It's Gut Check Time

12:25 PM -- INDIANAPOLIS -- IP Possibilities Conference & Expo -- You can't listen to anyone for more than a few minutes here without hearing a reference to what "Washington" and the Federal Communications Commission (FCC) are doing to independent telcos. The hot topics: Universal Service Fund changes, expected cuts to the rate of return, changes in Intercarrier compensation, and even greater fears of what's to come.

And don't get anyone started on Quantile Regression Analysis, or you're likely to start a riot. (I'm not explaining that reference to the uninitiated, but JSI Capital Advisers does so here.)

This isn't a conference on regulation, however -- the point of this event is to focus on the potential of IP-based services and applications to help small independent telcos and cooperatives find new revenues to replace what they are losing.

The obvious question then is: Are these companies willing to risk further investment in their future, without the aid of federal subsidies, under clouds of regulatory uncertainty and no assurance of seeing a return on that investment?

In other words, can rural telcos live in the real world of business?

Their major vendors are pushing them in that direction. Companies such as Adtran Inc. (Nasdaq: ADTN), Calix Inc. (NYSE: CALX), CHR Solutions Inc. and Metaswitch Networks -- all of whom are big players in the small markets -- have a common mantra here, and that is this: It's riskier to stand still and not invest, than to push forward and take a chance on the future.

As Ray Carey, CEO of NeoNova Network Services Inc. , told a panel I moderated on cloud services, there are plenty of companies ready to step in and serve the business customers that independent telcos serve today -- Google (Nasdaq: GOOG) and Microsoft Corp. (Nasdaq: MSFT) are two -- but many of those customers would prefer to do business with the local firm, if they can.

If that local firm is more focused on cutting back -- eliminating employees, reducing network investments, ignoring new service possibilities -- the business will go elsewhere.

At least some folks here think that's just fine with the FCC: Washington wants to see greater efficiencies and that means consolidation of smaller companies into larger units with greater economies of scale.

So it will really come down to the telcos themselves. Survival is a possibility, but it's going to take more intestinal fortitude than what's already been required of these companies.

— Carol Wilson, Chief Editor, Events, Light Reading

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paolo.franzoi 12/5/2012 | 5:36:34 PM
re: It's Gut Check Time


I know what Calix will claim but, has anybody done any work into how much lower their revenue will be when new rules hit?

I read what is being written in your article and find it unlikely to happen.  It does lead me to believe that there are potential business opportunities here (like with any change) but I don't believe these are going to be IOCs increasing investment.  The only way they have afforded what they have is with subsidies.  The most humorous part was the insinuation about competiton.  The whole reason most of these companies exist is that NOBODY wanted to invest a single dollar to bring ANY service to those areas.  There isn't other players coming into those markets.  The only thing that started folks down that path is the idea to get some of those fat subsidies.



fgoldstein 12/5/2012 | 5:36:34 PM
re: It's Gut Check Time

The Universal Service Fund was a blank check for rural ILECs.  Literally.  They were ensured a spectacular 11.25% rate of return.  They could leave their retail prices at 1990 levels (like $8/line for a phone), collect a share of their revenue requirement from intercarrier compensation (access charges), and simply send USF the bill for the rest.

So some of these small telcos have big staffs to handle small loads.  Why not, when somebody else is paying?  Some have invested in ridiculous Fiber to the Ranch networks when wireless would do (so Border to Border, for instance, gets >$1000/month of subsidy for each of its 96 or so lines, to pay off their FTTR build, though they had previously covered their whole territory unsubsidized via unlicensed WISP radios). 

The new plan is so draconiian that it custs legacy support by a whopping five percent!  Oh the horrors.

No wonder these companies are traded by financial players who see the USF cash as a simple annuity.

cnwedit 12/5/2012 | 5:36:32 PM
re: It's Gut Check Time

Actually, the competition to which I referred is OTT competition - it exists today for business services such as hosted email. Location is irrelevant for Google - a business can be in the middle of nowhere and still use its apps. And Ray Carey's point is that businesses that go directly to Google or another cloud-based service represent lost revenue for the local LEC.

shygye75 12/5/2012 | 5:36:32 PM
re: It's Gut Check Time

Carol -- Does the FCC really think that cutting USF would result in some sort of economy of scale? Didn't the big telcos already bail on the rural market? Why would they have any reason to re-engage if the business case is even weaker than it is with subsidies?

Flook 12/5/2012 | 5:36:32 PM
re: It's Gut Check Time

You're saying USF is like ObamaCare, right?

paolo.franzoi 12/5/2012 | 5:36:31 PM
re: It's Gut Check Time


Mail service is free....so lost revenue (humor)?

Is what they are driving at is OTT Business Services?  That is part of the unregulated side of a carrier.  The USF stuff is all part of the regulated side.  They are not supposed to be subsidizing their unreg side with their reg side.  If they do that is a big no-no and people will go to directly to jail without passing Go.




cnwedit 12/5/2012 | 5:36:31 PM
re: It's Gut Check Time

What they are driving at is the full range of business services, not just email, which may be a free part of consumer broadband but is not free to businesses who want hosted Exchange.

What the entire IP Possibilities event is about is finding new revenues to keep companies going, not mixing up regulated and unregulated sides of the business. Many of the small telco folks I talked to in Indianapolis are looking at all kinds of things to keep the doors open.

Is it as easy as articles based on vendor quotes make it sound to offer all this new stuff? Of course not. But I didn't talk to a single telco exec who didn't think it was necessary and important.

cnwedit 12/5/2012 | 5:36:31 PM
re: It's Gut Check Time

The FCC has actually redirected federal funds to areas of the country that don't have broadband today, which makes sense if you are trying to get to universal broadband.

Since the vast majority of those areas are rural territories served by a large incumbent (because large incumbents have intentionally directed their investment to areas in which they could turn a profit, big shock), the consequence of the FCC's action is to send what used to be USF funding (now to become Connect America) into the pockets of AT&T, CenturyLink and Verizon. The figure being bandied about is 85% of unserved areas are in big telco footprint, but I haven't verified that.

The stats that are being widely quoted by rural associations regarding the impact of the changes is that the rural LECs have invested most heavily in broadband infrastruture will get a "major haircut" (that's the technical term) in terms of subsidy cuts; while another larger group of rural telcos in the mid-range will see some revenue reduction but nothing major, and a small group at the bottom of the investment pyramid might actually benefit.

The FCC  has sent clear signals that it won't fund inefficiencies and that it thinks many small telcos are inefficient. One point Geoff Burke of Calix makes repeatedly is that the FCC is actually telling small telcos that their customers need to be paying for a bigger portion of their services, and obviously that's a point on which many USF critics would agree.

fgoldstein 12/5/2012 | 5:36:30 PM
re: It's Gut Check Time

> You're saying USF is like ObamaCare, right?

No.  I'm saying it's more like the Bush Pentagon.

paolo.franzoi 12/5/2012 | 5:36:30 PM
re: It's Gut Check Time



I guess I think it is odd that these IP services are going to be a big seller for a 10,000 line phone company.  There is a bank, a flower shop and an Agway.  The COST to deliver these services on their own will be massive which means they get to give it to Neonova or Google or someone else.  The reason for the cost - lots of new IP people...good ole cousin Eddie can't run the IP services cloud.

There are places like INS, Airstream and Comporium where this might make sense but for the individual telco this is going to kill them not save them.



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