New York tests market for telephone competition

By Aaron Pressman

WASHINGTON, Feb 8 (Reuters) - Oren Kaunfer says he won't go back to Ma Bell.

The 23-year-old Manhattanite and his two roommates opted for telephone service from upstart RCN Corp. <RCNC.O> instead of the dominant carrier in New York, Bell Atlantic, when they moved in a few years ago, preferring RCN's lower prices and combined local and long distance service.

"We wanted to be part of the revolution," Kaunfer says, echoing RCN's advertising campaign that features Vladimir Lenin.

Now, thanks to a historic decision by the Federal Communications Commission, Bell Atlantic Corp. <BEL.N> can finally offer long distance and bundles of services too.

But Kaunfer still likes the service and lower prices from RCN. Bell Atlantic wants him back. And the company is spending millions on advertising new offers not just to woo competitors' customers but to garner added business from its huge base of existing local customers and stem any further erosion.

RCN and others like AT&T Corp. <T.N> and MCI WorldCom Inc. <WCOM.O> have already grabbed about half a million of the Baby Bell's local New York customers for their own.

Analysts and regulators are watching closely to see how the battle plays out, for New York is the first test of the less regulated free-for-all envisioned by Congress when it passed the 1996 Telecommunications Act.

Signed into law four years ago today, the act required the regional Bell companies created in the 1984 break-up of AT&T to share their local networks with competitors as a means of jump starting local phone competition. As a reward, any Bell that met the law's 14-point checklist for sharing would be allowed to offer long distance service in its region.

So far, it's been slow going with New York the only state approved by the FCC for Bell long distance and competitors continuing to gripe about barriers erected by the incumbents.

RCN, one of the first to offer competing phone service, says it has more than 100,000 local customers in New York and more than 900,000 nationwide. Long distance giants AT&T and MCI have stepped up their New York efforts to meet Bell Atlantic's new offerings. AT&T has 150,000 local customers in the state and MCI has about 225,000, the companies say.

It's still a drop in the bucket compared to Bell Atlantic's 6.6 million households served in the state. And nationwide the market share of former monopoly carriers like Bell Atlantic, SBC Communications Inc. <SBC.N> and BellSouth Corp. <BLS.N> remains about 95 percent.

Competitors argue that the Bells are maintaining their monopolies by discriminating against other carriers who seek to interconnect. The Bells say they have spent billions to open their networks and problems with dropped or delayed service have largely been eliminated.

The FCC and state regulators say they are ready to intercede if needed. "It's really just the beginning," says FCC Chairman William Kennard. "Obviously, we've got a lot more progress to make but I point to the fundamentals being in place."

According to the FCC, investment in communications networks is skyrocketing with $30 billion spent by competitive local carriers since 1996.

To ensure that Bell Atlantic keeps its network open -- and to monitor the rules nationwide -- Kennard set up an enforcement bureau at the FCC last year. "I worry about people trying to game the system," he says. "That's why we set up the enforcement bureau."

New technologies are finally allowing some competitors to bypass the Bell companies' networks altogether using cable television wires or wireless antennas, for example.

But those solutions are still in the early phase, according to Paul Glenchur, an analyst at the Schwab Washington Research Group. Competitors "are going to depend heavily on access to the Bell networks and that's going to continue to be the case for some time," Glenchur says.

Most analysts expect a slow atrophy in Bell Atlantic's residential phone business. But few are worried that the losses will significantly hurt the company or the other Bells, since other parts of the market like wireless and data services continue to grow rapidly.

The $300 billion U.S. telecommunications market is growing 8 to 9 percent a year, according to Lehman Brothers analyst Blake Bath. Almost all the growth, however, is coming from the $80 billion wireless and data market segments, he says.

The Telecom Act barely mentions data services and the Internet. Wireless is also largely unregulated and competition is fierce with as many as seven carriers in some of the largest cities.

"The reality is that regulation is lagging what's going on in the marketplace," Bath says. "While regulation was intended to drive local phone competition and give the (Bell companies) additional freedom, the growth now is wireless and data."

((Aaron Pressman, Washington newsroom, 202-898-8312)) Tuesday, 8 February 2000 12:12:44

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