REACHING OUT : Small Phone Firms Quietly Rewiring U.S.
From atop Duluth’s Board of Trade Building, John B. Keller can look out over the frosty Lake Superior shoreline and take in most of the territory served by his long-distance telephone company’s new microwave system.
The market might be tiny by the standards of the big telecommunications companies, but it is one in which Keller’s partnership, Telephone Associates, is a heavyweight. “It’s a niche market for us--our own back yard,” Keller said. “We are competitive with anyone.”
Particularly with telecommunications giant AT&T.; With its digital microwave equipment linking Duluth to Superior, Wis., the sister city across the icy harbor, Telephone Associates can offer its business customers high-speed data transmission and other services that AT&T; can’t yet match. The result: Telephone Associates has snared a surprising 25% average share of the commercial long-distance market throughout the Iron Range.
While MCI and US Sprint--themselves multibillion-dollar concerns--command attention as major long-distance alternatives to AT&T;, hundreds of relatively small regional firms like Telephone Associates have quietly rewired America. Though together they share just 5% of the nation’s long-distance business, these regionals are nonetheless dividing--profitably, for the most part--a $2.15-billion-a-year pie.
“People are unaware that this second tier of regional carriers exists,” said David H. Jones, an executive of Atlanta-based SouthernNet, which turned its first profit last year. “People don’t realize there’s an active, vital business out there beyond AT&T;, MCI and Sprint.”
These ventures range from virtual mom and pop operations with annual sales of no more than a few million dollars to Allnet Communications of Birmingham, Mich., which has annual revenues in the hundreds of millions. The newcomers, unleashed by industry deregulation over the past two decades, have often brought fresh ideas and resourcefulness to a field dominated by what one executive called “a utility mentality.”
Some of the upstarts, for example, have built their regional networks at bargain-basement prices by pulling optical-fiber cables through abandoned gas pipelines, installing them atop high-tension power grids or stringing them along railway rights-of-way.
Now, some of the newcomers are linking their regional systems to provide nationwide service--without taking on the back-breaking debt that MCI and Sprint shouldered in building their national networks. Five regionals have linked their systems into the National Telecommunications Network, offering coast-to-coast fiber optic transmission services--carrying voice, video and data--to their own customers and to other carriers as well.
Telephone Associates and the other regionals are, in some ways, analogous to the small airlines that developed after deregulation of that industry to serve markets abandoned by larger carriers. Just as these small airlines haul passengers to major airports where they can catch planes to their final destinations, the small long-distance companies carry their customers’ calls to a metropolitan area where they are switched onto the network of another company, such as AT&T;, which will carry it to the proper area code.
This growing patchwork of interlocking regional networks suggests how the U.S. telephone system might have evolved had there never been a Bell System monopoly. And it also bespeaks some maturity in a field that, at the outset, attracted its share of fly-by-night ventures seeking quick profits with minimal investments.
“Long-distance companies are no longer an endangered species,” said Jerry McAndrews, president of the fledgling industry’s Competitive Telecommunications Assn., or Comptel.
The transformation was evident at Comptel’s annual meeting in New Orleans this month. Gone were the sweaty-palm merger and acquisition dealings between sinking companies that marked meetings past. Instead, Comptel offered workshops on how to tap into such hitherto unchallenged AT&T; money-makers as operator-assisted calls, toll-free 800 service and international calling, and on how to perfect billing systems and weed out fraudulent credit-card customers.
Some Firms Driven Out
In the hotel corridors outside the meeting rooms, Keller, Jones and other executives buttonholed one another in search of partners to share the costs of their regional networks.
The earlier shakeout purged the fledgling industry, through bankruptcies and mergers, of under-financed ventures and outfits unable to cope with sharply higher costs for local connections and with rate-cutting by the chief competition, AT&T.; The list of 500 or so companies offering some form of long-distance service two years ago has shrunk to closer to 300, McAndrews estimated, and still more firms are expected to be driven out of the business.
The remaining companies have survived, said Howard Finkelstein, president of Metromedia Long Distance, because they offer services that are competitive with AT&T;’s, not necessarily cheaper.
“Nowadays,” he explained, “people don’t care about saving a little bit of money if the trade-off is quality and service.” When rates were 20% or 30% less than AT&T;’s, he said, customers might overlook poorer calling quality.
“Today, you differentiate by quality,” said Finkelstein, whose company serves customers in Texas, Florida, New York and New England.
Robert B. Morris III, who follows telecommunications for Prudential-Bache Securities, added that the regionals “recognize that this is really a service business, and they excel by being very close to their customers, understanding their needs and being extremely responsive.”
“Some of them are making much better money than MCI on the basis of return on assets,” he added. These profits “demonstrate the operating efficiencies of smaller networks, which when they are loaded to capacity within a region can make very good money,” according to Morris.
Among the profitable firms is Midco Communications, which services thinly populated South Dakota from its base in Sioux Falls. Its parent company, Minneapolis-based Midcontinent Corp., has served the market for 50 years, bringing the region its first movie houses, television stations and cable television system.
General Manager Ginny Hageman said Midco stresses customer service. For example, she said, when Midco’s business customers asked for a toll-free service, the company made its own 800 number available and routed the incoming calls to subscribers. And when they requested an answering service as well, Midco bought one.
Hageman said Northwestern Bell, which provides local telephone service in her company’s area, and AT&T; “are abandoning these markets” by pulling out their customer service personnel to trim operating costs. “We’re just filling in behind them,” she said.
Despite its success--Midco has been profitable for the last four years--the company does not expect to move into neighboring states, Hageman said. “We want to grow, but we don’t want to grow out of South Dakota. We’ll grow functionally , not geographically.
“If you are a mom and pop, low-margin business, you can’t afford to keep up” with the revenue and regulatory requirements that vary between states, she explained.
Keeping a regional focus is not, however, a universal strategy. Teleconnect Long Distance Services & Systems is expanding at a rate of two cities a week (already including Los Angeles) from Cedar Rapids, Iowa, where it switched its first call just six years ago.
Teleconnect added long-distance service to its original business of selling and servicing business telephone systems in response to customer needs, said Clark McLeod, a former science teacher who is the company’s founder and chairman. “It became clear to me,” he said, “that the Midwest--and especially Iowa--was going to be bypassed by the major carriers.”
Consequently, McLeod decided to build his own regional network. Later, he joined with Williams Pipeline of Tulsa, Okla., to string fiber-optic cables through abandoned gas pipelines and create a low-cost, high-quality network connecting Chicago, Omaha and Kansas City to Teleconnect’s system in Iowa.
“Williams had the pipelines, and we had the technology,” said McLeod. “It was a remarkable marriage. And all of a sudden we were the technology leader in Iowa.”
Teleconnect already has matched or exceeded AT&T;’s market share in several Iowa cities, McLeod said.
Meanwhile, Williams Pipeline, now renamed Williams Telecommunications Group, has extended its network to the West Coast and linked it to four other regional networks east of the Mississippi. The resulting consortium--the National Telecommunications Network--offers a new, entirely digital, fiber-optic system stretching more than 10,500 miles to connect 150 major markets coast to coast. (Such a system of hairline cables can transmit vast quantities of information--voice, video and data--at the speed of light and with virtually no distortion, a necessity for computer data.)
The diverse origins and resourcefulness of the regional firms are demonstrated by one of the NTN partners, 6-year-old SouthernNet, whose founders include a third-generation, family-run local phone company in Georgia. In all, 13 small and independent phone companies in Alabama and the Carolinas joined forces to build an all-digital, fiber-optic network between Atlanta and Washington. By running its cables atop regional electrical utilities’ high-tension grids, SouthernNet was able to minimize construction costs.
‘Exploitable Asset’
Similar ingenuity was shown by 5-year-old Lightnet, a venture put together by Southern New England Telephone and CSX, a railroad holding company that wanted to exploit its railway rights-of-way. The result is an all-fiber, digital network, based in Rockville, Md., that specializes in high-speed transmission of voice, video and data for commercial and government customers.
According to Lightnet’s acting president, Richard Donofrio, customers--which include banks with automated teller machines and insurance companies with far-flung claims networks--no longer view telecommunications as a necessity whose cost should be minimized but as an exploitable asset.
“That’s a real change in outlook,” Donofrio said. “These rapidly growing, data-based services require networks that can move a great deal of information reliably and efficiently, and the bank or insurance company that does it well has a competitive edge.”
Consequently, Lightnet, which did $100 million in long-distance business last year, focuses less today on low prices than on good service. “We compete for the most part on value,” he said, “and I don’t define value just in terms of price.”
That doesn’t mean, however, that cost is unimportant. “We’re always looking for people who can handle our traffic and save us a penny, or half a penny, or even a quarter of a penny,” said Keller of Telephone Associates.
“People tend to lose track of the fact that if you can bring a penny (per minute of calling) to the bottom line, with a million minutes that’s $10,000,” he said. “If you can make a deal for a 1-cent saving, you’ve just brought $10,000 to your hind pocket.”
But Keller and his two partners, who meet at lunch weekly to go over what they call their “Friday book” of operational reports prepared by the company’s managers, have no desire to expand or sell their venture. “We’re very satisfied to be a debt-free company,” he said, “and we’re not an expanding type of company.
“We haven’t expanded,” he added, “even to Eau Claire.”
And remaining local will safeguard his company’s service edge over AT&T;, Keller maintained, explaining: “Even if they say, ‘Reach out and touch someone,’ they don’t know how.”
LONG DISTANCE ON THE LINE Sharing the $43-billion long-distance telephone market
AT&T.; . . 80%, or $34.4 billion
MCI and Sprint . . . 15%, or $6.45 billion
Others (300 companies). . . 5%, or $2.15 billion
Source: Competitive Telecommunications Assn.
