Mayhem on Main Street

May 14, 2001 12:00 PM, Vince Vittore

Cultivating a ‘bad’ rep

Competitive telecom is nothing new to Winkel, who fashions himself as something of an outsider, always testing the limits of conventional telecom manners. As one of the founders of Long Lines Ltd., Winkel helped create the company that in the early 1980s became of the first in the nation to give a then-fledgling company named MCI its first equal access to subscribers. Since then, he's been rubbing Independent telcos, particularly those serving rural areas, the wrong way. And the company's latest effort is no exception.

“By and large, the Independents have done a bad job of promoting service in the rural markets,” he says.

It's Winkel's most recent work, though, that strikes at the heart of the independent market. Pairing up with municipally owned utilities, Pioneer and its partners are using a variety of access techniques to provide an array of services that many metropolitan area subscribers take for granted.

Moreover, Winkel sees the company's efforts in a social perspective, noting that the company is creating an environment where small businesses are more likely to stay in town because they have modern telecom facilities. That in turn provides more jobs, which keeps more people in town and staunches the pipeline of young talent that often leaves Iowa's small towns after graduating from college.

“The end result is we're trying to bring the kids back,” says Winkel. “Our biggest export in Iowa is our kids. We can have some real quality jobs right here and we have the quality of life issues working for us.”

Sergeant Bluff is a case in point, he adds. Considered for years as a “suitcase” community to Sioux City, Sergeant Bluff got a big break when Long Lines started a call center in 1983 in an old grocery store. The grocery store is long gone, but the call center has since developed into one of MCI's largest and currently employs 3500 in a town with a population of just 3000.

“These things all kind of drive each other,” he says. “That's the kind of attitude we're trying to promote, and technology is part of that attitude.”

A manifest destiny for access

Pioneer Tel's latest attempt in trying to replicate its Sergeant Bluff efforts is in Manning, a town of 1400 about 40 miles north of I-70.

When Jeff Carson moved to town in late 1999 after having lived in the Minneapolis area for the better part of a decade, he called the local telco then owned by GTE to set up service. “I called for a voice mailbox and was told I couldn't get one; they just didn't offer it,” he says.

So began a journey that would eventually put Carson in charge of an effort by Manning's municipally owned utility to break the monopoly held by GTE. Manning Municipal — the power company — is part of the Northwest Iowa Power Cooperative, which has an ownership stake in Pioneer's ISP venture as well as an 860-mile fiber loop of its own.

Starting off with not much more than rights of way and some financing from Pioneer, Manning has installed a hybrid fiber/coax system from ADC Telecommunications that covers most of the town and offers a menu of services including 47 channels of cable TV, cable modem service and voice services (including voice mail).

“It's just something that the area had to do for self-survival,” says Carson. “The best thing we offer is service. It's something they've been lacking for years.”

Launching service on Nov. 15, 2000, the company had managed to win over about 450 customers to at least one of its services by mid-February.

‘The best thing we offer is service. It's something they've been lacking for years.’
— Jeff Carson Manning Municipal

The next step is expanding the network to rural areas through an arrangement with the owner of multichannel multipoint distribution service (MMDS) licenses in the area. Using the patchwork of access technologies such as leased MMDS spectrum, Carson envisions giving rural users such as farmers' wives an economic lifeline in which they can work as call center operators via IP voice.

“They've been left out in the lurch for so long,” he says. “I'll bet I've had 150 rural customers ask when they can get our services. We can't afford to buy the spectrum, but if I can get someone to lease it to me, it will make sense.”

Like Winkel, Carson views the effort in Manning as part community service, part economic development with a touch of entrepreneurship mixed in for good measure.

“One of the things we're trying to do is promote economic development,” Carson says. “I think it's a good thing to see for the rural areas. We're not giving up on ourselves.”

Citing a concrete example, he says one growing company was forced to move out of town because it had no high-bandwidth choice aside from a $1400 per month T-1 line to link its Manning office to the outside world. “They lost 22 jobs. That's devastating to a community like Manning,” Carson says.

Indeed, operating in such a small-town environment forces Carson to think through decisions that typically would be no-brainers to larger telcos.

“There are a lot of thoughts like, ‘If I offer inside wiring, how is it going to affect the two electricians in town that rely on that to feed their families?’”

Personal gets political

Not everyone sees Pioneer and Manning's effort as community development.

The Rural Iowa Independent Telephone Association, which represents Iowa telcos that have fewer than 20,000 lines, says the mere idea of competing with a government-backed entity is unfair. It has refused to allow either Manning Municipal or Pioneer into its membership.

“Various members can evaluate their own situation, but as an association we oppose government being in competition with private companies,” says Judy Pletcher, executive secretary and lobbyist for RIITA.

In the Iowa telco environment, which has been staunchly independent for a century, such statements always seem to come with caveats. RIITA itself has about 40 members who have created CLECs, often to compete in neighboring towns. And Iowa Network Services, which provides a number of backbone services to telcos across Iowa, is officially owned by the state.

The difference, says Pletcher, is INS has a specific purpose and isn't designed to compete against the “mom-and-pop” telcos. The ILEC-backed CLECs also must be granted a CLEC certification and fulfill many of the same obligations as ILECs. State law currently allows municipally backed utilities to compete in the telecom market, but they also have the same obligations as incumbents, including universal service contributions.

And that's where things get tricky. Because municipal utilities are government organizations, they don't pay the same taxes as incumbent carriers, according to Alan Wells, president and chief operating officer of Iowa Telecom, a company formed to acquire 300,000 access lines in the state from GTE and that now competes directly with a number of the new CLECs.

“When you look at the size of towns that we serve, in general it's pretty hard to justify having two companies serve the towns,” he says. “Either one or both companies have to suffer. The suffering has really come from the incumbent.”

That's changing, though, with a renewed investment plan. Wells spent some of his time at the launch of Iowa Telecom offering residents a giant mea culpa, noting that GTE did little to help itself in the state and virtually ignored the plant for years, allowing it to deteriorate. In truth, Wells even understands why some towns wanted to start their own telecom companies.

“Most of those municipalities started their operations not because they wanted to make a bunch of money but because they wanted better service,” he says.

With Iowa Telecom, which is partially owned by INS, Wells sees a company that is now committed to upgrading plant and services. It's so focused on it that competing against local utilities will do more harm than good, he says.

“My fear is that when competition really starts, the losers are going to be the municipalities,” he says. “The services we offer aren't a whole lot different. One of the advantages we have is [a] plant in place that is already paid for. At some point, it's going to come down to price.”

In fact, Wells cites a number of towns that have either slowed or halted plans to launch local services after Iowa Telecom completed its acquisition of GTE assets. In other cases, the service offered by the municipality was so poor, customers came back to the incumbents, he says.

“Most of the community leaders tell us they don't want to get into the phone business. I just think most of the towns are going to have a hard time finding a way to make money at this,” Wells says.

However, specific talk of Pioneer's plans to expand its idea out to other towns gets Wells riled to the point that he even accuses the company of running a Ponzi scheme where towns are offered incentives to get others to sign up. He also questions how much revenue is staying in the towns and how much is ending up in Pioneer's corporate headquarters, which are located in Sioux Falls, S.D.

Taxing situations

Carson acknowledges that some poor efforts in other towns have had an effect, but they haven't deferred any plans.

“My biggest adversary is the corner café. People talk about the experience in other towns, and even though you're operating a different company and using different technology, they don't distinguish between the two,” he says, noting that Coon Rapids, 20 miles east of Manning, has had very lackluster results so far using a Nortel platform.

On the tax issue, Carson claims such criticism is unfounded.

“We're taxed the same exact way as any other telephone company,” says Carson. “Our money stays in town, too. The taxes we pay also help support the town. I would say more of our money stays in town than theirs.”

The only advantage Carson is looking for is a filing form from the department of revenue in which the first 30 pages are geared specifically for large publicly traded companies. “We're not asking for breaks. We just need a form that makes sense.”

Winkel adds that municipally owned utilities actually operate at a disadvantage and that traditional Independent telcos are guilty of dipping into the taxpayers' pockets.

“They're trying to say there's some inherent advantage by having government involved. That's just not the case. Jeff is paying 1% over prime [for financing equipment purchases]. Independents can go to [Rural Utilities Service] and get it at 2% and 5% [interest loans]. Where do they think that money is coming from? That's money that came from taxpayers.”

As for giving utilities financial incentives to get others involved, Winkel denies any such arrangements exist and says he only encourages those thinking about joining his group to call others that are already involved.

“I worry that I'm burdening Jeff too much,” Winkel says. “I absolutely do not pay them to get other people involved.”

Carson adds, “What benefit is it to me if a town that's 80 miles away asks me about the infrastructure we've put in? The only reason they call me is to ask if it works. The only thing we're doing here is [trying] to better ourselves.”