In theory, a competitive broadband communications market allows small companies to carve out a niche, providing services that larger companies don’t. But as a couple of small Texas firms are finding out, surviving in a broadband world dominated by giants can be practically impossible.

In Brownwood, Texas, WTS Online is trying to compete with Verizon Online, while buying DSL service wholesale from its parent company, Verizon. As the retail prices for DSL service continue to drop, however, WTS is getting badly squeezed, says Larry Summers, general manager.

He is convinced VOL is selling service below its costs, and driving the competition out of business in the process.

Less than 200 miles away in Irving, Texas, Scott Birdwell has even more tangible proof that another giant, SBC Communications, is trying to put his enhanced services company out of business. SBC has sued Transcom Enhanced Services in a Missouri court, claiming the company owes access charges for the voice-over-IP features it is selling on a wholesale basis. SBC’s access claims have cost Transcom a contract with AT&T, as well as major customers, forcing the company to file for bankruptcy as a strategic move. Birdwell is hoping the bankruptcy court will take action on what he says is illegal behavior by SBC.

Who loses?

Both Summers and Birdwell say the failure of companies such as theirs will leave consumers with fewer choices. In Summers’ case, he sees his base of rural customers being lured to Verizon by lower DSL prices, even though the service they ultimately receive may be less.

“The bottom line is simple,” Summers wrote in a filing with the Federal Communications Commission this year. “Verizon has retail and wholesale contracts with independent providers at a cost that is higher than their lowest priced ‘retail’ bundled price and an unbundled price little more than the wholesale price. The result is that over 90 percent of DSL customers have chosen to save money--temporarily in my opinion--by taking the lower price from the unregulated subsidiary instead of an independent. This is monopolistic practice, by any definition, in my opinion.”

He estimates Verizon Online’s costs at a minimum of $39, when the tariffed wholesale cost of the line is added in with universal service fees, and the cost of bandwidth, customer service and acquisition, billing and collections, payment to partner MSN, and administrative overhead. Verizon Online currently sells DSL for $29.95--or three dollars more than the tariffed wholesale rate--and throws in a free wireless router.

Summers’ company provides computer repair and IT services, in addition to being an ISP. But companies such as his won’t survive if they can’t compete on a level playing field in the broadband world, Summers said in a telephone interview.

“Verizon isn’t going to help them fix their computer when it’s infected with spyware,” he said. “In fact, the worst spyware I’ve ever seen came with a Verizon Online ad, and their customers couldn’t get rid of it.”

In major cities, getting computer repair assistance is no big deal but in rural communities, a shrinking pool of IT shops stands to shrink further, Summers said. “I can’t stay in business competing with Verizon Online, when every customer who calls Verizon for anything hears a commercial for Verizon Online, and every Verizon technician is getting a credit for referring customers.”

A spokeswoman for Verizon denied any intent to drive small ISPs out of business, saying Verizon wants the revenue generated by those companies.

She added, however, that the “FCC has certified our business as competitive,” and said smaller ISPs “have other options for access,” including wireless service.

Summers has explored those options and said wireless access is too costly for the Brown County area he serves. In his lengthy filing with the FCC, in response to Verizon’s petition for forbearance seeking regulatory relief for its DSL service, Summers asks the FCC to investigate whether Verizon and other former Bell companies are selling DSL service below cost, and if so, to step that predatory practice.

He’s not holding out a lot of hope, however, because companies such as WTS Online can’t afford the legal assistance needed to fight the lobbying influence of the Bell companies. “I don’t have the $75,000 I’d need to hire a lawyer to fight this at the FCC,” Summers said.

Unusual step

Birdwell and Transcom also aren’t taking their case to the FCC, even though that’s where it’s likely to wind up. Birdwell, the company’s CEO, believes that would take too long and eat up too many resources. Transcom has been operating an IP-based network since 1998, aggregating bandwidth on a wholesale basis and reselling enhanced VoIP-based services to other carriers.

About a year ago, its problems with SBC began when that company used an FCC ruling regarding AT&T as the grounds for collecting access fees from Transcom and others.

“SBC took that ruling and said it applies to all enhanced service providers and began to come after us and some of our competitors,” said Birdwell. “They essentially said, ‘You are subject to access fees, anybody that uses you owes us access fees, and anybody that sells services to you owes us access fees.’”

SBC declined to comment on the matter, because it is in litigation.

Birdwell and Transcom President Chad Frazier believe the FCC’s ruling on AT&T does not apply to their company.

“We felt that the AT&T ruling, rather than negate our exemption, solidified our exemption,” Birdwell said. “AT&T didn’t meet the standards, but in our situation, there is a change in content on each call we handle and, in a lot of calls, a net change in form. So that ruling specifically said it didn’t apply to us.”

But SBC and now AT&T disagree with that interpretation. AT&T terminated its contract with Transcom in early February with four days notice, Birdwell said.

“AT&T had supported our exemption status for last two years and had been a supplier of ours, but the same week they announced they were being purchased by SBC, they did an about face--they said we were doing something illegal and unlawful, and they were terminating services in four days time,” Birdwell said. Transcom is fighting that contract cancellation as well.

The decision to file for bankruptcy was made to try to force the core complaint – that SBC is unfairly imposing access fees – into a courtroom as quickly as possible, said Frazier. The company is fighting SBC’s lawsuit against Transcom and others, claiming the Missouri court in which SBC filed has no jurisdiction over matters involving two companies based in Texas.

But while it awaits a ruling, Transcom is losing customers and suppliers, because, Birdwell said, SBC has been in contact with both groups by letter. “There is a tremendous amount of fear factor, because of SBC,” he commented. “A lot of our supporters and our suppliers are afraid to come forward and speak on our behalf, because of SBC. Our largest supplier has said they won’t testify for us unless subpoenaed.”

Like Summer, Birdwell doesn’t expect a lot of support from regulators or politicians.

“It’s hard to go to a legislator and say, ‘We want to go up against these guys who’ve given you $10,000, and we’re a little bitty company with 12 employees,’” he said.