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RESIDENTIAL PHONE COMPETITION DISCONNECTING

The future looked bright in 1999, when New York was a hotbed of telephone competition.

Sprint, MCI and AT&T all rushed to go head-to-head with Bell Atlantic, making New York the first state in the country to see real choice for residential service.

But instead of a competitive tiger, New York's free market looks more like a sick kitten, at least as far as residential telephone service is concerned.

Choice for home phone lines is failing to take root in New York, as would-be competitors AT&T and Sprint retreat from the market despite having attracted tens of thousands of customers.

The newcomers say Verizon's monopoly power is driving them out. But some experts say that low, regulated rates in the home phone business make it tough for anyone to make a buck.

"I don't think there is any competition for local (residential) service, nor do I think there will be," said Robert Rosenberg, president of Insight Research Corp. in Parsippany, N.J. "There is no relief in sight."

AT&T said last week that, without regulatory changes, it will stop selling residential service in New York state because of the price it pays to lease Verizon's lines. AT&T chief Michael Armstrong called the lease rates it pays for Baby Bell lines, including its 750,000 leased lines in New York, "exorbitant."

Sprint beat AT&T out the door, having switched most of its 15,000 residential customers in New York back to Verizon by last week.

Of the big long-distance carriers, only MCI-Worldcom said it is making a profit in New York's market for local, residential phone service. A spokeswoman wouldn't discuss the company's level of profitability or the number of customers.

In New York state, competitors pay Verizon $12.49 a month in cities, $19.24 a month elsewhere, to lease a copper phone line. The amount doesn't include rental charges for space in Verizon facilities where competitors set up their switching equipment.

Verizon said that the rates for its lines are based on its cost and regulated by the state Public Service Commission.

What makes residential service a lean business is the regulated prices that providers can charge consumers, it said.

"Historically business customers subsidized residential rates," said Edward Young, senior vice president of Verizon federal government relations. "If you're providing a full package of services, you make your money somewhere else."

Last week marked the fifth anniversary of the Telecommunications Act of 1996, which was supposed to launch a new era of competition. New York was the first state where the incumbent monopoly phone company, then called Bell Atlantic, met regulatory requirements to enter the long-distance business. That sparked the long-distance companies push into New York, in a kind of pre-emptive strike.

But while some would-be competitors are calling the law a failure, smaller phone companies called CLECs or Competitive Local Exchange Carriers say they're thriving in New York while telecom giants flounder.

The difference, they say, is their focus on business lines, where regulated rates are nearly twice what they can charge for a residential line.

"It's the exact same potatoes but in a more expensive bag," said Vern Kennedy, head of Broadview Networks in New York City.

Broadview, which once targeted residential customers, now has less than 25 percent of its base in the residential market. The company can charge business customers $16.50 a month for providing a line, while it can charge only about $10 for a residential line, he said.

After paying for the line itself, "you still have your sales costs, billing cost, collection cost," Kennedy said.

The line rates reflect regulatory "tariffs," not the actual bill that customers receive.

In fact, Sprint will continue selling business phone service in New York while it withdraws from the residential market, said Tom McNamara, senior manager of regulatory affairs. The company plans to re-enter the residential market in the future, using more of its own equipment to reduce lease costs.

Said Young of Verizon, "A lot of companies are doing business without regulatory favors."

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