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Bypass Debate Generates Questions That So Far Outnumber the Answers.

Each years seems to bring a unique crisis to the telecommunication landscape. Problems brewing over several years suddenly take on new dimensions. Peripheral issues burst int prominence. And a rush among industry peers ensues to analyze, resolve and, above all, succeed.

The year 1984 is no different. Rising to headline status are the many aspects--threatening or promising--of bypassing the local telephone facilities.

A good deal of confusion seems to swirl about the concept of bypass; therefore, a quick definition that is applicable throughout this article: Bypass occurs when customers avoid a telephone company's twisted-pair cable network through alternate telecommunication services. The existing local exchange is effectively bypassed. Often, a dedicated circuit connects a client's location with a long-distance carrier's point of presence, therein bypassing the local telephone network. Both the carrier and the user save access-charge costs. Revenues that under any other circumstance would be flowing into telephone company coffers are diverted.

The potential impact of bypass is far reaching for telcos, users and vendors alike. Users in particular are at a crossroad, a predicament of which telcos must be wary and on which bypass vendors can capitalize. The uncertain regulatory climate, too, is producing a heavy dosage of confusion among industry participants and watchers.

Arising out of this confusion is one common thread: A concerted effort to come up with some answers. Whether telco, vendor or user, concrete facts and valid statistics seem to be in short supply.

The market is almost beginning to assume a cluttered look thanks to the various technologies competing for industry recognition and market share. There are currently six premier offerings: microwave, satellite, optival fibers, Digital Termination Systems (DTS), coaxial cable and infrared. Although microwave probably enjoys the greatest popularity, offerings such as fiber optics will eventually overtake it in terms of the amount of traffic carried. More and newer forms of bypass will also vie for market prominence (cellular radio, for instance, one it becomes truly cost-justificable) as the decade matures. Users as a result will have even more technologies to evaluate and select from.

Whatever the technology, more and more users are beginning to seriously explore the alternatives. Although it may mean departing from a normal service routine and embracing a relatively unfamiliar technology, MIS managers are already actively evaluating the pros and cons of bypass implementation.

They have good reason to do so, with the bottom line being dollars saved. In a hypothetical situation, a state telecommunication director has responsibility for a 20,00-line Centrex. He estimates that by utilizing an on-premise vehicle in lieu of Centrex, he can reduce his local loop needs by approximately 25 to 33 percent.

If a $6-per-line-per-month charge were to be levied against his Centrex, that's well over $1 million each year to retain a service he was concerned about to begin with. He starts shopping around, perhaps only half in earnest. Continuing in a hypothetical vein, suppose he was confronted with a choice between remaining with his service as usual--with its inherent data limitations, access charge and all--or investing $5 million in a bypass system and acquiring an on-premise switch. If you evaluate just the access-charge savings, the bypass system could annually recover 25 to 33 percent of his earlier telecommunication cost. And you now have the capacity for high-speed data transmission tossed into the deal.

Numbers such as these are causing a good deal of smiles among bypass corporate higher echelon. Bypass is already occurring, and the pace seems to be quickening. Will the BOCs suffer revenus loss? Yes. The difficulty lies in assessing the magnitude of that loss.

The operating companies are well aware of the serious problem presented by potential revenue loss to bypass vendors. In addition the problem is compounded by a curious Catch 22: As telco customers abandon traditional service, subscribers remaining on the network will be subjected to rate hikes in order to compensate. The telcos will levy these hikes to pay for equipment, and ensure against heavy losses. But this measure in turn will generate incentives within the remaining subscribers to turn elsewhere. The telcos lose again.

Let's look at the pros and cons of bypass. Evidently there is alot to be said for bypass alternatives. Bypass is a reality and a growing reality at that. Here are some reasons why:

* Bypass vendors frequently offer greater bandwidth than copper-wire pairs.

* Some boast faster service than the local telephone companies. That could be critical considering that, prior to divestiture, telcos wer able to meet installation dates more than 95 percnt of the time. Since the breakup the rate has dropped to 20 percent.

* Vendors offer systems that allegedly would provide greater realiability and flexibility .

* Some vendors with their particular offering can provide new service or services not before available.

* Bypass vendors point out that owning a system could promote greater control of system cost--over the long term. And on top of that, as has been the way of other technologies, time will see the price structure come down, encouraging even wider abandonment of traditional telco facilities. Users Taking a Cautious Approach

Despite the fact that vendors of bypass alternatives have an impressive arsenal at their disposal, clients aren't necessarily throwing themselves at their doorsteps. Yet. In the eyes of the cautious MIS manager, bypassing the local telephone company is an uncertain venture at best. Bypass vendors have to assuage the fears of potential customers and assure them of the integrity of their networks. That's not always an easy accomplishment by any stretch of the imagination.

Beyond that, the initial investment is often extremely burdensome. For most organizations today, bypass is simply too highly priced. Frequently, only those companies equipped with the highest telecommunications budgets are able to justify what could be an enormous venture.

In addition, each bypass technology carries inherent disadvantages for users over and above the obvious alienation of telephone companies. DTS, for instance, although capable of transmitting wideband data ranging from 9.6 kb/s to 56 kb/s, presently is not overtly competitive for voice traffic. Another example might be CATV's limited hurdles to two-way voice and data. The list goes on.

Is the concern of the Bell operating companies then justified? The statistics say yes. With close to 31 percent of the Fortune companies employing bypass by year -end 1984, both the long and short-term ramifications of bypass are rapidly assuming very real--and measurable--dimensions. Projecting three years down the line, in 1987, indications are emerging that point to a 44-percent bypass penetration of the Fortune ranks. And that's a conservative estimate. (Also see story on the ICA bypass survey, July CN, page 30B).

As it is, bypass penetration is not restricted to the Fortune participants. Approximately nine percent of the service industry already uses one of the many variations of bypass. By 1987, this figure will have mushroomed to 24 percent. Of the population of universities in the United States, 61 percent will have implemented bypass by 1987, compared to 16 percent by year-end 1984.

In addition, approximately 60 percent of utilities already have made the often cost-prohibitive transition to bypass. Like the others, that industry, too, will jump several percentage poins by 1987--to 7-percent penetration. Clearly, the direction of the industry is conjuring images of substantial changes in the marketplace.

It is precisely numbers such as these that generating concern among telco pundits.

Why are companies so willing to drop a service that is both familiar and ubiquitous? Obviously, economics have a lot to do with it. But the problem is not so easily defined. Several factors are involved--factors that include the huge telecommunications and data communications traffic among the Fortune ranks; traffic that aggregately surges upward each year. Over 66 percent of the Fortune 250 headquarters switches are greater than 1,000 lines; another 21 percent are between 501 and 1,000 lines. The demand generating from these huge communications hubs is tremendous.

The allure of bypass, therefore, transcends the monies realized over time; it includes the prospect of merging data processing with the intensive telecommunication traffic. And for the comtemporary MIS manager, any potential assistance in cutting through the chaos of corporate information system is worth taking a very serious look at.

But the worries of the operating companies don't stop there. One of the alternatives being examined by the telephone companies to help stem by bypass tide is to offer substantial upgrades on their acknowledged large Centrex base--in effect, bring a premium Centrex into the scene to reduce the chances of a user opting for an on-premise switch and a bypass alternative. But once again the statistics paint a grim picture. In 1981, a high 35 percent of Centrex users had plans to abandon Centrex; last year that number had risen dramatically to 55 percent. And close to 70 percent of the Fortune Centrex base may opt for an alternative because of access charges. So even when dealing with potential answers to the bypass threat, the BOCs are seeing their efforts short-circuited.

Back orders at AT&T also have the BOCs concerned. In April of this year, between 25,000 to 30,000 lines were backlogged. That's almost one out of 12 lines installed. Users care little if it's AT&T that's backlogged or the BOC. Users see only a delay in line installation--another incentive to turn to a bypass vendor. Large Toll Users

Environments particularly vulnerable to bypass (that is, heavy data/voice traffic) search for a savings range of 15 to 40 percent. It is interesting to note that most of these "at-risk" areas comprise the roughly two percent of all business customers who presently account for 80 percent of all business toll revenues. Take away that 2 percent . . .

As noteD, vendors are studying closely several regions and industries. They have met with encouraging success--so far. Counter-strategies are being developed by telephone companies to abbreviate this trend.

The counter-strategies to be employed with minor exceptions are more or less consistent from one regional holding company to another. As expected, public utilities commissions around the country are being stormed by protests. The telcos are arguing for cost-based pricing in order to avoid a rush of customers away from their facilities. The ultimate cost of bypass, they maintain, will be levied against residential and small businesses since they will have to be hit with the increased charges that are "forced on" the telcos.

Their posture is becoming more agressive--necessarily so. In what has recently emerged an intensely competitive market for voice and data traffic, any organization forced to price significanlty higher than the competition could conceivably be placed in a very precarius position. Market share would almost certainly be jeopardized. Telcos Enhancing Services

The telcos, however, aren't stopping there. Additional avenues they are pursing include enhancing Centrex features, employing local area data transport services, upgrading local calling services and features, introducing their own bypass capabilities and acquisitions.

Telcos are well aware of the potential damage they could suffer if AT&T enters the melee. Certainly AT&T has substnatial incentives to bypass telco facilities, if only to buttress a sagging market share. If, in fact, AT&T Communications dedicates enough energy on the Fortune 1,000, revenues resulting from providing bypass service in 1990 could exceed $5 billion, compared to $500 million in 1985.

So the surface threat to telcos does seem to be substantially real. Whether or not customer network integrity is jeopardized by following the bypass route remains for many uncertain. For vendors, the profits are there if the technologies can both the priced attractively and survive the test of time.

Whether vendor, telco or user, 1985 looks to be a very intriguing year--a year of resolutions and compromises perhaps, but certainly a year of decisions.

To date, uncertainty has stasmped the issue. Indeed, apparently the largest single problem emanating from the bypass controversy today, is that more questions have emerged than answers:

* Which bypass technologies offer users the fastest payback . . . and why?

* What are the Fortune 500 plans concerning bypass technologies?

* How much does it really cost businesses to install private facilities to bypass the local telco?

* What will equal access do to the market shares of the OCCs?

* How will the RBOCs reprice their local loops to offset the attractiveness of bypass?

* What impact will bypass ultimately have on the RBOCs, AT&T, and OCCs?

* Which bypass technologies will best withstand the test of time?

Once these questions (and many others) have been satisfactorily resolved, the road to cost-effective decision making becomes smooth. In the final analysis, economics with dictate the course for telcos, vendors and users. After all, it was economics that helped spawn these new technologies. And it will be economics that determine the long-term winners in what has suddenly emerged as a hotly disputed market.
COPYRIGHT 1984 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1984 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Blundell, G.
Publication:Communications News
Date:Aug 1, 1984
Previous Article:Integrating Data into Office Telecom Stream Provides Small- Office Alternative to LAN-PBX.
Next Article:Canadian Business Telecom Users Question Local Measured Service.

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