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Small rural firms may hit telecom paydirt

As GTE and others sell their rural networks to focus on urban areas, smaller providers may be the salvation for tiny towns craving advanced phone and Net services.

The small West Texas town of Pecos is about to lose its phone company--and some of its citizens couldn't be happier.

Located about 200 miles east of El Paso, Pecos is typical of scores of rural communities around the United States where big local phone companies are selling their networks to focus more heavily on cities and populous suburbs. GTE recently announced that it plans to sell all of its New Mexico networks and much of its Texas systems to a smaller, local phone company.

These sales have raised some concerns over whether the big phone companies are leaving hard-to-serve rural properties in the technological dust as they move on to more lucrative land with high-speed Internet offerings.

But these small communities say they are happy to see the incumbents go. Town residents and consumer groups believe that companies that aren't distracted by corporate business concerns or urban demands can do a better job than the large phone carriers.

Still, the telecommunications newcomers aren't guaranteed success. They'll face the same hurdles as did the large companies--outdated networks, high upgrade costs, as well as low profit margins.

"I feel sure it will turn out better," said Kenneth Neal, Pecos's city manager. "We don't exactly have a Main Street-, New York-, or San Francisco-style phone system here. We almost never see [GTE] in town."

Off the hook
Far from having high-speed Net connections through technology such as ISDN or digital subscriber line (DSL), Pecos has only just recently gotten caller ID. A single GTE serviceman serves the town's 12,000 residents, Neal said, and residents must wait weeks before phone problems can be remedied.

Sarahlee Tiede, chief of the customer complaints division for the Texas Public Utilities Commission, said her group has been looking into complaints of poor service in some rural GTE communities. But that company is not alone, she said. Other large phone firms have had similar complaints from outlying rural areas--areas often the last to receive investment dollars and network upgrades.

The trouble, many firms lament, is that rural phone service is expensive to provide. The government does give subsidies through the Universal Service Program--fees that appear on every consumer's phone bill. But since profit margins in metropolitan areas are much higher than in rural regions, companies like US West complain that they can not afford to bring advanced services to outlying areas.

That's led some of the big local phone companies to simply sell their lines and move on.

GTE has sold of a number of its rural networks in recent months, nearly completing its planned sale of 1.6 million lines this year. US West has also been active in selling outlying properties, claiming the most rural networks of all the Baby Bells. In its most recent round of sales, US West sold 531,000 lines for around $1.65 billion, spokesman Jeremy Story said.

The companies say they are using the capital from these sales to help fund the introduction of high-speed Internet, data, and wireless services in their territories. Yet companies that are focused on serving rural communities can provide these types of services more efficiently, the Bells say. However, they are also quick to add that they have no intention of leaving their rural customers in a technological backwater.

"We're not abandoning all of our small markets. We will continue to operate any number of rural communities," said Bill Kula, a spokesman for GTE. "Our commitment is to provide customers with the latest advances in technology regardless of where they live or work."

Smaller and more ambitious
The sales of rural lines has spawned a new breed of telecommunications company--many of them owned and operated by minority investors--that are optimistic about revitalizing rural communities with new services.

DBA Communications, run by a group of Hispanic investors, created the firm specifically to buy portions of GTE's rural network. They hope to expand their reach with other acquisitions, but will first focus on modernizing their newly acquired 400,000 phone lines.

"We have a different vision, a different goal for these communities," said Toney Anaya, an investor in DBA and former governor of New Mexico. The group plans to bring DSL to the communities, in an effort to jump-start the rural communities' participation in the information economy.

"This will be very important to the future development of these communities," Anaya said. "Those that don't prepare for the new telecom world will be leapfrogged."

Citizens Utilities, a more established rural telecom provider has similar plans, although the firm says it will take time to modernize much of the network it has acquired from the likes of GTE and US West.

"We've got to make some basic infrastructure investments before we can make those kind of promises," said Brigid Smith, the company's assistant vice president of corporate communications. "In some places, it's more basic than even caller ID and call waiting--things that other areas take for granted."

The transfer of networks to these small companies has been closely scrutinized by state regulators, who worry that newcomers won't have the capital to maintain the existing infrastructure. But for the most part, the firms are well funded--DBA, for example, is backed by more than $8 billion in venture capital, and even grabbed a senior executive from Qwest Communications International to be its chief executive officer.

The companies are keeping their collective eye on long-term prospects, they say. Many of these rural communities are growing quickly, and could become the profitable suburban regions of the future--a process that could be speeded by the addition of a modern telecommunications infrastructure, the companies note.

Smith cites her company's investment in Elk Grove, California--a now-thriving suburban of Sacramento--as an example of rural investments growing well beyond expectations.

Consumer groups have looked at the transfer of these rural phone systems to small companies with some initial skepticism--but agree that the competitive firms will likely do a better job then the large carriers, both with ordinary quality of service concerns and in deploying new high-tech services.

"The factor that they're selling these off is not of special concern to us, because we didn't think they'd roll stuff out there anyway," said Mark Cooper, the lead telecommunications analyst for the Consumers Federation of America.