After taking over a growing share of Pacific Bell’s local toll call business, several major telecommunications firms are moving in on PacBell’s recently-ended monopoly on local phone service.
Three major players AT & T;, MCI Communications and ICG Communications are aggressively wooing local phone customers, especially businesses, nibbling away at PacBell’s former monopoly in L.A.
Since entering the market late last year, the three have taken about 5 percent of the business service in the L.A. area, commanding more than 40 million of the 800 million minutes in monthly calling traffic.
Some analysts figure that the newcomers’ share could end up as high as 50 percent.
PacBell officials don’t seem all that concerned. In fact, Lee Bauman, PacBell’s vice president for local competition, said the company must prove that its market is open to competition for local phone service before government regulators allow it to enter the lucrative long distance market.
“We’re eager to show that local lines are open to competition,” Bauman said. “We’re delighted that MCI and ICG are investing in local infrastructure, because it’s only through investment in infrastructure that customers have true choice.”
Analysts say most of the action so far in local phone service competition has been in the business arena, where profit margins are typically higher than for residential service.
Business accounts are also more attractive because many customers occupy single buildings, making it easier to wire them, said Bruce Carlsmith, an analyst at Montgomery Securities.
“Competition for local service is growing,” he said. “The basic strategy for new entrants is to underprice PacBell by 20 percent. In the classic study, price competition doesn’t begin to heat up until the incumbent carrier’s market share drops from 100 percent to the 70 percent area.”
Of the three companies challenging PacBell in L.A.’s local business market, MCI and ICG are building their own fiber networks, while AT & T; has relied on reselling PacBell service for market share.
Reselling is more a temporary strategy for AT & T; in Los Angeles, while the firm formulates a longer-term plan for the market, said Jenny Goldstein, Pacific Region product delivery director for business services at AT & T.;
Since entering the local business market last December, AT & T; has grown its local business call volume to 12 million minutes of traffic per month in the L.A. area, Goldstein said.
“We’re evaluating a variety of different options, including resale and the option of building our own infrastructure,” she said, adding that a major drawback to resale is the reliance on PacBell to maintain phone service and infrastructure.
To avoid those and other limitations, both MCI and ICG have embarked on major efforts to build up their own extensive fiber optic networks in L.A.
MCI has invested $1.7 billion nationwide on infrastructure for its local phone initiatives in 25 cities, said Lynn Coker, MCI’s general manager for local services in the Pacific Southwest. He declined to specify how much of that money has been spent on L.A. infrastructure.
MCI serves most of L.A. from its main switch in downtown Los Angeles, which can accommodate businesses within a 35-mile radius. Since launching the switch last December, MCI has signed on about 400 business customers in L.A. County, logging about 13 million minutes in local phone usage per month.
“We are the new kid on the block and have to prove ourselves,” Coker said. “We have to invest in the best architecture on the block.”
Likewise, ICG has spent tens of millions of dollars to set up two L.A. switches one downtown and the other in West Los Angeles and a third switch in Irvine, said Sheldon Ohringer, group vice president for marketing and business development. ICG currently serves business customers with a mix of service on its own local network and some resell product from PacBell.
“Resale is an initial entry strategy that allows us to serve a large group of people,” Ohringer said. “It’s a temporary, fill-in strategy until we can get all customers on our own switches.”
Indeed, competing systems of switches and networks in L.A. and other major markets could well be the wave of the future for local phone service, both for businesses and eventually residential customers, predicted Mike Bloom, president of Communications Ventures, a consulting firm in San Ramon.
“I think resale is a temporary phenomenon, because what these new entrants will do is backwards integrate” their resale customers as they build out their own networks, Bloom said. “We’ll probably end up with lots of competing infrastructures in major markets like California.”
PacBell’s Bauman pointed out that while AT & T;, MCI and ICG have all been eager to offer local phone service to big business customers, they may be slow to pursue less profitable smaller businesses and even slower to pursue local residential service.
To that end, he said, PacBell will probably be left with many small business and residential accounts unless government regulators step in and provide incentives for other companies to serve those less profitable, often money-losing accounts.
“Lower usage lines are not profitable for anyone in the industry, so competitors are seeking the high usage lines,” he said. “(The competition) has only won less than 5 percent, but they don’t want 100 percent. They’d be happy to have 10 percent to 15 percent of the market if it’s out of the top usage lines.”