Businesses Cut Off As Carriers Struggle

The days of cheap connections and multiple choices are disappearing for thousands of businesses as competitive local carriers fall like high-speed dominoes, dragging the New Economy with them.

The days of cheap connections and multiple choices are disappearing for thousands of businesses as competitive local carriers fall like high-speed dominoes, dragging the New Economy with them.

In San Francisco, Scott Hauge, president of CAL Insurance & Associates, is struggling to keep up with his insurance clients after losing Internet service in the wake of NorthPoint Communications bankruptcy and network shutdown. Without access to e-mail, providing quotes for his small-business customers takes up to four weeks instead of the previous half-hour, he said.

"The last few weeks have been rough, with the power blackouts and with the Internet going down," Hauge said. "And theyre telling us we aint seen nothing yet."

Indeed, the problems NorthPoints 100,000 mostly business customers are facing nationally could multiply if other carriers collapse. Two of the largest DSL carriers still competing with the regional Bells — Rhythms NetConnections and Covad Communications — teetered on the brink as turmoil swept through their executive ranks last week.

As Rhythms CEO Catherine Hapka resigned from the company that she once elevated to a bright star on Wall Street, the Internet service providers relying on the Rhythms network sought to avoid a shutdown.

"Theres a fair amount of desire that this doesnt happen again the way NorthPoint and AT&T pulled the plug on the customers," said Dan Foster, chief sales and marketing officer at California ISP MegaPath Networks.

Many larger companies, such as computer giant NCR carefully avoided becoming too reliant on the upstart DSL companies. "Our needs are so big and so global that we use the major network service providers such as WorldCom and AT&T," said NCR spokesman Paul Curtin.

But the anxieties of losing vital connections go beyond the struggling competitors, said Andrew Ulmer, attorney at the California Internet Service Providers Association.

"This specter is looming out there that your service might be cut off by an incumbent carrier for anticompetitive reasons," Ulmer said.

The California Public Utilities Commission was helpless when it came to keeping the NorthPoint network running, partly because it uses WorldComs fiber. That bodes ill for state regulators ability to level the playing field. When Pennsylvanias utility commission ordered Verizon Communications to split its operations into retail and wholesale units, the move was seen by experts as a symbolic gesture with no practical effect.

Even long-distance giants AT&T, Sprint and WorldCom are retreating from local markets, though AT&Ts purchase of NorthPoints DSL assets was seen as a hopeful move.

For consumer advocates, the fact that the upstarts could not survive in the business market means chances of residential competition are even worse.

"Theres a theory that, guess what, guys, this really is a monopoly — that you really do need all these miles of network to succeed," said Ken Reif, head of the Colorado Office of Consumer Counsel.

Glen Macdonald, a telecommunications analyst at Adventis in Boston said the competitors financial troubles have essentially handed the race for DSL deployment to the Bells.

Industry officials estimate that only about 5 percent of residential and business consumers have high-speed Internet access through nearly 3 million DSL lines and about 5 million broadband cable modems.

Macdonald said when the dust settles, the Bells will go bargain-shopping for assets among failed competitors as a more efficient alternative to spending capital dollars on new infrastructure.

Officials at SBC Communications and BellSouth, two leaders in DSL deployment, said competitors failures wont slow their service expansion plans. But they said overall capital expenditures for 2001 will remain flat or decrease.

SBC has earmarked $12 billion for capital expenditures this year, about the same as in 2000. BellSouth said it will spend $5.5 billion to $6 billion, down from $6.7 billion last year.

Selim Bingol, corporate spokesman at SBC, said the company is on course to spend $6 billion by 2003 on Project Pronto, started in 1999 to promote DSL service. It has spent $2 billion so far and had installed 767,000 lines by the end of last year.

But SBC/Ameritech pulled the plug on DSL expansion in Illinois last month over a fight with state regulators, who ordered the company in February to open its enhanced data network facilities to competitors.

SBC chairman Edward Whitacre Jr. wrote a letter to members of Congress recently, asking for a national broadband policy that would preempt such state regulatory control. He said the Illinois decision could stop DSL from being deployed permanently to nearly 2 million customers in Illinois.

The letter prompted angry responses from Illinois consumer advocates, competitors and one member of the Illinois Commerce Commission, accusing Whitacre of distorting the facts.

David Bolger, a spokesman at the United States Telephone Association, which represents primarily the regional Bells, said he sees no indication of slower DSL deployment ahead.

"If there is a lack of incentive, it comes from the regulatory arena," Bolger said. "We have been saying in Congress, if you truly deregulate, you will see massive deployment of DSL and that is what we expect to happen."

But Jonathan Goldman, public policy director at the Citizens Utility Board in Illinois, a utility watchdog group, said the Illinois case illustrates entrenched monopolistic muscle.

"I dont want to speak for the competitive carriers, but I think their sense is that Ameritech has intentionally stonewalled them, he said. "If the Bells can keep them on the ropes for a few months, they will be out of business."

Robert Wines, who owns NET2IT, an Internet consulting service in Chicago, has also struggled with DSL service from SBC/Ameritech. His service was down late last year for days and weeks at a time, leaving him without crucial e-mail contact with clients and leading to losses.

"Broadband access has become to many of us like gas or electricity," he said. "We have to have it. When you dont, it can put you out of business, and there are no alternatives, even here in Chicago. No matter what you think about Ameritech, its the only horse there is to ride."

Competitors point to the Bells as the culprit. High access fees, anticompetitive practices and a sympathetic Congress and Federal Communications Commission have virtually eliminated most local challengers, said John Windhausen Jr., president of the Association of Local Telecommunications Services.

"If you really want to get negative, you could argue that the Bell companies have collectively destroyed the New Economy," Windhausen said. "Theyre putting our companies out of business and were dragging down the Internet with us."

With Congress making moves that could tilt the playing field in the Bells favor and a critical decision on access charges coming this month from the FCC, April could be either the cruelest month for local competition or lead to its resurrection.

While some carriers such as Allegiance Telecom, Focal Communications, Time Warner Telecom and XO Communications still appear viable, Windhausen concedes that local competition could diminish to a historical footnote. "Its an outside possibility, but its a possibility," he said.

For business executives such as Hauge, the lessons of local competition can wait. Currently, hes trying to run a business. And after watching the lights go out and Internet service disappear, that can be quite a challenge.

"Were getting hammered in all directions," he said. "Economists say that when the elephants dance, the little guys get squashed. And Im a little guy."