 1996, competitors were let into the local phone markets.

To make this happen quickly, local phone companies were required to share their facilities with new competitors. They had to lease both the local phone lines and the switching facilities in a package called UNE-P or Unbundled Network Elements - Platform. Competitors could then offer long distance service through their own networks, combined with local service obtained by leasing the UNE-P service from the local phone company, and bundle them together for one low price. This is what made the local and long distance package plans take off. What really made it work was that the ILECs had to sell their platforms at the wholesale rate and not gouge their competitors.

Perhaps that sounds a little unfair to the locals, but in return they got the opportunity to enter the long distance markets and offer their own bundles of local and long distance service. They also retained the advantage of owning the copper. In other words, the actual phone lines that run to your house or business were installed over the last century by the local phone companies. They own them. During all those years, nobody else was allowed to string phone wires. Now there's so much wire in the ground and overhead that it would be too costly to duplicate. If you want service from a competitive local phone company, you first have to get it installed by the ILEC and only then can you switch to your preferred provider.

Now here comes Christmas in March. As of March 11, the ILECs no longer have to sell their UNE-P facilities for wholesale rates. They can, and have, bumped up the prices. In a year, those CLECs will have to get their own equipment or get out of the business. The only contested item will be the copper phone lines. You can still lease them from the local phone company in a new package called UNE-L or Unbundled Network Elements - Line.

Let's see. The local phone companies have taken back sole use of most of their facilities plus added long distance service to their offerings. Is Ma Bell being reincarnated? The local telcos must be jumping for joy. Or are they?

Ma or no Ma, those other kids aren't leaving the neighborhood. Some CLECs have already started co-locating their own switching equipment in the big local phone offices where there are thousands and thousands of lines to fight over. Others may merge, get out of the business, or compete in a different way.

Something that's really spooking the ILECs is that there are other wires besides theirs coming into houses and businesses. Cable TV was never a threat to the telephone companies until Cable started offering broadband. Now you can get VoIP phone service with an analog telephone adaptor called an ATA plus your Cable Modem service or DSL. Even if the local phone company owns the phone wire that carries your DSL, you could be bypassing them for your pricey long distance calls using VoIP over DSL.

The other wire that comes into just about every building is the electrical power line. BPL or Broadband over Power Line service has been approved and is up and running in some areas. If it spreads to more communities, VoIP over BPL could take the place of using telephone wires from ILECs.

Wireless is even scarier. Many high school and college students got their first phone as a cell phone and see no reason not to use it exclusively. Wireless Internet service is available in many areas now and WiMAX will be here in a couple of years. Voice over WiFi is starting to be an option in WiFi hotspots. What's going to happen when WiMAX expands the hotspot to 31 miles of coverage in all directions?

Then there is glass. We were taught in science class that glass doesn't conduct electricity so nobody expected that you could connect phones with it. Yet, fiber optic carriers do just that. A pair of copper wires carries one phone call or perhaps 24 if you use it for digital T1 phone service. A fiber optic bundle the same size can carry thousands and thousands of phone calls or the equivalent bandwidth of computer data.

This is the problem for the legacy phone companies. The advance of technology has so changed the options for delivering voice and data services that there is no going back to monopolizing the phone business. Not even if you could hog all the old equipment. Newer players will simply go wireless, fiber, cable, power line or some other technology that isn't out of the lab yet.

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