Zeroing in on the COMPETITION.

The story is told of two explorers in the Alaskan wilderness who had the misfortune of being spotted by a very hungry bear several hundred yards away. The explorers began running, but the bear gained upon them with every step. "This is hopeless!" the first explorer yelled to the second. "We'll never outrun that bear!" "1 don't need to outrun the bear," his partner calmly replied. "I just need to outrun you."

Like a hungry bear on the prowl, the competitive marketplace is ruthlessly efficient in eliminating the slow and the weak, leaving the strong and the capable to survive another day And as cruel as it may seem, this thinning-out process results in additional resources becoming available for those who are able to cultivate skills that allow them to survive--whether in nature or the telecommunications industry.

Regardless of one's feelings toward competition, it remains an inescapable fact of life in today's telecommunications industry. Successful entities in the competitive marketplace will be those who embrace it, who can find the potential benefits to a competitive situation and make them reality

Who Is the Competition?

In the business world, as in the sports arena, the groundwork for success in a competitive arena is laid well in advance of the competition itself. This preliminary work includes undertaking the necessary preparation and effort to allow a level of performance to the best of one's abilities, as well as assembling and cultivating an intimate understanding of the competition--their motivations, strengths, weaknesses, vulnerabilities and any opportunities for mutually beneficial coexistence. Consider this, then, a "scouting report" on the competitors you, as an incumbent local exchange carrier (ILEC), are likely to encounter, either now or in the foreseeable future.

First, a caveat: it's important to keep in mind that every situation is unique. The range of products and services included under the "telecommunications industry" umbrella is remarkably vast, and growing. This article is intended to provide an upper-level overview of competition; some of the competitors noted here may be relevant to your particular situation, while others may not.

* CLECs: First (and most obvious) are competitive local exchange carriers (CLECs), which are seeking to compete with incumbent carriers in numerous areas, including wireline and wireless services. According to the FCC, CLECs provided 12.7 million (6.7%) of the approximately 192 million nationwide local telephone lines that were in service as of June 2000, up 53% from year-end 1999.

But though the CLECs have been fairly bold since the passage of the 1996 Telecommunications Act, the past several months have been difficult. After an initial flurry of activity, the CLEC industry is mired in a wrenching shakeout. As a result, numerous CLECs are taking dramatic steps to cut costs and raise capital; those that were unsuccessful have been forced to declare bankruptcy.

The problem, put quite simply, is one of too many CLECs chasing a limited number of telecom dollars. Those CLECs that remain are facing two significant problems, both affecting their ability to raise the necessary capital to build out their networks. First, Wail Street investors are becoming wary and insisting upon evidence of long-term viability before entrusting CLECs with their money. Second, a slowdown in operations has resulted from the growing realization of business customers that stability and reliability are valued assets. Customers who may have been burned in the past by companies that either slashed customer service staffing or, in the extreme, gone bankrupt, are loath to risk making the same mistake twice.

The FCC identifies nearly 300 reporting CLECs in the United States, and the actual number is undoubtedly larger. While the eventual post-shakeout tally is a matter of speculation, economic theory (as well as the past experience of other industries, such as airlines) suggests that the number will be considerably lower due to consolidation and market exit. The survivors, however, will be formidable competitors--strong, hungry and battle-tested.

In the "turnabout is fair play" department, many NTCA member companies report CLEC activities of their own. While this is illustrative of how competition presents opportunities for all, these companies ultimately will confront the same challenges facing the CLECs.

* Electric Utilities: As detailed previously in the November/December 2000 issue of Rural Telecommunications, electric utilities increasingly are venturing into the telecommunications industry. These companies typically possess advantages in infrastructure, experience, name recognition and access to capital, and many electric companies already have made inroads in the telecom marketplace.

Despite these advantages, recent industry developments may slow utilities' entree into the telecom arena. The recent California energy debacle is a textbook example of the dangers of improperly imposed deregulation (utilities were encouraged to divest their generating assets, then compelled to purchase power under a regime where wholesale markets were fully deregulated, while retail prices remained capped). While the lessons learned from California hopefully have rendered the chances of similar catastrophes occurring elsewhere minimal at best, it seems likely that electric companies will focus more on their core business, and will be less interested in diversification--in the short-term, at least.

* ISPs: Incumbents long have competed with Internet service providers (ISPs) for Internet access services. Now, with the continued development and improvement of Internet protocol (IP) telephony technologies, it is becoming increasingly apparent that the Internet itself will pose a threat to incumbents' voice and data traffic. It is estimated that IP telephony's market share of total voice minutes will grow from less than 1% in 1998 to 13% in 2002.

In 1998, the Global Information Exchange Corp. (GIEX), a company that operates CoastalNet, a North Carolina-based ISP with nearly 17,000 subscribers, became one of the first ISPs to establish a CLEC subsidiary. Officials of the subsidiary, Crescent Telephone, hope to build upon the relationships already established through the ISP. "Our proven track record in serving rural and suburban customers ideally positions Crescent Telephone to offer complete telecommunications solutions to markets historically underserved by traditional carriers," said Jacob Roquet, GIEX president and CEO, and founder of CoastalNet and Crescent. "We'll also take full advantage of the synergies generated by growing CoastalNet and Crescent together." Should Crescent's business model prove successful, expect other ISPs to jump into the CLEC pool.

* Cable TV: Numerous cable television providers are offering broadband and two-way cable networks. An increasing number are looking to compete with ILECs for voice traffic and broadband data services. The National Cable Television Association (NCTA) estimates that by year-end 2000, 3.6 million customers subscribed to high-speed cable Internet service, and cable operators were serving more than 800,000 residential cable telephony customers.

Like electric companies, these competitors have the advantage of familiarity--they already have a toe-hold in the customers' premises. In order to successfully compete with cable companies, incumbents will need to be prepared to offer their customers equivalent state-of-the-art services, such as DSL or fiber to the home. NCTA reports that some of the larger phone companies are offering video-programming components as part of their bundled service packages.

* Government: While federal government activity in the telecom industry has waned, more than 230 state and local governments are operating some form of telecommunications business. According to the American Public Power Association, 18 municipalities are offering local phone service, 10 are offering long distance service, 61 are offering Internet access and 32 high-speed data. And, somewhat surprisingly, these numbers seem to be increasing.

In a recent report entitled, "Does Government Belong in the Telecom Business?" Jeffrey A. Eisenach; president of The Progress & Freedom Foundation, concludes "[government entity] entry will not achieve its desired goals of lower costs and more rapid deployment of efficient telecommunications systems." In fact, Eisenach claims. "government entities are not well suited to compete in the dynamic world of telecommunications" and those that have tried "have been saddled with financial losses and obsolete, legacy technologies."

Despite these shortcomings, municipally owned companies (munis) possess several significant advantages (such as tax breaks and accessibility to rights of way) not generally available to those in the private sector. As a result, in some areas, munis can pose a formidable competitive challenge to incumbent carriers.

* Wireless: Recent regulatory actions in the area of wireless services bode well for the competitors, and hint at further challenges ahead for incumbents. Last December, the FCC granted Western Wireless' petition for eligible telecommunications carrier (ETC) status in the state of Wyoming; shortly thereafter, Verizon Wireless' petition for ETC status in Delaware also was approved. (ETC designation is a prerequisite for receiving federal universal service support.) In each case, the Commission ruled that the ETC designation was in the public interest because it promoted competition and thus would help keep rates affordable for low-income customers.

Looking to the future, the biggest challenge set to emerge from the wireless sector is the advent of so-called third generation (3G) services. A quantum leap beyond 1G (analog cellular) and 2G (digital cellular and PCS), 3G ultimately will encompass toll-quality voice, high-speed data and high-resolution video. 3G deployment in the United States still faces several obstacles, however. Spectrum must be auctioned off, and frequency-sharing arrangements and relocation procedures likely will need to be implemented.

Further, 3G network buildup will require substantial investment, without hard evidence of a market for the service. 3G deployment already has begun in Europe, where its success or failure likely will influence the speed of its adoption here. The deployment of other nascent technologies--such as telephony services over unlicensed spectrum equipment, which promises greatly reduced barriers to entry--looms in the foreseeable future (five to 10 years).

Outrunning the Bear

Survival in nature--or in the business world--is never guaranteed. But raking the following steps can greatly increase the odds:

* Know yourself: What line of business do you want to be in? What are your core competencies? it's crucial to be forward-looking. Where do you want to be a year from now? Five years?

* Know your customers: What do your customers want? What makes them happy? If you can offer them the services they want, and also bundle them in an efficient, cost-effective manner, then tie the whole package together in a ribbon of excellent customer service, you will make it extremely difficult for that customer to leave you.

* Know your competition: A little bit of market intelligence can go a long way Who are your competitors? What are their motivations? What are their strengths and weaknesses? What are their long-term objectives?

* Think strategically: The goal to survival is to stay one step ahead of the competition. Long-term thinking is an absolute necessity Analyze alternative strategies--play the "what if" game.

The greatest weapon against a competitor is a happy customer. The ultimate goal is not only to offer customers the services they want at reasonable prices, but to do so before they even know they want them. And while accomplishing this goal will be no simple matter--it will require constant hard work, planning and excellence in every aspect of business--ultimately it will mean the difference between seeing another sunrise and ending up as so much bear chow.

Rick Schadelbauer is NTCA's economic analyst.

CASE STUDY: THE STATE AS COMPETITOR

Competition in telecommunications is taking many forms, and rural telcos find themselves battling a divergent group of entities for a limited number of customers. In some cases, the competition is the state itself. In Iowa, for instance, the state-run Iowa Communications Network (ICN) has compelled rural telcos to re-evaluate their business strategies to keep step with a taxing competitor.

The ICN is a statewide, state-administered fiber optics network with more than 4,000 miles of fiber optic cable reaching all of Iowa's 99 counties. ICN's stated purpose is "making educational, medical and governmental services more easily accessible to Iowans."

Construction of the $350 million network was completed in 1998, with most of the construction and start-up costs borne by the state using taxpayer dollars. ICN provides local and long distance dialing, voice conferencing services, high-speed data transmission, Internet access and full motion and compressed video to its authorized users. Authorized users of the ICN, as defined by Chapter 8D of the Code of Iowa, include all accredited K-12 school districts and private schools, public and private colleges and technical educational institutions; federal and state agencies; the U.S. Post Office; hospitals and physician clinics; and public libraries.

In December 2000 the FCC ruled that ICN "is a telecommunications carrier for purposes of the 1996 Act" and thus eligible for direct reimbursement for discounted telecommunications services provided to schools, libraries and rural health care providers. The FCC's decision makes the ICN an even more formidable competitor for Iowa incumbent local exchange carriers (ILECs).

According to Don Miller, manager of Northwest Telephone Cooperative Association in Havelock, Iowa, ICN poses a significant challenge to Northwest's operations. Northwest is an ILEC serving four communities. The telco provides Internet service to more than 8,000 customers in over 60 communities in northwest and north central Iowa. While the network does not currently operate in Northwest's service territory, its presence impacts the company's Internet and CLEC expansion decisions. In looking to enter a new small rural town, Northwest has found that schools receiving Internet access through the ICN weaken the company's business case.

"We need to have customers sign up for all available service offerings, or else we can't afford [entering the new area]," Miller said. A new issue facing Northwest is digital subscriber line (DSL). "If broadband isn't provided below or at cost [to the company's service area or rural areas of Iowa]," Miller said, "ICN may try to provide it."

Recently, Northwest has taken proactive steps to provide distance learning to three schools that did not connect to the ICN and to connect a hospital with two of its satellite clinics. Last year, the Iowa Interactive Instructive-Learn (I-LEARN) Consortium of West Bend (Iowa) was awarded a $350,000 distance learning and telemedicine (DLT) grant from the U.S. Department of Agriculture.

Northwest and two other independent telephone companies provided the matching funds that enabled I-LEARN to meet the DLT program's eligibility requirements. The I-LEARN consortium, which consists of three rural school districts in northwest Iowa, is seeking to construct a distance-learning project and a hospital in need of a network for administrative purposes.

The funds will be used to acquire and install the telecommunications equipment necessary to connect to fiber-optic telephone facilities running near the consortium's facilities. The consortium's ultimate goal is to utilize the network to train teachers, students, staff, firefighters, ambulance crews and nursing home care-givers. The funding from the independent telcos and the DLT program has enabled I-LEARN to avoid the upfront costs associated with joining ICN, but will provide them with the ability to connect their local network to the ICN.