Regulatory News - Qwest Views Opening Markets as Business Opportunity

Posted: 02/2001

Qwest Views Opening Markets as Business Opportunity
By Amy Trautman

The battle lines were set for local telecommunications service competition, when President Clinton signed the Telecommunications Act of 1996.

The bill was packaged with promises of more competition, new services and lower prices for consumers. A month later, in Wyoming, the rhetoric met marketplace reality, as US WEST, the RBOC that served 14 Western and Midwestern states, notified the Wyoming Public Service Commission (http://psc.state.wy.us) that it would discontinue offering the popular business service, Centrex Plus, which allows customers to combine multiple lines in a single-switched system.

The news was not received well by McLeodUSA Inc. (www.mcleodusa.com), an Iowa-based CLEC. McLeod had purchased Centrex lines from US WEST and was reselling them to business customers at a profit. The CLEC was convinced that US WEST's action was an attempt to prevent it from competing.

This kind of hardball tactic earned US WEST a reputation as the most obstinate RBOC when it came to opening local markets to competition.

Even years after the Telcom Act was implemented and other RBOCs complied with FCC (www.fcc.gov) directives, US WEST remained defiant.

That was before US WEST merged last summer with Qwest Communications International Inc. (www.qwest.com).

Less than five months after Qwest acquired US WEST, McLeodUSA praised the new competitive philosophy. In a recent announcement about a wholesale agreement with Qwest for voice and data services, McLeodUSA's president and COO Steve Gray stated: "We are pleased with Qwest's commitment to improve service to consumers, its progress toward opening the marketplace to competition and the new relationship this agreement establishes between McLeodUSA and Qwest management."

That agreement was announced less than a week after Qwest chairman and CEO Joe Nacchio visited McLeod headquarters in Cedar Rapids to close the deal.

The McLeodUSA contract and new corporate initiatives mark what some believe is a significant transformation of one of the nation's largest local service providers. By embracing Qwest's business model, one of the most entrenched RBOCs appears to be transforming into a strong proponent of competition.

Old Economy Meets New Economy

Last September, Qwest announced a series of initiatives to spur competition within its 14-state region. The measures break down longstanding barriers to market entry.

According to Qwest's senior vice president of policy and law Steve Davis, the initiatives go beyond what the Telecom Act requires.

"We aren't just opening the door to competition in the market, we're kicking the door down," Davis says.

To date, Qwest has dropped 37 lawsuits US WEST had filed against regulatory agencies. The company also introduced wholesale products that it says will ease the barriers for CLECs to enter markets. Where most RBOCs require CLECs to build their own facilities to connect with competitors, Qwest allows CLEC-to-CLEC connections through the CO.

The company also has ended the RBOC practice of requiring that collocation construction space be complete prior to a CLEC accepting orders for unbundled, dedicated interoffice transport.

FCC spokesperson Michael Balmoris says that Qwest appears to be determined to open its 14-state region more than its predecessor was.

"Although we do not have any supporting data, the movement toward opening up its market seems to be more aggressive," Balmoris says.

It has reason to be aggressive. In approving the merger, the FCC required Qwest to divest more than a quarter million long-distance customers in its local service territory. Until the company gets the commission's approval in these states, Qwest can't offer a complete bundle of services to customers.

The company's executive vice president of wholesale markets Greg Casey suggests Qwest's haste to get Section 271 approval is partly responsible for the cooperative approach toward competitors and regulators.

Before the FCC will approve an RBOCs request to provide in-region long-distance service, a company must satisfy requirements listed in Section 271 of the Telecom Act. They were written to prove to the commission that the area is open to competition.

"People who assume we're making these decisions simply because we want 271 approval are off base," Casey adds. "Certainly, that's one of our top priorities, and we're going to do whatever we need to do to get back into the long-distance business. But, more fundamentally, we just have a different mindset when it comes to wholesale customers."

According to Casey, too many people narrowly view CLECs as competitors. Qwest sees them as some of its best customers.

"Once you've made that leap, then it makes sense to do what's necessary to allow them to be successful," he says.

But Qwest's approach to opening its markets is stirring unrest among other RBOCs. For example, a Telcordia Technologies Inc. (www.telcordia.com) analysis of comments filed by 24 parties in response to the FCC's notice for proposed rulemaking on collocation reveals a gap between Qwest's and the RBOCs'.

In its brief, Qwest disagreed with SBC Communications Inc.'s (www.sbc.com) and Verizon Communication's (www.verizon.com) interpretation of the term "necessary." It supported Cisco Systems Inc.'s (www.cisco.com) definition that would allow competitors to collocate multifunctional equipment.

Qwest also told the FCC that it does not believe it is just and reasonable to deny two CLECs, which are otherwise lawfully collocated, to cross-connect with one another.

According to Qwest, regulators need to look carefully at its advocacy, because it occupies a unique space within the communications industry: It is an ILEC in 14 Western and Midwestern states; but it competes as a CLEC, building-centric (BLEC), data LEC (DLEC) and IXC outside the local region.

"You can't close the door to your markets in-region and go out-of-region expecting other incumbents to open their markets for us,"Davis says.

"If we hit a situation where regulators seem to be tipping the scale in one direction, we're going to capitalize on it whether it's in or out of region. That's the way our business model is structured. We're going to be very predictable. We're always going to make rational business decisions," he continued.

Customers, Not Competitors

Former US WEST executive Audrey McKenney, now a senior vice president of wholesale markets for Qwest, says she recognizes a difference between the two companies' philosophies toward wholesale markets.

McKenney depicts US WEST's approach to providing products and services to CLECs as a one-size-fits-all solution. It is an approach that tends to end up in arbitration.

She says Qwest prefers to keep attorneys out of its wholesale negotiations by approaching its contract talks from a business perspective.

Two recent CLEC deals illustrate this business philosophy toward wholesale customers. The McLeodUSA deal is Qwest's largest wholesale contract to date. Qwest expects the agreement to generate $600 million in revenue during the next three years. The company also signed a five-year contract worth $150 million with Eschelon Telecom Inc. (www.eschelon.com).

In describing negotiations, Eschelon's president and CEO Richard A. Smith says, "We are seeing the real benefits of the Qwest-US WEST merger and the opening of the local marketplace."

Eschelon has reason to be happy. The negotiations only took two months--almost unheard of in the industry. In the end, the CLEC expanded its market coverage to a wider range of local phone and DSL services. In return, Qwest increases its revenues and ensures that cost recovery moves forward.

While not everyone in the industry praises Qwest's approach, industry analysts like Jeffrey Kagan (www.jeffkagan.com) give the company credit for being different.

"Qwest is not coming at this from the same perspective as US WEST; it's not just doing the minimum to satisfy competitors," Kagan said recently. "This company has an entrepreneurial spirit and a refreshing approach. It is trying to clear the decks as soon as possible and doesn't want to go back to regulators time and time again."

Top Priority: Re-entering LD

Still, Qwest doesn't have what it wants. Nacchio has been quite vocal that among Qwest's top priorities is to offer long-distance services in its 14-state local service territory. He has declared that the company will win approval in at least one state by summer.

The timeline looked like wishful thinking a few months ago. But the company's management is confident the goal can be accomplished, because the biggest hurdle to Section 271 approval--the testing and approval of its OSS--is on target for completion by June or July in all 14 states.

The company also believes it has an advantage because of a unique agreement US WEST and regulators reached in 1999 with 13 state utility commissions to form a regionwide, collaborative process to plan and to conduct OSS testing.

After more than 11 months of negotiations and countless workshops, the collaborative adopted and approved in November a master plan complete with performance measures.

Now, the OSS testing begins. Once complete, Qwest will file with the FCC for Section 271 approval in each state where it has met all other obligations.

Qwest and regulators also have organized a separate collaborative to determine if the RBOC meets non-OSS-related items required within the Section 271 guidelines.

Everyone Is Watching

Of course, the verdict remains as to whether Qwest can continue its "business-to-business" approach to opening the markets to competition and meet its self-imposed deadline for re-entering long distance.

"Reality is, no local companies have opened markets enough to satisfy competitors," says Kagan. "But Qwest is one of the most aggressive players in the space. Basically, they just want to get on with it and compete."

If Qwest has proven anything, it has shown that it is not afraid of a little competition. And it appears as if it may succeed in transforming one of the most entrenched RBOCs into a lean competitor, in and out of region.

Amy Trautman is a free-lance writer in Denver. She can be reached at trautman@mindspring.com.