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Hooking up business

Start-up companies are spending millions of dollars to break into the Tampa Bay area's telephone market. They are targetting lucrative business customers, not unprpofitable residential ones. And local monopoly Verizon Communications isn't happy.

By MICHAEL BRAGA

Revised August 2, 2000

© St. Petersburg Times, published July 31, 2000


When residents of the Tampa Bay area want phone service, they're pretty much stuck with Verizon Communications, the new name for the old monopoly, GTE Corp.

But it's a different story for business customers. They're bombarded with competing sales pitches for less expensive local telephone and Internet services.

The deluge is so bad at PowerCerv Corp. that Donna Wheeler doesn't answer her phone anymore. "Every call goes directly to voice mail. When I find out what they're selling, I hit delete," the Tampa software company's information services director said.

The rush is on to court lucrative business accounts. By one estimate, there are 180 telephone companies licensed to operate in the Tampa Bay area among more than 300 across Florida.

While the sales calls can be annoying, the newcomers can bring price breaks to business customers. Wheeler, for instance, switched to WinStar Communications from GTE. Now PowerCerv's phone bill is 50 percent less and its Internet bill is down 75 percent. Another incentive: Plenty of business customers say the smaller newcomers are more nimble when answering service calls compared with the giant Verizon, which was created from the merger of GTE and Bell Atlantic.

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[Times photo: Fraser Hale]
Donna Wheeler, information services director at PowerCerv Corp. in Tampa, has been so swamped by sales calls for telephone services that she's stopped answering her phone.
All this has Verizon crying foul over the newcomers' practice of skimming off their best customers while avoiding the money-losing residential business. Verizon estimates it has lost 20 percent of its business customers to start-ups. Now the company's senior management wants the Public Service Commission to let Verizon boost residential rates or impose a tax on newcomers.

"We are forced by law to provide telephone service to all residents in our service area," said John Blanchard, president of Verizon's southeast region. "They swoop in and cherry-pick our high margin business customers by offering lower prices."

Still, Verizon has deep pockets, while the newcomers often lack financial strength. In fact, all the new competitors are money losers, thanks to heavy debt and expenses, and are dependent on heavy infusions of capital. But Wall Street has grown more cynical about throwing millions of dollars at lesser-known start-ups. By contrast, Verizon reported profits of $8.3-billion on revenues of $58.5-billion in 1999.

* * *

In many ways, competition in the local telephone industry today resembles competition in the long-distance telephone industry 15 years ago. Back then, there were scores of long-distance carriers fighting to gain market share from national powerhouse AT&T Corp. But only a few dominant players such as Worldcom and Sprint remain.

In the local telephone industry, hundreds of upstart companies are pitted against regional monopolies such as Verizon. The struggle began with industry deregulation after the passage of the Telecommunications Act of 1996, which opened local telephone markets. Monopolistic phone companies were required to sell access to their phone lines at wholesale prices and allow competitors to attach equipment to the monopolies' networks.

Since then, more than 600 competitive carriers have sprung up across the country. Some built their own networks at great cost but with the potential for enormous payoffs down the road, while others focused on renting lines from giant phone companies at wholesale prices. This latter group of resellers have been able to make money by offering their rented lines to business customers, but it's a low margin business and not likely to grow.

Most phone companies in the bay area are resellers.

"They don't present much of a threat to Verizon," said Mike Gallagher, chief executive of Florida Digital Network, an Orlando telecommunications company that launched service in Tampa in June. "They take money out of Verizon's left pocket and put it in the right."

By contrast, about 330 companies nationwide have invested more than $30-billion to build networks. About 16 of these companies, including Adelphia and Bluestar, are building networks in the bay area.

By charging prices of 20 percent to 30 percent lower than Verizon, these competitors have had an easy time picking off the giant company's best customers. Lately, however, these upstart competitors have discovered that they are competing against other newcomers as well.

"We are facing a different set of competitors from four years ago," said Rich Black, director of marketing for Intermedia Communications in Tampa. "The competition is much more intense."

With everyone reducing prices, upstart phone companies are offering more products and pushing customers to sign longer term contracts, which makes it more difficult for them to break away. Intermedia, for instance, pushes customers to commit to at least one-year contracts.

"That reduces our churn and allows us to better plan our network costs," Intermedia chief executive David Ruberg said.

At 2nd Century Communications, customers can buy local, long-distance and high speed Internet service, plus Web hosting, Web development and network management services. The Arlington, Va., company offers accounting and human resources software over the Internet to help customers manage their businesses.

"The more service we can offer our customers, the more potential revenue streams we can collect from a single broadband connection," 2nd Century chief executive John Prisco said.

New companies also are targeting smaller companies. "The new wave is all about providing service to the mass market," Florida Digital's Gallagher said. His company is marketing mainly to companies with fewer than 10 phone lines.

To gain competitive advantage over Verizon, upstart phone companies are focusing on service. "There is an ingrained frustration with monopolies with regard to their service," Gallagher said. And there is no shortage of business executives willing to vent their frustration about relations with GTE.

"I had nothing but problems with GTE," said Dick Rice, the president of Tampa Reprographics, a company that copies large documents such as blueprints and maps. "You have to pass a major act of Congress to get them to do anything for you."

Rice says when he moved offices in Tampa last year, GTE didn't show up to help. Rice had to spend 48 hours answering phones in one office and manually forwarding them to the other. "It was a nightmare," Rice said.

Some think the merger of Bell Atlantic and GTE will create more bureaucracy. "The larger a company gets the slower it is to respond," said Tony Copeland, general counsel for BTI Telecommunications, a Raleigh, N.C., telecom company that entered the bay area in February.

For the upstart phone companies, response time and overall reliability are critical. "Our average response time is 10 minutes, compared to four hours for GTE," said Todd Bishop, Adelphia's general manager for the Tampa Bay region.

Despite their claims, smaller phone companies don't always live up to their service pledges. John Boogades, the information services director for Total Employment Co., a Tampa staffing company, said he got terrible service from e.Spire Communications, a Herndon, Va., telecommunications and Internet company.

"Our phone and Internet service would often go down for hours at a time in the middle of the day," Boogades said. "We would call for service. But no one would come. That's just unacceptable." He switched his service to MCI Worldcom Business Solutions, a subsidiary of Worldcom Inc. of Jackson, Miss.

Rice didn't have much more luck with Teligent, a Vienna, Va., telecom company, which he hired after dismissing GTE. "They refused to send a service rep so we fired them," Rice said. He now does business with 2nd Century.

Officials from e.Spire did not return calls seeking comment. But Carl Pavolic, regional vice president for Teligent, said his company's top priority is service, and he said the company learns from its mistakes.

Some local businesses have switched back to Verizon. For instance, Ken Benton, president of Affordable Home Mortgage, a Naples mortgage company with an office in St. Petersburg, said he moved his service from GTE to Intermedia four years ago because Intermedia's prices were better. But a month ago, Benton switched back to Verizon.

"We got terrible service from Intermedia," Benton said. "They overcharged us and tacked on a bunch of extra charges and fees. We had to spend a lot of time fighting them to get the charges reduced."

Most industry observers agree that Verizon, by far the largest phone company in the region, is bound to get the most complaints. They also say Verizon's system is older and more prone to problems.

"Verizon has do deal with all kinds of switches and software. They have an incredible entangled legacy mess," said Suzi Pilat, vice president of IntNet, a Clearwater Internet service provider that is looking to offer voice services. "It's too costly for Verizon to trash its network. So they have to work with it."

John Ferrell, Florida regional president for Verizon, readily admits his company operates old circuit-switched equipment to complete calls to residents and businesses over pairs of twisted copper wires.

Competitors are using Verizon's old copper, too, because they have to complete many of their calls over Verizon's network, Ferrell says. But, he says, Verizon is spending $310-million to upgrade equipment in the Tampa Bay area this year. "That's a lot more than all our competitors combined," Ferrell said.

As to criticisms about service, Ferrell said Verizon's system is probably the most reliable in the area. "We would love to have 100 percent of our customers content 100 percent of the time," Ferrell said. "But we know we are not going to make that goal. With 100,000 customer touches a week, some people are bound to be unhappy."

Still, Ferrell recognizes the need for Verizon to be more responsive to customers, especially to those it has not focused on before. Six months ago, the company established a Business Partnership Center to cater to small businesses.

But it's trickier for Verizon to lower its prices to defend market share. "We can't lower prices below costs," Ferrell said. "We have to keep them high to subsidize the residential side of our business."

It costs Verizon an average of $27.73 a month to provide a single phone line to both business and residential customers. But residential rates are set by the Florida Public Service Commission, so Verizon can charge no more than $11.83 a month to urban residents and $9.51 a month to rural residents.

"We do make money from residential customers that purchase additional services such as caller ID, call waiting and call forwarding," Ferrell said. Verizon offers those three services for $15.95 a month. "But we lose money on customers that just buy the basic service."

To make up for the loss, Verizon charges $35 per line each month to business customers. And that price has not come down despite the competition.

"Should the price come down?" Ferrell said. "Yes, it should." But he says Verizon has to keep rates artificially high to protect the company's return to investors.

What's Verizon's solution? Ferrell and Blanchard want the Public Service Commission to allow Verizon to boost residential phone rates. Another idea: Force competitors to pay a "universal access tax" to subsidize Verizon's cost of providing an inexpensive telephone system to bay area residents.

Meanwhile, Verizon's strategy for retaining customers is to get them to buy more services: everything from long-distance to wireless to high-speed Internet. Buying these services from a single carrier and paying one monthly bill is a major selling point, Ferrell says. "No other carrier can offer as many services as we can."

* * *

Verizon's biggest advantage is its deep pockets and control over its network. Competitors looking to build their networks pay about $250,000 to buy equipment and connect it to each of Verizon's switching stations. There are 40 switching stations in the bay area. That means start-up carriers have to spend at least $10-million to blanket the region.

NewSouth and Florida Digital Network say they are spending $20-million to build local networks, while Adelphia says it's spending $40-million. Bishop of Adelphia says his company is spending twice as much as its competitors to lay 150 miles of fiber optic cable.

"We want to control the network," Bishop said. That means the company will no longer have to rely on Verizon and will be able to control its costs.

The problem, however, is that the stock market dive in April and the gradual rise in interest rates dried up money for building networks. Intermedia, which expects to lose $180-million in the second quarter, has decided to sell off its valuable Web development subsidiary Digex Inc. to provide cash for growth and pay down its hefty $2.9-billion debt.

Other companies such as Adelphia and NewSouth have been more fortunate. Adelphia is backed by a cash-rich cable company parent, while NewSouth recently landed $170-million from a group of investors headed by Kohlberg Kravis & Roberts, a New York investment firm.

For many other companies, no money means it's time to merge or be acquired. Several competing companies operating the bay area already have teamed up. Florida Digital Network, for instance, recently combined with Cavalier Telephone Corp. of Richmond, Va., and Conversent Management Holdings of Marlboro, Mass. Meanwhile, Bluestar of Nashville, Tenn., was purchased by Covad Communications of Santa Clara, Calif.

Even Intermedia had talks with BroadWing Inc. of Cincinnati, but negotiations were called off in July.

As the consolidation continues, the strongest players will be the survivors. Said Peter DiCaprio, a telecommunications analyst with Thomas Weisel Partners in San Francisco: "Wall Street stock and bond markets pay more attention to big companies."

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