Telecom Pipsqueaks Jump in Where Titans Fear to Tread

When Congress overhauled the nation’s telecommunications laws last year and paved the way for competition in the market for local phone service, one of the major goals was to spur investment in new infrastructure. New competitors could get into the game by reselling dial tones from the Baby Bells, but for the most part that was meant to be a temporary solution.

Things haven’t turned out the way lawmakers expected. Long-distance giants like AT&T;, MCI Communications and Sprint still rely on resale for their local-phone strategy. Under a resale arrangement, competitors buy service from incumbents like Pacific Bell and GTE at a wholesale discount--between 10% and 17% in California--and then market it to customers under their own brand names.

These deep-pocketed firms were thought to be the most likely candidates to construct new facilities, but over the last year and a half they have insisted that building a comprehensive new local phone network simply isn’t affordable.

Instead, the new construction has come from smaller firms with fewer financial resources that aim to build up their networks bit by bit. By starting with lucrative business customers in rich markets like Los Angeles, they hope to generate enough revenue to finance an expansion that in some cases could trickle down to residential consumers.

One example of this breed is ICG Communications. This upstart firm from Englewood, Colo., has spent tens of millions of dollars in the Southland alone to build a local phone network stretching from Dana Point to Santa Clarita to Moreno Valley.

ICG has leased fiber-optic cables from utilities like Southern California Edison and the Los Angeles Department of Water and Power and attached its own switching equipment. The company has also installed its own fiber in much of Orange County. ICG began selling dial tones to Southland businesses in March.

“We believe that to be the dominant [alternative] phone company in Southern California, we have to be facilities-based,” said Bryan Renner, ICG’s vice president for business development in California. “We will resell Pacific Bell [service] to gobble up market share, but we’ll migrate them over to our facilities.”

WinStar Communications is also selling local phone service on its own network. The New York firm began serving small- and medium-sized small businesses in Los Angeles in April and San Diego customers in June.

WinStar’s network relies on a “wireless fiber” system, which uses a wireless link to connect customers to its own fiber rings--leased from other firms--and switches. The company puts a short antenna on a customer’s building, which transmits the call to a WinStar hub antenna less than 1.5 miles away. From there the call is transferred onto fiber-optic cables.

At a few thousand bucks a pop, the wireless antennas offer an affordable way to link a building to the phone infrastructure, said Doug Morgan, WinStar’s vice president of marketing. Connecting a building directly to a fiber network can cost $40,000 or more, he said.

With growing demand from business and residential customers for additional phone lines for fax machines and Internet connections, the need for new phone capacity “is clearly there,” Morgan said.

Upstarts like ICG and WinStar are the exception rather than the rule. Of the 500 or so firms that are peddling dial tones around the country, only about a dozen or so are building their own networks, according to Robert Rosenberg, president of Insight Research Corp., a telecommunications consulting firm in Parsippany, N.J.

Also rare is these firms’ focus on long-term investment instead of short-term profits. Eric Nelson, ICG’s executive director of marketing in California, freely admits that “we won’t get a payback in one or two years.”

In the first wave of competition, the Baby Bells expect to lose about 20% of their share of the $100-billion local phone market. Renner figures if ICG can grab just 10% of the $20 billion that’s up for grabs, that will produce $2 billion in revenue--enough to cover its infrastructure investment.

For now, the little guys say they are relishing their independence and view the majors as competitors, not potential buyers.

“Compared to other folks that have to use the Bell companies for access, we really have control over our own destiny,” Morgan said.

*

Karen Kaplan covers technology, telecommunications and aerospace. She can be reached via e-mail at Karen.Kaplan@latimes.com