Rural Convergence

Local phone company beats out the big boys.

Livingston, Texas — population 6,000 — is a rural stretch of land located somewhere between Houston and nowhere.

But here, in the heart of the Great Piney Woods of East Texas, the future of high-speed communications is now. Converged services like data, telephone and digital-quality television are traveling over a unified copper backbone.

Though you wont see Hank at the Courthouse Whistle Stop Café fiddling with a Palm Pilot or Nancy at the Texas Pepper typing away at her laptop while shes biting into a burrito, investors and observers of the converged services industry who make the trip to Livingston are dumbfounded. As they step into the double-wide trailer to get a look at a customer site, they wonder how in the world a community where some households still use party lines has access to technology the rest of the nation is clamoring for.

The answer is Curt Walzel. The residents know the executive vice president and general manager at Livingston Telephone by sight and name, and these days theyre often calling out to him as he walks into the bank, or a neighborhood restaurant, asking when theyre "gonna get that new television thing."

"Theres no sacred ground anymore," Walzel says. "Grocery market, barber shop, even in church I get asked about it."

And the answer? "Whenever you want it."

Providing anything over DSL, even high-speed data access, has been a struggle since the technology was first dreamed up. After data, most of the effort seems to have been put toward enabling packet-based voice lines. When it comes to delivering video, some in the industry see it as extremely difficult, if not impossible. Reasons usually ticked off include: not enough bandwidth, too difficult to compete with the cable and satellite companies, and lack of relationships with content providers.

The irony is that the people delivering that message are the same people who say voice-over-DSL is indeed a reality, despite facing similar hardships. But since Walzel doesnt drive in the tech fast lane, he doesnt hear much about video- or voice-over-DSL and he isnt susceptible to the pessimism. All he wanted to do was provide a better television service than the local cable company offered, while adding a revenue stream for the company that has been selling cheap rural telephone service for nearly a century.

Generating Revenue

Despite its remote location, Livingston Telephone was able to innovate and upgraded its analog switches to digital in the early 80s. "The Bells still have exchanges that arent digital," Walzel points out.

As a privately owned company, LivTel has always looked for new ways to generate revenue. Since its a rural telephone company and subsidizes basic telephone service with government funds, it cant use profits from those services to start up new ones, like DSL. And at $5.60 per customer per month, theres not much profit anyway.

LivTel has had dial-up Internet access for six years. But soon people began to talk about the profitability in television and wondered if Walzel and LivTels board might decide to acquire the local cable franchise from Cox Communications.

"We didnt want to do it because the plant theyve got is very old and in bad shape and it would have to be a total rebuild," Walzel says. Besides, hed also have to operate two separate plants — coaxial cable and copper.

But television was definitely on Walzels mind when, at a trade show, he ran into representatives from Myrio, a Kirkland, Wash., video-over-broadband software developer and systems integrator.

Before too long, Myrio was in Livingston, building a head-end pieced together using best-of-breed hardware run by its proprietary software.

Now LivTel can offer voice, video and data on the same copper telephone wire that used to generate just a few bucks per customer, per month. "We can provide that all as one package or we can provide them pieces of it. It all depends on what the customer wants," Walzel explains. "We take our $5.60 customer and turn them into a $79-a-month revenue stream."

Thats something Verizon Communications cant do. Thats something executives at SBC Communications fantasize about. Thats something BellSouth and Qwest Communications International have only looked at in limited trials. So how in the world does Livingston Telephone manage it?

In this case, size does matter. "No way would this be possible at one of the Bells. Who makes the decision? How does it get funded? Theres too much politics," Walzel says. "Here, theres not some big committee — just 22 shareholders checking in once in a while to make sure theyre making money."

Another issue as a carrier is determining where the copper plant is and if its even capable of hauling the advanced services. This has been a problem nationwide; subscribers cant get DSL because theyre too far from the central office, the telephone wire serving them is of poor quality or they are served by a fiber loop where DSL cant travel.

But things are a little different for rural telephone companies. When LivTel asked the Rural Electric Association to subsidize the upgrade of its telephone equipment in the early 90s, the REA had a few requests of its own. To get the money, LivTel had to clean up bad copper, chart where each copper loop runs and place each customer within 12,000 feet to 18,000 feet of the central office or remote terminal.

As Walzel explains, he breaks out a map of Livingston with overlapping circles indicating a 12,000-foot radius from every remote terminal. The map is impressive, since it looks like nearly everyone in Livingston falls into one of the circles.

Walzel gets a big smile on his face when he talks about the few properties that fall outside the circles. "Theres exactly one customer up there [in the north] and its a lumber yard. Now down here [in the south] there are some homes, some nice homes, but were really not too concerned over what those people want."

"They still have party lines, and DSL aint going to work on some party line," he explains with annoyance. "Those people wont even upgrade from party lines, since theyre grandfathered in the state of Texas."

There are 22 party lines in Livingston, accounting for most of the 2 percent to 5 percent of the customers to whom Walzel cant deliver LivTels new services.

Back inside the circles, on the map of a town where wireless phones are still referred to as car phones, selling is more about ser-vices than demographics.

Whos Buying?

Where Bells market high-speed internet access over DSL, with plans to upgrade to video- and voice-over-DSL later, LivTel sells "cable television" to its telephone subscribers, with the option of getting high-speed data as well.

Walzel says ethnicity, gender and income hardly come into play among his customers. But age, thats a different story. The younger they are, the more they want to get connected.

When Kim Vess, a twenty-something mother of a 5-year-old boy moved to Livingston with her husband last year, they were just looking for a good television service. Vess works for Livingstons dial-up ISP operation, so she spends all day on the PC. As a result, Vess isnt what one would call a power user of the system. She doesnt have her home PC hooked to the system, and she and her husband primarily use the service to watch television.

"I really like the video-on- demand," Vess says. She chooses from 40 to 50 movies available to watch at $2.99 for 24 hours. "Before something like this, I used to rent one to two movies [from the video store] a month. Now I rent one to two a week."

Mark and Kristen Poole, who have four children between the ages of 2 and 14, also take advantage of the wide selection of films to watch, avoiding the late fees that used to haunt them at the video store.

But what Mark Poole really likes is that all his services — telephone, television, Internet and video rental — are on one statement. "I dont have four bills; I have one."

Most of the kids are watching cartoons and dont want to be bothered, but 12-year-old Mike says he likes using the high-speed Internet access because his brothers and sisters used to nag him to log off when he got on the Internet. "Because its so fast, I can do what I want and get off."

The oldest of the bunch, 14-year-old Katie, says she spends most the time trading music on Napster, e-mailing friends or cruising teen-site

Kristin Poole says she realizes how uncommon LivTels services are. "This far out in the sticks, to get something this good out here is impressive."

LivTel is also signing up all the businesses in the area. Every bank, insurance office and accounting firm in the town uses it. Livingston is home to five licensed day-traders, and offices from most of the major investment institutions in the country, such as AG Edwards, Edward Jones, Merrill Lynch and Morgan Stanley. That may not seem typical of a small town like Livingston, but, as Walzel explains, the town is an attractive destination for retirees from around the country.

"All these guys take their dollars out of their pension fund, and their 401(k)s and start playing with it," Walzel says.

It costs $1,500 to sign up and provision each new subscriber, and LivTel needs 5,000 customers before it repays the investment in its new systems. That may seem a daunting task in a town of 6,000, but Walzel has his sights set beyond Livingston.

On the outskirts of town, several other rural telephone companies are looking to offer value-added services. Walzel has contracted with them to connect to his video head-end via fiber and resell video services to their customers — an additional 44,000 residents of Polk County — and plans to expand it even further than that.

"There are 58 independent telephone companies in the state of Texas," says Robert Manne, president and CEO of Myrio. "They look to [Curt] for where to go. Hes on the cutting edge."