Part One in a Two-Part Series

When rural telcos talk about federal policies, as they did this week at the NTCA - The Rural Broadband Association convention in Dallas, they aren't throwing around esoteric theories about net neutrality or Internet freedom or regulatory excess. They are talking about the life and death of the rural telco, and that gives their arguments a very different tenor.

Former FCC member Harold Furthgott-Roth was the first to state the obvious. He took the stage right after a cantankerous opening-day debate in which leaders of two telecom cooperatives lambasted Blair Levin, who headed the National Broadband Plan team. Furthgott-Roth tried to explain why the attacks had been so personal. (See Rural Telcos Go Toe-to-Toe With DC.)

"There's a lot of fear about what is going on in Washington, a lot of fear about the future of their companies," he said. "This is not a theoretical game. These companies have banks that lend them money and if those banks ever saw the National Broadband Plan or the NPRM that came out of the FCC last week [addressing Universal Service Fund reform], they would probably not lend them money."

Justifiable concerns
Fear does seem to be the dominant emotion among the rural telco crowd, and it's perfectly understandable. Many a rural telco leader heads a company that's been a family legacy, or a cooperative that has been a community lifeline. Like incumbent telcos, they are seeing traditional wireline revenues shrink, but their other two major longtime sources of income -- the Universal Service Fund and Intercarrier Compensation -- now are also under attack. (See FCC Proposes USF Reform.)

It's politically popular to portray rural telcos as private firms that are lining their owners' pockets at taxpayers' expense, but most NTCA companies are community-owned and represent areas in which larger telcos aren't interested. People engaged with this community sense the desperation many are feeling.

Bob Harvey is vice president of sales for the central U.S. region and all of Canada for Metaswitch Networks , which got its start in the softswitch business selling to independent telcos. He's a veteran of that process and is seeing a split in the response by rural telcos to the current crisis.

Some companies have been aggressive in rolling out new services, such as IPTV or enhanced business applications, but others are now hunkering down, waiting -- and hoping -- to be acquired by a larger independent, Harvey says.

"They are companies with 300 to 500 lines, who depend on USF and ICC money, and they are seeing no alternative but to sit and wait," he comments.

Many independent telcos that were aggressive in video have had trouble finding profits in that business and are now watching over-the-top video erode their one reliable source of revenue -- video on demand, says Russ Sharer, vice president of marketing for Occam Networks Inc. (Nasdaq: OCNW), another company that built its access equipment business selling to Tier 2 and smaller ILECs.

Pursuing new revenues
At the NTCA event, small telcos were encouraged to get more creative in finding new sources of revenue. Levin challenged them to get more serious about delivering advanced services to businesses and anchor institutions in their region, since there are likely to be ongoing government initiatives to bolster rural health care and education.

Sharer and Michael Romano, senior vice president of policy for the NTCA, believe most rural telcos are already serving their anchor institutions to the best of their abilities.

"Every customer I know of has already hooked up the schools, libraries and banks they serve. They do try to be good corporate citizens," Sharer says. "The challenge is that most of them don't have enough business customers to make a living."

Many cooperatives serve areas outside the small towns in which there are anchor institutions, adds Romano. "There are companies with several hundred lines that don't serve a school, a hospital or a library," he says.

Telco geeks?
Calix CEO Carl Russo used a keynote address to urge rural telcos to think bigger when it comes to both their consumer and business customers, offering IT support as well as broadband connectivity.

"The Geek Squad is an indictment or an opportunity for all of you going forward," Russo said. "You have the opportunity to service your customers better than anyone else."

Calix's idea is for rural telcos to spot and address customer problems early on, using remote software and other tools, generating new revenue in the process. (See Calix Jumps Into SaaS.)

But Calix isn't the only vendor offering new ideas for rural telcos to make money. Next week, part two of this report will look at some of those ideas.

— Carol Wilson, Chief Editor, Events, Light Reading