The Opportunity for a Rural Telco in the IP World

By TMCnet Special Guest
, CEO, Mammoth Networks
  |  November 01, 2010

This article originally appeared in the November 2010 issue of NGN.

Rural phone companies have their work cut out for them over the next five years. While the traditional switched phone system isn't going away overnight, it will be threatened in the future as the Federal Communications Commission starts to shift Universal Service Fund money toward broadband solutions and pushes to eliminate long-distance per-minute charges. 

Encouraged by the publication of The National Broadband Plan and fueled by an influx of federal stimulus money, new broadband service providers have an incentive to edge their way into unserved and underserved areas that rural carriers have thanklessly serviced with dial tone for generations.  

The rural telcos are the same group that has purchased the undesirable exchanges from the RBOCs and invested in them hoping for a return on investment. The Rural Utilities Service, the same group helping to hand out broadband stimulus funds, has trained the rural telco to plan long term by funding projects with a large upfront investment and a long road to profit. The question then begs to be answered: How does a rural telco adapt to the IP world and shorten its investment cycle? The answer is undoubtedly expanding beyond their borders.

If history provides any guidance, one of the real opportunities for rural broadband will be down the road when new entrants realize how hard it is to make a living in a stand-alone rural market and they decide to divest. Who will be around to pick up the pieces? The established rural carrier that has embraced the move to an all-IP world – that same ILEC that has made a business where others had not dared.

Currently, the U.S. Department of Commerce's NTIA and the U.S. Department of Agriculture's RUS program are on track to hand out $7.2 billion in one-time broadband stimulus funding, with the vast majority of that funding going into infrastructure builds. Entities picking up this windfall include rural phone companies, local and state governments, and even larger telecommunications interests.

However and wherever the $7.2 billion goes in either building up rural phone companies or establishing competitors to them, those projects are only the tip of the iceberg of changes on the way. Buried in the FCC's (News - Alert) National Broadband Plan is a decade-long roadmap to revise both the USF and intercarrier compensation. On the FCC roadmap, USF money will be shifted into Connect America and Mobility funds by 2012, with those funds supporting the expansion of broadband infrastructure and high-speed wireless infrastructure, respectively. Over the next decade, the FCC wants to shift up to $15.5 billion from the High-Cost program into building and supporting universal broadband.

Perhaps the ugliest battle awaiting the FCC is its proposal to setup a framework for phased reform of intercarrier compensation to eliminate per-minute charges and "rebalance" local rates to offset lost revenues from ditching the current ICC model. Rural carriers heavily dependent upon ICC will face a drastic change in their operating models and will need other sources of revenue, such as delivering high-speed broadband to more customers and looking at opportunities in underserved RBOC territories.

Needless to say, there will be a lot of haggling and lobbying along the way to move The National Broadband Plan from a vision document into actual goals most people will agree upon. The NBP is just a plan offering recommendations at this point in time, but the FCC has made it clear that it will do everything within its scope of responsibility to bring it to life. There is a trifecta of NRPMs (notice of proposed rulemaking) on USF transformation, USF contributions, and intercarrier compensation restructuring scheduled to come out this quarter.

It is important to keep in mind that USF monies will be shifting to broadband projects, and legislators in both parties recognize the need to shore up the universal service funding base due to declines in revenue as residential customers have shifted from landline to broadband and cellular services.  

So what should a rural telco do? Start investing in an all-broadband future with a five-year timeline. A rural telco has a distinct advantage over its non-facilities brethren – voice experience.   What better group to pursue double- or triple-play services in the fringe RBOC markets than those that are in the sister communities to a neighboring ILEC market?

Further, the FCC clearly acknowledges the need for "no flash cuts" with new rules phased in over a "reasonable time period." While change is coming, rural telcos should have time to adjust to changes rather than simply waking up on a Tuesday and having to turn on the new business model.

At the same time, rural telcos cannot afford to keep thinking business as usual. Standing still is only an option for failure with the number of changes in the pipeline. Betting against all of them is just crazy talk.

Rural telcos will have numerous opportunities for growth if they can pick their battles carefully. A wireless broadband provider moving into ILEC territory to offer access may seem like competition, but the provider is going to need to purchase landline circuits (preferably fiber) to towers, facilities to install gear, and broadband access to the rest of the Internet. Working with the new entrants can bring in steady customer revenue, while forcing them to build their own organic infrastructure means an ILEC receives nothing.

And if a rural telco can deliver bundled services in its own backyard, it has a suitable knowledge base and resources to deliver broadband services to underserved RBOC territories next door. If anything, the rural telco has the advantage since RBOCs have no desire to work with federal grant money due to the potential for various open access strings to be attached and little urgency to invest because they can't get a good enough return on investment for the capital expenditures and overhead they would incur. Secondarily, fringe RBOC communities are typically smaller and rural, meaning they are last on the list of upgrades by the RBOCs for any type of deployment. 

Even more enabling is the fact that a rural telco can be much more nimble than the RBOC once they embrace IP-based services. Moving to an IP infrastructure opens up vast possibilities with numerous third-party (i.e., not RBOC) telecommunications services available, delivering more flexible, innovative, and typically more aggressively priced products. IP easily enables a rural telco to tap into advanced E911 services, SIP origin and termination services with aggressive domestic and international rates, nationwide DID availability, and access to one-stop shopping for DSL and WAN circuits regardless of LATA.

The National Broadband Plan is a great start. If rural telcos position themselves aggressively, they will be around to pick up where the initiative leaves off. This same group also has the cash and the know-how to operate companies that were quick to sell the government an Internet-based business plan.

Brian Worthen is CEO of wholesale service provider Mammoth Networks (News - Alert) ( ).

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Edited by Stefania Viscusi