In Verizon's shadow

Little guys: The effort to create local phone competition against the powerful regional Bells is called a failure by many. Here are the stories of three tiny competitors.

October 07, 2001|By Andrew Ratner | Andrew Ratner,SUN STAFF

The telephone industry once was contained in two words: Ma Bell.

It's much more complicated now.

Today, hundreds of companies compete to provide phone service in the United States, although they have been going out of business this year at the rate of almost one a week.

Four large companies that spun off from the former Bell System, including Verizon Communications Inc., control about 90 percent of the $700 billion industry. Hundreds of other companies known as Competitive Local Exchange Companies, or CLECs, split the remaining 10 percent.

Many thought the balance would have looked different - more competitive - after the 1996 Telecommunications Reform Act. That was the landmark federal legislation that sought to advance deregulation of the industry that started with the court-ordered breakup of American Telephone and Telegraph Co. in 1984.

Investors were shaken by a succession of bankruptcies buffeting large telecommunications providers, including Covad Communications Group Inc. of San Jose, Calif.; Winstar Communications Inc. of New York; Rhythms NetConnections Inc. of Englewood, Colo.; and Teligent Inc. and PSINet Inc. in Northern Virginia.

The Sept. 11 terrorist attacks further tightened debt pressures. During the past week, two broadband phone services companies based in Northern Virginia, Net 2000 Communications Inc. and XO Communications Inc., announced cuts of 300 and 600 jobs, respectively. Net 2000 also said it will retreat from its push into the Philadelphia market.

The meltdown disheartens industry officials who say consumers need more robust competition to lower prices and improve service, especially with high-speed transmission of data and Internet service.

The long-distance market, led by AT&T, Sprint Corp. and WorldCom Inc. and now wireless phones, has been much more competitive than the local service market. AT&T has been so roughed up, it has begun shopping its telephone unit to the regional Bells, who now appear stronger than the parent from whence they sprang.

"To be honest, no one expected the roller-coaster would go up so high up and then it would be a dizzying descent that would leave a lot of people sick to their stomachs," said Reed E. Hundt, who led the Federal Communications Commission from 1993 to 1997 and now is involved in several telecommunications companies.

"The Bells operate according to the normal laws of the jungle. They try to butt heads with their rivals and knock them out. It's the FCC's job to be the referees, be clear, and they aren't."

This is a story about three of the roughly 125 CLECs licensed by the Maryland Public Service Commission to operate in the state - the phone companies you've likely never heard of.

Global Telecommunications

"Why would anyone get into this business?" asked J.R. Liquefatto, a vice president at Global Telecommunications Brokers in Owings Mills, repeating his questioner's question. "It's beyond me. We struggle every single day to keep our head above water."

This hasn't been a stellar year for Global Telecom, at least by recent standards. Revenue is up 40 percent, but it grew at a 200 percent clip the previous two years, said Dror Mei-Tal, the company's owner. Still, the company has 35 employees, up from five in 1997, and this spring moved into a new office park a few miles from the Owings Mills mall.

Mei-Tal , 39, retired as a major in the Israeli army after he was wounded in Lebanon in 1984. He traveled to New York with his wife to begin college, but a visit with friends in Maryland convinced him that the Baltimore area was a better place to live.

After gaining a business degree at Towson University, he sold discounted long-distance phone service to small businesses. He decided to use his contacts and knowledge to launch a company in his basement.

Rather than trying to amass the capital to construct his own phone network, he took advantage of a provision in the 1996 Telecommunications Reform Act. It enabled him to rent portions of Verizon's lines at wholesale prices, then resell them below Verizon's retail rates, but still at a profit.

The premise of the reform legislation was that competitors couldn't possibly afford to duplicate the existing phone system, especially the so-called "last mile" into nearly every home, which it took a century to build in a virtual monopoly.

But therein lies one of the main obstacles of telecommunications deregulation as it exists today - competitors of the giant phone companies are often also their clients.

The arrangement isn't as odd as it might seem, said Hundt, the former FCC chairman. Federal courts ordered Hollywood studios to open their theaters to other moviemakers in the 1940s and car manufacturers to open their dealerships to small competitors in the 1970s.

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