Wireline telecom scare fest: What's keeping telco executives up at night?

Wireline nightmaresWhat's making wireline telecom executives scared to turn out the lights? We're serving up five telecom tales that are arousing anxiety in this industry segment.

From the fear that special access rates will burn competitive providers' opex accounts dry, to cable operators scooping out telcos' business services brains and eating them for lunch, these chilling market scenarios have dominated the headlines in 2013.

If you dare to read on, you will be able to imagine the shivering and screams of telecom leaders trying to escape the challenges that confront them. 

And if you can't get enough of frightening wireline scenarios, check out FierceWireless' top wireless nightmares. You can also take a look at Wireline Nightmares from years past, including the ones we did 2010 and in 2012. 

Special access feesAT&T's special access rate increase hurts competitors' bottom line

U.S. businesses have plenty of competitive provider choices, but what's hurting the bottom line of these operators is the cost of the TDM-based special access circuits they use to deliver services. This is because nearly 80 percent of the special access market is owned by two telcos: AT&T (NYSE: T) and Verizon (NYSE: VZ).

As it progresses with its TDM to IP network transition, AT&T told its special access customers, including BT Global (NYSE: BT), Sprint (NYSE: S), and tw telecom (Nasdaq: TWTC), in a letter that it would stop offering extended contracts and discounts for the special access lines they purchase to provide services to business customers and for wireless backhaul.

Verizon, meanwhile, abandoned its previous plans to pursue a 6 percent rate increase.

BT Global, which has been present in the U.S. market for over 20 years serving large multinational companies, recently appealed to the FCC to make changes on special access.  

"The fact that we're going through a difficult time being competitive on special access means that we can grow less fast and we can serve the customers as we would normally like to serve them in other countries around the globe," said Bas Burger, president for US & Canada, Global Industry Verticals at BT Global Services, in an interview with FierceTelecom. "The way it will impact us is it will slow down growth and will make it more difficult to make money on the bottom line because it's increasing costs."

Sprint is in a similar situation. The provider purchases special access to serve its wireline-based business customers and to backhaul wireless traffic from 38,000 cell sites. While Ethernet offers greater bandwidth, it's not a fit for every business, nor is it universally available.

"With the wireline network, we have a large number of business customers that have no need for big capacity Ethernet," said John Taylor, Sprint spokesman on federal & state public policy issues, in an interview with FierceTelecom. "They just need that DS1 or that DS3 because that's what they have always needed, and it does not do them any good if Ethernet is cheaper on a per Mbps basis if they're being forced to buy capacity they will never need or use."

Interestingly, AT&T later said it would delay its new fee changes for a month to address its special access customers' concerns.

What is also frustrating the competitive service provider community is that the FCC has not done much to address the issue. In September, the regulator released its revised data request on the Report and Order and Further Notice of Proposed Rulemaking providing instructions covering special access. It said it will use it to see if it has to make any changes to its pricing flexibility rules.

Cable business servicesCable takes more of the telcos' Ethernet, SMB mojo

Cable operators may be best known as the dominant consumer video providers, but they are increasingly becoming a factor in the business services market.   

A particular target for cable MSOs are small to medium businesses (SMB), a segment that's been typically ignored by larger telcos which have focused more attention on their larger multinational corporation (MNC) customers. Initially offering a similar bundle of their DOCSIS-based triple play voice, video and data services, cable has been building out its fiber networks to offer sophisticated services such as cloud and Ethernet.

Ethernet, in particular, has become a bigger part of the cable operators' business services arsenal.  

While not nearly as big as the telcos, Vertical Systems Group's (VSG) mid-year Ethernet Leaderboard showed that cable operators now make up 20 percent of the total U.S. Ethernet port base.

Rosemary Cochran, principal of Vertical Systems Group, told FierceTelecom in a previous interview that "For new installs, the cable MSO segment as a whole had more new ports installed in the first half of the year than the incumbents did."

Comcast (Nasdaq: CMCSA), for example, reported that Q3 2013 business revenues rose 26.8 percent to $2.37 billion. 

Besides organic growth, some MSOs have been more actively pursuing new deals to expand their footprints and service portfolios. This comes after the FCC changed the rules for cable operators to purchase other CLECs.

Leading the acquisition race are Cox and Time Warner Cable (NYSE: TWC).

Cox Business recently acquired EasyTEL Communications, a business-focused CLEC serving the Tulsa, Okla., market. This deal will give them a 95,000 fiber route mile network to serve more businesses in the Tulsa market. 

On a slightly larger scale, Time Warner Cable entered a deal to acquire DukeNet, a competitive provider for $600 million earlier this month. This acquisition gives it an 8,700-mile regional fiber-based network that provides services to business and wholesale wireless operator customers, in North and South Carolina.

One telco that's seen the effect of cable's SMB moves is Verizon. While finding success with SMBs where its fiber-based FiOS service is available, it has struggled against cable in markets where it does not offer the service today.

"Within FiOS we are gaining share in the small business environment, but the issue is we have to pass those small businesses with FiOS," said Fran Shammo, CFO and EVP during the company's Q3 earnings call. "Honestly, that has not been a focus of ours as most of it has been on residential homes within our footprint."

Cable may still have a long way to go before they are major contenders in the larger business space, but it's clear they are getting the attention of traditional wireline telcos that have enjoyed a monopoly on business services for decades. 

PSTN shutdownPSTN shutdown shrouded in regulatory, operational uncertainty

For over a century, the public switched telephone network (PSTN) has been the bedrock voice service platform, but declining use and growing operational costs have driven regulators and traditional telcos to seek an eventual shut down path.

By 2017, the FCC aims to shut down the TDM-based network that supports the PSTN. In November 2012, the FCC issued a public notice proposing TDM to IP trials and sought comments. These trials were focused on examining the impact of IP transition areas like next-generation 911, transitioning consumers from wireline to wireless services, and interconnection of VoIP traffic that's provided by incumbents and competitive providers.

One carrier that's been public about its desire to shut down its TDM network is AT&T. The service provider filed a petition to conduct TDM to IP trials on two of its 4,500 wire centers, but said during the recent TIA 2013 conference that they cited a lack of clarity on how to make the TDM to IP transition.

Large telcos like AT&T and Verizon aren't the only ones working through this transition.

Tier 2 telcos such as Frontier (Nasdaq: FTR) are also working with regulators to find the best way to migrate their networks to IP.

Frontier, which continues to migrate parts of its network to IP, says it does not want regulators dictating how it should make its transition.

"We still have a robust copper network and we're overlaying fiber on top of that and many of the regulatory overlay issues will become more important on an earlier date to Verizon and AT&T than to Frontier, but we are engaging with the FCC and the state regulators because we want a level playing field when it comes to regulatory framework," said Kathleen Abernathy, executive VP of external communications for Frontier, in an interview with FierceTelecom. "It can't be that when we're providing the exact same service as other providers that we're providing the exact same service that we're subject to more aggressive regulation."

Besides the regulatory issues, power and cooling costs to run the PSTN continue to rise. While other technologies such as computer storage have dropped, power and cooling costs rose 50 percent in the past 10 years.

One vendor that hopes to solve this nightmare for service providers is GENBAND, which said it has developed a method to make this transition. It claims that a joint program it is running with energy efficiency company CoEfficient will save one service provider client $8 million in annual energy costs.

"What we noticed is we can transform an old network that's becoming riskier as this stuff gets older to support and manage so it eliminates this risk and gets you into this new infrastructure that can do everything the current one does, but then a lot more," said David Walsh, CEO of GENBAND, in an interview with FierceTelecom. "This means you can start growing that business and it can be financed on the back of the power savings."

But as great as the next-gen IP network is, the service provider community needs clear direction on the implications and how to make it happen.  

Google FiberGoogle Fiber broadens its FTTH coverage

Google (Nasdaq: GOOG) has become the great broadband hope, offering a 1 Gbps fiber to the home (FTTH) service in select cities. While still a blip on the overall broadband landscape, their presence has driven telcos and cable operators to respond with similar packages or increase their existing speeds.

Both AT&T and CenturyLink (NYSE: CTL) have responded to Google with their own fiber-based broadband pilots.

AT&T, while taking the less risky hybrid copper/fiber-based fiber to the node (FTTN) architecture, began a FTTH pilot in Austin. It announced its 1 Gbps plans only hours after the Internet search giant named the city as one of its destinations.

Leveraging existing fiber from a legacy HFC-based network its predecessor US West built, CenturyLink unveiled plans to begin a pilot FTTH network in Omaha. This was followed with the announcement of a similar trial in Las Vegas.

What initially irked area telcos and MSOs in Kansas City about Google Fiber are the "concessions" it got for pole attachment rates and office space. 

Randall Stephenson, CEO of AT&T, said during the Goldman Sachs 22nd Annual Communacopia Conference that "Cities and municipalities are saying we'd like you to come in and invest and they are beginning to accommodate and tailor terms and conditions that make it feasible and attractive for us to invest."

Other telcos such as Verizon, which has halted new FiOS buildouts, have been dismissive of Google Fiber.

Fran Shammo, CFO of Verizon, said during the Nomura Global Media & Telecom Summit in May that "we compete vigorously in the FiOS footprint and I highly doubt Google will build anything in the FiOS area."

It's unclear how many markets Google will ultimately will light up with FTTH, but large incumbent telcos and cable MSOs are being forced rethink the meaning of higher speed broadband. 

Over the top videoOTT services steal more market share

Over the top (OTT) service providers have become a key challenge for traditional service providers. Unlike the traditional service model that required a major capital and network infrastructure build out, players like Skype and Netflix (Nasdaq: NFLX) can ride over an existing broadband connection.

On the voice services end, it's hard to overlook how Skype and Vonage (NYSE: VG) have changed how consumers use voice service.

Initially dismissed as a technology hobbyist's toy, Skype's influence continues as traditional service provider long-distance voice traffic revenues decline.

According to a TeleGeography report issued earlier this year, international telephone traffic growth declined slightly from five percent in 2009 to about four percent in 2010. These figures are a significant decline from the usual 15 percent average growth rate seen in the 1990s and 1980s. By contrast, cross-border Skype-to-Skype voice and video traffic grew 44 percent to 167 billion minutes in 2012. 

The growth of Skype voice comes as traditional telcos every quarter see traditional local and long-distance voice revenues decline. AT&T and Verizon reported that in Q3 2013 voice connections declined to 16.7 and 21.4 million, respectively.

At the same time, the battles between cable operators and OTT video providers such as Netflix have become stuff of legend. Comcast and Level 3 finally settled their dispute that dates back to November 2010 when Level 3 challenged Comcast's request that it had to pay the cable MSO a fee to deliver Netflix movies to its residential customers.

So how can service providers survive and thrive in the OTT world? For one, they can offer services such as home automation services and even PC support not only to their own customers but even outside of their traditional serving territories.

AT&T, Comcast and Frontier all have begun to offer some form of home automation in both their home markets and outside where they currently don't own infrastructure. A consumer can simply go to an online portal and order service regardless if they are a customer of their other services.

Just this past week, AT&T surpassed its goal to make its Digital Life service in over 50 markets, for example.

OTT services may be threat, but they can also be a way to pursue new revenue opportunities for service providers by extending these ancillary services to drive up ARPU on existing customers and win new ones that they could not have reached before via their traditional service models. 

Wireline telecom scare fest: What's keeping telco executives up at night?
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