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REACHING OUT : Small Phone Firms Quietly Rewiring U.S.

February 14, 1988|BRUCE KEPPEL | Times Staff Writer

From atop Duluth's Board of Trade Building, John B. Keller can look out over the frosty Lake Superior shoreline and take in most of the territory served by his long-distance telephone company's new microwave system.

The market might be tiny by the standards of the big telecommunications companies, but it is one in which Keller's partnership, Telephone Associates, is a heavyweight. "It's a niche market for us--our own back yard," Keller said. "We are competitive with anyone."

Particularly with telecommunications giant AT&T. With its digital microwave equipment linking Duluth to Superior, Wis., the sister city across the icy harbor, Telephone Associates can offer its business customers high-speed data transmission and other services that AT&T can't yet match. The result: Telephone Associates has snared a surprising 25% average share of the commercial long-distance market throughout the Iron Range.

While MCI and US Sprint--themselves multibillion-dollar concerns--command attention as major long-distance alternatives to AT&T, hundreds of relatively small regional firms like Telephone Associates have quietly rewired America. Though together they share just 5% of the nation's long-distance business, these regionals are nonetheless dividing--profitably, for the most part--a $2.15-billion-a-year pie.

"People are unaware that this second tier of regional carriers exists," said David H. Jones, an executive of Atlanta-based SouthernNet, which turned its first profit last year. "People don't realize there's an active, vital business out there beyond AT&T, MCI and Sprint."

These ventures range from virtual mom and pop operations with annual sales of no more than a few million dollars to Allnet Communications of Birmingham, Mich., which has annual revenues in the hundreds of millions. The newcomers, unleashed by industry deregulation over the past two decades, have often brought fresh ideas and resourcefulness to a field dominated by what one executive called "a utility mentality."

Some of the upstarts, for example, have built their regional networks at bargain-basement prices by pulling optical-fiber cables through abandoned gas pipelines, installing them atop high-tension power grids or stringing them along railway rights-of-way.

Now, some of the newcomers are linking their regional systems to provide nationwide service--without taking on the back-breaking debt that MCI and Sprint shouldered in building their national networks. Five regionals have linked their systems into the National Telecommunications Network, offering coast-to-coast fiber optic transmission services--carrying voice, video and data--to their own customers and to other carriers as well.

Telephone Associates and the other regionals are, in some ways, analogous to the small airlines that developed after deregulation of that industry to serve markets abandoned by larger carriers. Just as these small airlines haul passengers to major airports where they can catch planes to their final destinations, the small long-distance companies carry their customers' calls to a metropolitan area where they are switched onto the network of another company, such as AT&T, which will carry it to the proper area code.

This growing patchwork of interlocking regional networks suggests how the U.S. telephone system might have evolved had there never been a Bell System monopoly. And it also bespeaks some maturity in a field that, at the outset, attracted its share of fly-by-night ventures seeking quick profits with minimal investments.

"Long-distance companies are no longer an endangered species," said Jerry McAndrews, president of the fledgling industry's Competitive Telecommunications Assn., or Comptel.

The transformation was evident at Comptel's annual meeting in New Orleans this month. Gone were the sweaty-palm merger and acquisition dealings between sinking companies that marked meetings past. Instead, Comptel offered workshops on how to tap into such hitherto unchallenged AT&T money-makers as operator-assisted calls, toll-free 800 service and international calling, and on how to perfect billing systems and weed out fraudulent credit-card customers.

Some Firms Driven Out

In the hotel corridors outside the meeting rooms, Keller, Jones and other executives buttonholed one another in search of partners to share the costs of their regional networks.

The earlier shakeout purged the fledgling industry, through bankruptcies and mergers, of under-financed ventures and outfits unable to cope with sharply higher costs for local connections and with rate-cutting by the chief competition, AT&T. The list of 500 or so companies offering some form of long-distance service two years ago has shrunk to closer to 300, McAndrews estimated, and still more firms are expected to be driven out of the business.

The remaining companies have survived, said Howard Finkelstein, president of Metromedia Long Distance, because they offer services that are competitive with AT&T's, not necessarily cheaper.

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