HOT SPRINGS, Va.--Independent telephone companies face major competition from the newly merged AT&T and Verizon, as well as from wireless substitution and cable VoIP services. But they can head some of those threats off by offering their own VoIP and IP-services and creating a nationwide peering network that links ILECs and keeps all traffic on-net, to avoid termination charges.

That’s the suggestion of two Wisconsin men--one an ILEC operator and the other a national satellite distribution service--speaking today in a panel session at the 43^rd Annual OPASTCO Summer Conference and Trade Show.

Doug Wenzlaff, CEO and general manager of Solarus, formerly Wood County Telephone of Wisconsin Rapids, directed his company in building a statewide IP network that does direct IP peering, through connections to Level 3 Communications, and VoIP peering, as well as satellite and fixed wireless broadband services for an expanding base of customers both inside and outside of its legacy territory. Michael McLaughlin runs UNASAT, an affiliate of Solarus, and a wholesale provider to independent telcos looking to future-proof their services.

The reality of the ILEC business is that franchise protections and rural exemptions become meaningless in an era when competitors aren’t likely to overbuild local networks, Wenzlaff said. His company has seen access lines fall 10% to 27,000 within the last two years, due to wireless substitution and new VoIP offerings from Charter Cable.

Solarus’s response has been to develop its own VoIP offering and expand its footprint through the acquisition of ISPs, he said, as well as to offer digital video. Today, 29% of the company’s revenue comes from Internet access and video, Wenzlaff said. But just moving into new services isn’t enough if ILECs are to ward off the erosion of customers and the loss of access revenues.

“We want to invest in our future now, while we still have the cash flow from regulated services,” Wenzlaff said. Key to the investment was ending the dependence on Bell company networks to provide transport for traffic out of region. By building its own statewide IP network and doing direct Tier 1 peering, Solarus was able to reduce its costs, eliminate the multiple router hops that reduce quality and compete more effectively.

“By going with IP now and doing peering, we bypass the Bells,” he said. “We can offer a competitive long-distance product that lets us compete for business traffic. We have gained 65 business customers back onto our long-distance network.”

Via its connection to the AT&T LATA tandem switch, Solarus can now offer VoIP service to any AT&T customer in Wisconsin, he said.

Wenzlaff believes ILECs can create a national peering network that keeps their traffic “on-net” and eliminates the termination (access) fees they pay to big carriers, while enabling them to serve their business customers out of region.

UNASAT provides wholesale services to independents to enable them to provide VoIP and satellite service together, initially to SOHO and business customers, but ultimately to residential customers as well, McLaughlin said. Today, the company reaches about 72% of U.S. numbers and E911 coverage and will reach 80% shortly, he said.

McLaughlin sees the “super Bells” – AT&T and Verizon – as major threats to ILECs as they move their wireless services onto IP backbones and look to bundle wireless as part of a quad play, using dual-mode phones.

“AT&T and Verizon are your biggest customers in the regulated world,” he told the OPASTCO audience. “They are your highest cost customers and your most loyal customers.”

That high cost of termination/access fees is ample incentive for the big Bells to look for ways around the ILECs, and wireless access or VoIP over ILEC broadband networks provides them with a ready means of siphoning off customers.

“It cuts a huge expense off their balance sheets,” he said. “You have to compete with these guys at a different level than you ever have before. The Super Bells are looking at your customers and drooling.”

The smart strategy is to get out ahead of the big guys, including the cable companies, and offer a bundled VoIP and data service, including IP video, that uses a national ILEC peering network, he said.

“You are better off getting together and figuring out how to work together,” McLaughlin said. “You need to tear the borders down. Start by competing out of territory as soon as possible so you can get to know your competition. Create a dual-mode wireless strategy because a significant portion of your base is going wireless, whether you like it or not.”