Local telecommunications competitors

Local telecommunications competitors Strategy and policy

Paul Teske and John Gebosky

This article analyses current policy Issues Involved in the development of local telecommunications competltlon In the USA. Although rate structures that subsldlze resldentlal consumers may ultimately be threatened, viable local competltlon could solve many current regulatory problems. While It is dlfflcult to assess the state of competltkm, It currently appears to be nascent rather than established. The article examines In detail the role of emerglng flbre-optlc-based competitors In large US cities and shows how their strategies have evolved. Using New York Clty as a case study, the article analyses city and state policy optlons towards emerging competitors In the near future. Paul Teske is AssistantProfessor, Political Science and Management, State University of New York, Stony Brook, NY 11794, USA (Tel: 716-875 5035). John Gebosky is Senior Policy Analyst, New York City Department of Telecommunications and Energy, 75 Park Place, 6th Floor, New York, NY 10007, USA (Tel: 212-766 6596). The ideas and opinions expressed in this artiile are those of the authors and do not necessarily represent the official views of the institutions they represent. An earlier version of this article was presented to the 18th Annual Telecommunications Policy Research Conference, Airlie, VA, 1990.

Most of the issues that will dominate the US state and federal telecommunications regulatory agendas in the 1990s relate directly or indirectly to the near monopoly over end-user access still held by the local exchange telephone companies (LECs). Real competition is not likely to come soon to residential customers, but alternatives are emerging for large telecommunications users. Analysts have advanced various solutions, including ONA, CEI, separate subsidiaries, social contracts and price caps, to enable the LECs to realize untapped economies of scope by entering information services, manufacturing and long-distance services. The best solution to most of these problems would be true local competition. This article analyses the business strategies of emerging alternative local providers in the USA, such as Teleport Communications and Metropolitan Fiber Systems, as they compete in large cities like New York, and state and city responses to their market entry. We also consider the implications of competition for the telecommunications infrastructure and economic development.

Assessing the state of local competition Both state and federal policy makers have found assessing competition in all telecommunications markets difficult and frustrating. Assessing local competition is particularly difficult because it is only beginning to emerge in relatively narrow niche markets. Significant local alternatives that can reduce the market power of LECs are likely to be among the later competitive developments in telecommunications markets. Attempts to assess competition in telecommunications markets depend on one’s perspective and objective. For example, a regulator’s objective may be quite different from an academician’s or a potential entrant’s perspective. A National Regulatory Research Institute (NRRI) study suggested three reasons for caution in evaluating com-

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petition in telecommunications: (1) competition varies among states, LATAs and services, so each commission must do studies of its own state; (2) informed observers differ because they have different goals or prioritize the goals differently; (3) few studies of post-divestiture competition exist and are often inconclusive about the extent of competition.’ Former regulator Alfred Kahn has concluded: ‘Assessing markets in the real world inevitably involves the exercise of qualitative judgment in ways that can only be characterized as not merely subjective but, indeed, intuitive and impressionistic.‘* Thus, rather than assessing the level of competition, we analyse how it is emerging and its impact on existing firms.

Emergence of local competition ‘National Regulatory Research Institute, Evaluating Competitiveness of Telecommunications Markets: A Guide for Regulators, NRRI, Columbus, OH, January l-988, pp iii, vi and vii. *Quoted in New York State Public Service Commission Administrative Law Judge

Tg’mmendd

D~~s~cm~ 9 MaY198% P

3David Birch, Job Creation in America, Free Press, New York, NY, 1987, p 146. 4Mitchell Moss, ‘Telecommunications and the economic development of cities’, in William Dutton, Jay Blumler and Kenneth Kraemer, eds, Wired Cities: Shaping the future of Communications, G.K. Hall, New York, NY, 1987. %ee, for example, The $7 Trillion Gamble: Telecommunications and New York’s Economic future, report by the New York City Partnership, Inc, in collaboration with Booz Allen & Hamilton, Inc, June 1990; Jurgen Schmandt. Federick Williams. Robert Wilson and Sharon Strover, eds, The New Urban Infrastructure: A Study of Large Telecommunications Users, Praeger, New York, NY, 1990; Robert Wilson and Paul Teske, ‘Telecommunications and economic development; the state and local role’, Economic Development Quarterly, May 1990.

Increasingly, as the USA moves further into a knowledge-based, service-oriented economy, telecommunications represents the most important infrastructure for economic development. Birch notes: ‘Locales that offer state-of-the-art communications facilities have a great advantage in this kind of economy.‘3 Today’s telecommunications infrastructure has several levels. Moss points to ‘3 main components to the new telecommunications infrastructure in the US: (1) long-distance or intercity systems; (2) regional or local distribution systems; and (3) intrabuilding or intracomplex communication systems, such as local area networks or “smart building” systems’.4 State and city policy most affects the second and third segments-

As with all factors in economic development, the precise contribution of telecommunications is somewhat controversial. A consensus seems to have emerged, however, as many analysts now consider a good telecommunications infrastructure a ‘necessary but not sufficient’ condition for economic development .5 Table 1 shows the concentration of telecommunications-intensive employment in major cities compared to the national average. With 40% of its employment and 51% of its payroll coming from these industries that are highly dependent upon telecommunications, Manhattan was an obvious initial location for advanced telecommunications services and competition. Cities such as San Francisco and Chicago are also well above the national averages for employment and payroll from these industries.

Table 1. Chart of major cltles and telecommunications-lntenslve businesses (36 of total payroll employment). Manhattan

San Francisco

Chlcago

31.5 15.0 4.6 3.6 0.6 7.5

22.7 9.7 3.0 2.6 50::

14.2 4.7 3.4 1.7 1.1 3.3

9.9 2.9 2.3 1.4 0.6 2.3

Information technology

0.1

0.6

2.1

2.3

Research and development

0.3

0.3

0.2

0.3

Media

a.3

5.4

3.7

3.7

40.2

29.0

21.1

16.2

51.1

35.0

25.6

20.5

Informationservices Finance Insurance Real estate ComputerslDP Other

Note: Cateaorization of SIC codes comes from Schmandt St a/, op tit, Ref 5; specific figures calculated by authors from 1966 County Business Patterns (counties do not always correspond exactly to the city boundaries).

Total employment % of total pavroll from these-industries

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US average

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Local telecommunications competitors Infrastructure

Given the importance of the telecommunications infrastructure to economic development, the question remains: how best to build it? Should a state and city bolster and protect a local monopoly firm to provide updated facilities, or is it better to encourage competition among providers ? On the national level, we have already answered these questions: the transition problems associated with the AT&T break-up were endured to achieve the benefits of competition. On the local level, although the evidence is less clear so far, it may also be true that competition will best promote innovation in technology, diversity and new services. Chaffee notes: ‘A major boost to alternative carriers has come from the realization by corporate America that businesses can do better by designing their own communications networks - or using carriers who will do it for them - at a fraction of the cost of continuing to use conventional means. Stories of unresponsive entrenched carriers have helped to fuel the fire.‘6 For example, in 1984 it took up to one year for New York Telephone to deliver a T-l circuit to a large user; now, with Teleport delivering a T-l in less than 30 days, New York Telephone’s time has been cut to 30-45 days.’ This competitive activity itself may have stimulated the local telephone companies to respond. Kraushaar of the FCC notes: ‘Of particular note is the fact that a number of fiber rings have been reported by the Bell Operating Companies in some of the very same cities where urban fiber systems exist. Urban fiber systems may have motivated local telephone companies to price special access closer to cost, and in some cases these systems have impacted local operating company efficiency in serving the larger customers through the use of redundant facilities and fiber rings.” Reliability

‘C. David Chaffee, The Rewiring of America: The Fiber Optics Revolution, Academic Press, New York, NY, 1988, p 129. ‘Joel Gross, Fiber Optic Networks Introduce Competition to the Local Telcos, Donaldson, Lufkin & Jenrette Industry Viewpoint, 6 December 1989, p 3. *Jonathan Kraushaar, Fiber Deployment Update: End of 7989, FCC Industry Analysis Division, 28 February 1990, p 20. ‘Coopers 8 Lybrand, tnc, The tmpact of the Emerging Intelligent Network in New York State, February 1989, p 31. “Naruko Takanashi, ‘The Achilles Heel of the Information Society: socioeconomic impacts of the telecommunications fire in the Setagaya Telephone Office’, Technology Forecasting and social change, Vol 34, 1988, pp 27-52. “New York City Partnership, op tit, Ref 5, p31.

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Local competitors also argue that they enhance the telecommunications infrastructure for economic development by providing back-up services that may partially duplicate the local exchange company’s services, but which provide an alternative in the case of an accident, service delay or other problem. These new competitors often also provide up-to-date, self-healing disaster recovery systems within their own network. Financial firms, in particular, have been increasingly concerned about the reliability of the telecommunications infrastructure. A University of Minnesota study found that loss of telephone service for one hour cost an investment bank $6 million, and a loss of two days of service could fatally harm a bank.’ A very thorough study of telecommunications-related economic losses in Japan from the Setagaya, Tokyo, fire also revealed large vulnerabi1ities.l’ The New York City Partnership estimated that loss of telecommunications service for just one day in New York City could disrupt more than $1 trillion in financial transactions, noting: ‘Disaster protection and service recovery is a concern for all users, but a critical requirement for very telecommunicationsdependent businesses such as investment banks, brokerage firms, and television broadcasters.“’ Several recent telecommunications network failures around the nation have highlighted this issue for users. To improve telecommunications reliability, the Partnership study recommended cable diversity, route diversity and manhole diversity. They note: ‘New York City firms also have the benefit of achieving

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diverse routing by purchasing service from an alternate provider such as Teleport .‘I2

MANS: local competitors

‘*ibid,

432

p 37.

What form will sustainable local telecommunications competition take? Currently, local competitors (metropolitan area networks - MANS) are providing alternative fibre-optic capability. It is possible, however, that wireless systems, sometimes called personal communications networks (PCN), will ultimately emerge as the major extensive competitor to the local LEC wireline networks. These systems, which vary from mobile cellular types to personal satellite systems to systems more akin to local area networks in buildings, have the great advantage of not requiring the large up-front ‘sunk’ investment in secure, underground fibre and can be easily adapted to technological improvements in end-user equipment. In the long run these systems may make the type of competition we discuss here less viable; however, it is unclear how, whether and when such wireless systems will emerge as feasible local competitors. Although PCN has received substantial media attention in 1991, particularly as an easier way for cable television firms to provide competitive telecommunications services, as some PCN conference veterans have noted PCN is so far more of an ‘industry’ than a real business. As technological forecasting is not our specialty, we will let time answer these questions, and simply note the real possibility of other forms of local competition in the future. Fibre-based local competitors have been called metropolitan area networks (as an analogy to local area networks, or LANs), alternative access vendors (AAVs), alternative local telecommunications systems (ALTS) or ‘bypassers’ depending on the image one wants to connote. They provide several services. The MAN name suggests that they carry some traffic point-to-point within the metropolitan area, from origination to termination. For example, a MAN might carry data for a securities firm from its downtown financial centre trading area to its suburban back office location. The AAV name captures the idea that one important service is connecting points of presence (POPS) of long-distance carriers within a metropolitan area, and providing access to large users. Metropolitan Fiber Systems (MFS) estimates that the national BOC access revenue is $20.6 billion, of which AT&T pays $16.4 billion. This represents fully 20% of all BOC revenues. Some carriers want to avoid paying the portions of these rates that subsidize end-users, when possible, so the long-distance carriers themselves are the biggest customers of the MANS to date. Many consider this to be bypass, and potentially destructive to existing schemes of cross-subsidies to residential telephone users. MANS also provide back-up services that provide an alternative in the case of an accident, service delay or other problem, and they provide up-to-date disaster recovery systems within their own network. As noted above, there is increasing demand for this service. Since MAN revenues have been growing at about 22% per year, these services are in demand. Total industry revenues are about $400 million, projected to rise to $2.5 billion by 1995 (all the figures in this article are subject to the rapid changes in this industry and should be taken more as suggestive of trends and orders of magnitude rather than as precisely

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Local Table 2. MFS networks in major cities, 1991. Route

Buildings served 26 31 46

1 509 963 320 909 625

16.1 11.3 12.4 16.2 9.1 4.4 6.4 10.7

1190 1600

z-368

Flbre miles operational

Baltimore Boston Chicago Houston Los Angeles Minneapolis Philadelphia Pittsburgh

961

1 367 1 166

: 16 23 26

F)eady by 1992

Dallas blew York

27 71

a Authors’ estimate of completed network size. Sources: Company reports, TE ~3 M News, 1 June 1990; fiber Optic News, 11 March 1991. Tsble 3. Teleport 1sW.

networks

Fibre miles @arational Boston New York

in major cities,

Route miles

Buildings sewed

566

15.0

44

San Francisco

11 760 1 656

258.0 11.5

250 5

Ready by 1992 Chicago Houston Los Anaeles

720 1 022 907

15.0 7.1 6.3

na 32 5

Swrces: As Table 2.

‘Torn Valovic, ‘Will the US finally see competition in the local exchange?‘, Telecommunications, February (Pt I) and March (Pt II) 1990, pp 43 and 55. j4Research reported in Network World, Telecommunications Section, 11 June 1990. ‘5Gross, op tit, Ref 7, p 5. ‘sCharles Siler, ‘How to bypass your friendly phone company’, Forbes, 21 Au$Just 1989, p 88. 7Kraushaar, op tit, Ref 8. “Valovic. . 0D . cit. Ref 13. ’ ‘ibid.

=Siler,

op tit, Ref 16, p 89.

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telecommunications

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definitive). l3 Eastern Research Corporation estimates that by 1992 there will be 41 MANS in 28 different cities,14 which will represent investments of over $500 milli0n.l’ However, the evidence to date suggests that these MANS are not taking substantial traffic off the LECs’ networks. For example, although New York Telephone argues that they have lost billions to competitors, bypass represents only lO-30% of Teleport’s New York revenues, or $10-15 million per year.16 Telecommunications markets are growing rapidly and MANS are capturing some of this growth. Several companies have entered this business. The two largest firms are Teleport Communications, a subsidiary of Merrill Lynch, that grew out of a start in the Staten Island (NYC) teleport, and Metropolitan Fiber Systems, which is a subsidiary of Peter Kiewit Sons, Inc, of Omaha, a multibillion dollar construction company. MFS is already competing in Chicago, Baltimore, Boston, Houston, Los Angeles, Minneapolis, Philadelphia and Pittsburgh, and will soon be in Dallas, and expects to wire San Francisco, Washington, DC, and Atlanta by the end of 1991 (see Tables 2 and 3). MFS has received approval to enter Teleport’s home base in New York. They plan to be in 20 cities within a few years. Teleport is already in New York, Boston and San Francisco, and will be in Chicago, Houston and LA soon. Diginet, Inc, serves both Milwaukee and Chicago and has a fibre link between the two cities. At the end of 1989 Diginet had 5.4 route miles and 684 fibre miles in Chicago. Other MANS include Philadelphia Fiber Optics (274 fibre miles over 3.8 route miles at the end of 1989) and Eastern Telelogic in Philadelphia (2184 fibre miles over 68 route miles), Institutional Communications of Washington, DC (5877 over 135), Inter-Media Communications in Florida’s largest cities (793 over 47) and Indiana Digitel Access (444 over 35 in the Indianapolis area).17 As one might expect in a new market segment, these competitors have similarities but are also pursuing somewhat different business strategies. Teleport has not competed mainly on price but on service and on providing reliability. It has been successful with this strategy. The Wall Street Journal quoted Drexel Burnham’s VP for Communications Charles Koman: ‘Teleport’s air performance is better than what we get from New York Tel. We don’t have as many power outages. Quality is higher and prices are about the same.‘18 Teleport has installed T-l and T-3 circuits more rapidly than New York Telephone and has priced them about 5-10% lower. After only three years of operation Teleport turned a profit in 1988 and earned $35-50 million in 1989. On the other hand, MFS has cut prices more aggressively and has emphasized this aspect as much as or more than service. MFS has also looked to expand rapidly and to challenge barriers to entry aggressively, as evidenced by their petitioning the FCC to mandate interconnection and unbundling. Berge Ayvazian notes: ‘They want to be able to have regulators or others embrace them as providing the means for introducing competition in the local loop, not only for the largest 100 buildings in the city but across a broad range of capabilities.“’ MFS earned revenues of only $5 million in 1989 and will spend at least $100 million on construction through 1990.20 It is likely that, in an industry with high initial sunk costs, regulatory uncertainty and more competition, there will be shake-outs, failures, mergers and acquisitions. To help fund expansion, for example, Merrill Lynch has looked for investment partners for Teleport in other cities.

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competitors

According to market researcher Allan Tumolillo: ‘It’s going to start getting crowded in the local network business. You need big bucks to play in this game.‘21 In June 1991 Cox Enterprises, an Atlanta-based media firm with cable television and newspaper holdings, purchased a 12.5% stake in Teleport. Despite some deregulation in some states, these firms still have to advance a great deal of effort to enter new cities. They require state approval for market entry. City approvals have been more burdensome, in some cases, as franchise arrangements are often required to place fibre under the city streets. Issues of access to other rights of way are also important. Teleport and MFS both estimate that it costs $4-8 million to enter a new city with a small route (3-15 route miles) system, including the costs of rights of way and new network facilities.22

MANS in New York City

*‘Alan Breznick, ‘Merrill selling Teleport stake to fund growth’, Grain’s New York Business, 28 May 1990, p 1. =Gross, op cif, Ref 7, p 8. =New York City Partnership, op cif, Ref 5. *%oopers & Lybrand, op tit, Ref 9, p 55. 25Gross, op tit, Ref 7; Teleport Communications annual reports.

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It is difficult to overstate the demand for telecommunications in a world business centre like New York. Each business day 21 million calls are made in Manhattan’s central business district. New York state residents and businesses make more calls annually than are made in France or in the UK.U Using a slightly more expansive definition than in Table 1, two-thirds of Manhattan’s payroll comes from these informationintensive industries.24 Thus it is not surprising that the first major MAN developed in New York. The Staten Island teleport was conceived of as an economic development project in 1980, and led to a partnership in 1983 by the City of New York, the Port Authority of New York and New Jersey, Merrill Lynch and Western Union. Microwave congestion in lower Manhattan and the need for development on Staten Island led to the idea of running fibre from Manhattan to Staten Island, where communications traffic could be sent to satellites in geostationary orbit. To complete the economic development mission, the project included an office park at the location of the Earth stations on Staten Island, which has brought over 1500 jobs to Staten Island, and fibre-optic links to other business centres in the New York/New Jersey region and to potential future centres of development in Brooklyn (Metrotech) and Queens (Kaufman-Astoria Studios). As fibre became the transmission medium of choice in the 1980s Teleport built what is now a 258 route-mile fibre network, connecting New York and major cities in northern New Jersey. This set the stage for the alternative provider role for Teleport Communications, Inc, which until the Cox minority purchase in June 1991 had become 97% owned by Merrill Lynch. As Teleport recognized the demand for such service in New York, it planned to offer such services elsewhere, particularly in cities with large concentrations of data users. Teleport now has over 70 customers in New York, including longdistance carriers like AT&T, US Sprint, Contel, ITT and Cable & Wireless; financial firms like Bankers Trust, Bear Stearns and Merrill L ynch; and broadcasters like the TV networks, AP and Private Satellite Network. About 70% of Teleport revenues come from long-distance carriers, with a $2 million per month contract with AT&T at the heart of these revenues. The firm turned profitable in 1988 and is self-financing in New York. 25 Despite rapid growth, Teleport is still quite small compared to New York Telephone (NY Tel). Teleport New York has

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Local telecommunications competitors

about $80 million in revenue compared to $7.5 billion for NY Tel; Teleport has 11 760 installed fibre miles compared to NY Tel’s 74 000 miles; Teleport has wired about 250 buildings compared to 470.26 Teleport realized that it needed to interconnect to NY Tel’s network if it wanted to offer a wider range of services and access to more customers. Teleport had originally struck a basic agreement to interconnect with New Jersey Bell in 1986. In 1986 Teleport petitioned the New York State Public Service Commission (PSC) to promote interconnection and in 1987 petitioned the FCC for interconnection for interstate service. After some consideration, in 1989 the New York State PSC ordered NY Tel to provide interconnection to local competitors. Specifically, the PSC ruled that Teleport and other interconnectors should be allowed comparably efficient interconnections for the transport portion of private line and dedicated carrier access services. In response, NY Tel developed a ‘virtual collocation’ system known as Optical Transport Interconnection Service (OTIS) to meet this requirement. In return, the PSC gave NY Tel greater pricing flexibility for its services to large business customers. The PSC noted: ‘Our action is designed to foster competition while minimizing unreasonable or extraordinary adverse impacts on other ratepayers. To do so it must be evenhanded and must consider mitigating demonstrated losses of existing contribution that would result from this action.‘27 After some negotiation over the details, in November 1990 Teleport and Nynex (NY Tel’s regional parent) announced a comprehensive interconnection arrangement that will permit Teleport to establish multiplexing nodes in NY Tel and New England Telephone central offices. The multiplexing electronics will provide Teleport with broad interconnections to the local telephone companies’ ‘special access’ and ‘private line’ loop networks, as well as connections to Centrex and Intellipath services for certain purposes. Teleport has recently been joined in the New York City market by the other large MAN provider, MFS. In 1990 the City government and MFS completed a franchise agreement to install and operate a voice/data fibre-optic system.28 In return for the right to operate in the city, New York City government will receive a franchise fee from MFS that could amount to $50 million over 15 years. MFS is also required to provide in-kind services to the city government, which, if properly developed, could provide significant benefits. The MFS contract provides for the city’s exclusive use of 22 strands of ‘dark fibre’ in the initial backbone of the system, 15% of any additional fibre count added to the system and, at the election of the city, the installation of drop cables into designated buildings, owned or leased by the city and containing city offices, and/or the establishment of a telecommunications fund. MFS will provide its services to the city at 25% below the lowest price they charge anyone else for a similar service =Gross, op cif, Ref 7; New York City with similar volume. The city government is considering several potenPartnership, op tit, Ref 5. tial applications of the dark fibre capacity. 27New York State Public Service CommisThe MFS system’s original fibre backbone of about 10 route miles in sion, Case 29469, Opinion and Order Concerning Regulatory Response to Competi- Manhattan was amended to pass by more governmental facilities. The tion, Opinion No 89-12. issued 16 Mav additional portion incudes: a midtown Manhattan backbone to be date; a Harlem a8~>Sp%as approved by the NY City installed within 12 months of the commencement Board of Estimate on 8 March 1990, backbone to be completed within 18 months; a Bronx backbone to be Calendar No 43. MFS 2 was approved by the Board of Estimate on 21 June 1990, completed within 24 months; a Brooklyn and a Queens backbone to be completed by the end of 1992. Calendar No 68.

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MFS received benefits from Teleport’s struggle over collocation in New York. In the wake of the Teleport agreement, in December 1990 MFS signed a collocation agreement with NY Tel that will start with two NY Tel central offices in the Wall Street area and be expanded as the MFS network grows. Thus, while the city government will receive significant benefits from MFS’s entry, city business will also benefit, as: ‘Industry experts believe Metropolitan’s entry into the $100 million maket will set off a price and service war, just as Teleport’s debut did seven years ago. “With MFS in the marketplace, we’d be making another effort (to reduce private line rates),” says Robert Anderson, managing director of regulatory planning for New York Telephone.‘29

Conclusions

=Alan Breznick, ‘Third fiber-optics network takes on NY Tel, Teleport’, Grain’s New York Business, 26 May 1990, p 6. 30Richard Tomlinson, ed, Alternative Local Transpofl: A Total Industry Report, Connecticut Research Reports, Danbury, CT, March 1991. 31Edmund Andrews, ‘Bell units’ rivals gain at FCC’, New York Times, 10 May 1991, p Dl.

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While the rapid growth of MANS may eventually threaten some traditional cross-subsidization regulatory schemes, they provide many benefits for important segments of urban economies. They clearly spur the LECs to price services lower and to upgrade their facilities. The diversity represented by the very presence of MANS is desired by many information-oriented businesses. Teleport’s and MFS’s tenacious regulatory push appears to be paying dividends for interconnection on the federal and state levels as well as in large cities. A May 1991 proposed ruling by the FCC (expected to be adopted before May 1992) requires interconnection agreements for interstate special access and should spur expansion of competitive MANS into the second tier of US cities. Prior to this ruling, Connecticut Research Reports noted, ‘it will prove very difficult to operate a profitable Urban ALT Network in cities much smaller than Tampa, Florida’ .30 After the proposed ruling the New York Times reported, ‘If the rule is adopted, however, bypass companies would probably be able to generate profits in as many as 50 more cities [beyond the current 18 served by MANs].‘~~ Clearly, LECs and incumbent MANS have incentives to try to keep new entrants out of their markets or to disadvantage them. Cities and states can support them by erecting additional barriers to entry, or they can aid the competitive environment by encouraging entry. A presumption in favour of open markets may best serve states and cities, and their telecommunications-dependent businesses. Evidence from several major cities suggests that cities with a professional orientation to telecommunications through departments devoted to these increasingly complicated technological issues can fare better than those that rely on older structures of informal, politically negotiated franchises. New York City was able to garner significant advantages through careful negotiations on its franchise agreement with MFS. What will the future hold for the MAN industry? Some feel that pricing flexibility for LECs or accelerated PCN development will put them out of business. Others suggest that a ‘Divestiture II’ will be necessary to separate the inherently monopolistic portions of the local exchange from those that could be fully competitive. Within the MAN industry it may be sensible for a long-distance firm to purchase and link several MANS, particularly when the LECs themselves are allowed to compete in long-distance markets. Whatever scenario develops, MANS are a growing and important segment of the US telecommunications industry which federal, state and city policy makers need to understand. TELECOMMUNICATIONS

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