Phone firms can't spare a dime

As the strain on phone lines stemming from increases in Internet traffic gets increasingly worse, phone companies are under pressure to spend billions of dollars on upgrades or risk delayed connections for regular calls. But the Baby Bells don't want to be stuck with the bill.

Instead, they argue, the Internet service providers that are creating the demand should be the ones to pay.

"Bad economics bring upon us the worst form of meltdown," Michael Fitzpatrick, chief executive of Pacific Telesis Enterprises, said in a speech yesterday at a conference in Anaheim, California. "Not just an electronic meltdown, but a customer confidence meltdown. And that is what could lead to the flameout of what promises to be a really incredible ride."

Even though only eight percent of California households are connected to the Net, some local switching centers are already encountering problems with dial tone and data loss, Fitzpatrick said. He predicted that a huge tie-up of the local network would occur if Internet use expanded to reach 15 percent of local households.

The price tag for the upgrades needed to support the demand generated by Internet usage would be a collective $1 billion for the seven Baby Bells over the next several years, according to a recent study by Bellcore, an industry research group.

The stakes are high, not only for the companies and their stockholders, but for consumers. The bottom line: You could wind up paying more for Internet access or, worse, having your calls occasionally not go through.

Nobody's saying that a phone network crash is imminent. But Pacific Telesis chief executive Phil Quigley, in a speech at an investment banking conference in San Francisco this week, offered this worst-case scenario to hammer home the point: "Those of you who live in earthquake country know what happens when everybody picks up the phone at once. For the rest of you, welcome to town."

Quigley is not alone in that assessment. "The question is not what it does to ISPs, but what it does to consumers," said Sky Dayton, founder and chairman of EarthLink Network. His fear: "People could use the Internet less."

If that happens, it would cause a ripple effect that could stunt the growth of a burgeoning industry.

To prevent that, the Bells have petitioned the Federal Communications Commission to step in and reregulate network access rates to help pay for the upgrade. The government petition includes making ISPs pay more for the infrastructure upgrade.

Quigley sums up the industry's position like this: "Don't look for local exchange carriers to step up to a role of dumb elephants who do the heavy lifting for peanuts; it ain't going to happen."

ISPs have already invested more than $1 billion in Net access hardware, according to market research firm Yankee Group. But that's not enough, the Baby Bells contend.

Pacific Bell, PacTel's subsidiary for phone service, is spending $14 million to $15 million for switch upgrades this year alone, a spokesman said.

But FCC officials said today that it is not expected to weigh in with an opinion any time soon and won't even set the guidelines for how to make rules about changing the rates until November at the earliest.

Meanwhile, Internet demand is increasing by the minute. Online services that provide Net connections are now subscribed to by about eight percent of U.S. households, but the number is growing rapidly. Moreover, the average Internet connect time has grown to more than 33 minutes from around 20 minutes in 1992, according to Pacific Bell.

The history of the problem goes back 13 years, when regulators let ISPs pay the Bells less than the going rate to carry their Internet traffic. The policy was intended to help the fledgling ISPs get off the ground. At the time, the Bells had limited objections.

Why? In those days, ISPs were little more than online bulletin boards for a limited number of users.

But that was then. Today, those Internet providers are barreling toward the mass market with tens of millions of subscribers. With new technologies, the services carry graphics and animation, which further strains the phone network.

But they still pay only about 12 percent of what long distance carriers such as AT&T, MCI, and Sprint pay to use the Baby Bells' network, according to the regional phone companies.

In fact, companies such as Netcom, Microsoft Network, and EarthLink now compete with the Bells as well, since many of the local telephone carriers now provide their own Internet access services.

As Quigley put it, "Now they're in flight, and it's time to pull the flaps."

But even the ISPs that say they sympathize with the Baby Bells' plight wonder if the new competitive picture has something to do with inspiring their recent complaints.

"Part of my concern is that these telcos are getting into the Internet business," said Jeffrey Rubenstein, president of the Florida Internet Service Provider Association and Cybergate, an ISP. "They're becoming our competitors, and now they're complaining."

The likely outcome of the fight is still unknown, although the phone companies do have one of the strongest lobbies anywhere, according to Jerry Michalski, managing editor of industry newsletter Release 1.0.

But so far, the Federal Communications Commission is being careful to adopt a neutral tone and hope the problem resolves itself. In a statement for the FCC, Chairman Reed Hundt summed up the commission's view like this: "I don't know what the full answer is to this problem. But I'm inclined to believe our best guidance is to let technology, competition, and access reform make the problem go away. We are working to open markets so these forces can operate most effectively."