"The dynamics are shifting," said Jeff Kagan, an independent telecommunications analyst. "It's a different marketplace than it was five or six years ago. The Baby Bells are already facing competition from wireless providers, cable operators and VoIP," or voice over Internet Protocol.
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Kagan believes that the Baby Bells will eventually realize that it's in their best interest to build a strong wholesale business with competitive carriers rather than to try to drive them out of business. Local phone companies are already losing market share to wireless carriers and cable operators that are offering voice services. And now, with companies like AT&T and Vonage offering consumer VoIP, the Baby Bells will have even more reason to strike deals with competitors, he said.
"These guys no longer have 100 percent of the market," he said. "It's very short-sighted of them to raise prices so high it puts the CLECs (competitive local exchange carriers) out of business, because they could potentially become a good source of revenue for them."
In March, a federal appeals courtthat provided competitive carriers access to the Baby Bells' network at regulated rates. As a result, the Federal Communications Commission asked the Baby Bells and the carriers to negotiate commercial agreements on their own.
Since then, competitive carriers and the local phone companies have been trying to hash out new agreements by the. So far, only a few small agreements have been signed, and some critics believe that the closed negations are not going well.
FCC Commissioner Kevin Mitchell has stepped into at least one negotiation, after it was brought to his attention that local phone carrier SBC Communications had submitted a proposal that would not provide fair terms to Reston, Va.-based competitor Talk America.
On Monday, the commissioner's office requested confidential documents that were part of SBC's proposal from Talk America. According to a Wall Street Journal article, SBC's proposal would require Talk America to send 90 percent or more of its phone traffic to SBC's network instead of using its own equipment. It's also requiring that the company not enter similar agreements with rival phone networks.
SBC spokesman Dave Pacholczyk said the company is negotiating in good faith with Talk America and all other competitive carriers. The company argued in a letter to the FCC that it was one of the first companies to strike a deal with a competitive carrier, Sage Telecom.
"They have a business to run, and we have a business to run," Pacholczyk said. "But it's tough to run a business when you're giving money away."
Other competitive carriers have voiced their frustration with the Bells. Earlier this week, CompSouth, a coalition of local providers operating in BellSouth's region, publicly criticized BellSouth for creating a "false sense of cooperation" with competitive carriers.
"There are 2.7 million residential and small-business customers benefiting from competition in the BellSouth region today from carriers leasing facilities from BellSouth," Joseph Gillan, an economic adviser to CompSouth, said in a statement. "The companies with which BellSouth has reached agreements are estimated to serve less than 1 percent of this market. These agreements are not evidence of reasonable negotiations."
Last week, AT&Tthat incrementally increased leasing rates for the use of the Baby Bells' switching gear. Within hours, the offer was rejected by the local phone companies. BellSouth described the proposal as "a desperate attempt to perpetuate the regulatory scheme that was vacated by the D.C. Circuit Court on March 2."