Where competition works

America's Network, Sept 1, 2001 by Joan Engebretson

The results of a study by the Brookings Institution caught my eye right around the time America's Network was putting together a special section about independent telcos (page 41). Brookings researchers found that land development is outpacing population growth all across the US. During a 15-year period beginning in 1982, 25 million acres of farmland and open spaces were converted to residential and business use -- a 47% increase in developed land. Population growth during that same period was only 17%.

Numbers such as these are good news for companies such as CT Communications, one of several independent telcos profiled in our special section. CT has served a rural area about 20 miles outside of Charlotte, N.C., for more than a century -- and has benefited tremendously from the sort of suburban sprawl identified by Brookings. CT has experienced strong line growth as its territory converts into a bedroom community of Charlotte -- and by operating as a CLEC in adjacent areas, the company has garnered impressive new construction contracts for housing developments and shopping malls.

After learning of the Brookings research findings and seeing those findings come to life in the CT example, it wasn't surprising to also learn that more than 100 independent operating companies (IOCs) have become CLECs in adjacent communities. IOCs adopting that approach typically deploy advanced services including high-speed data and video. Often the incumbent that they're up against is one of the RBOCs and has not invested much in rural infrastructure. Advanced services, coupled with strong relationships within the community, are enabling IOCs-turned-CLECs to gain market share in the range of 50% and higher. Ironically, the best example of where local competition is actually working is where the industry may have least expected to find it -- in small towns and rural America.

Assuming this trend continues, it could cause us to question many of our assumptions about universal service. Do existing definitions of study areas -- which are based on each carrier's serving area within a state and which play a key role in how universal funds are allocated -- still make sense? The incumbents are still receiving universal service subsidies in some of the communities that IOCs-turned-CLECs are targeting, which seems illogical when the competitor expects to make a profit by overbuilding existing infrastructure.

One possible explanation is that the competitor is cherry-picking the most desirable communities within the incumbent's territory. So if a competitor overbuilds a community and gains 100% market share there (which, sources say, sometimes happens), does that community move from one carrier's study area to the other's? What if the competitor gets a 50% share? And who is the carrier of last resort?

Also, if a single connection can carry voice, video and data, how should we determine what part of the total costs are required to deliver voice? Or should we consider all costs -- and revenues from all services -- in determining what subsidies, if any, a carrier should receive?

An important test of how well competition is working will be whether or not we can minimize universal service subsidies. The result will depend on the answers to questions like these.