A Telecom Yankee Defends Its Turf

Can Connecticut's SNET keep AT&T and other titans at bay?

David E. Joslin of Lebanon, Conn., may be a harbinger of the telecom future. Sick of telemarketing calls from big-name long-distance companies, Joslin, a 30-year-old computer graphics designer, chose the only carrier in his state that offers local and long-distance calling on one bill: Southern New England Telecommunications Corp. (SNET), a $1.84 billion, 118-year-old independent phone company that serves only Connecticut. A few months later, he heard that SNET offered Internet access. Since SNET already had his billing information, he signed up with a few mouse clicks and a phone call. "Time is money," he says.

Connecticut's phone customers are providing important clues as to how the telecom battle will shape up now that federal regulations barring competition have been quashed. Even before Congress passed a sweeping deregulation bill last February, the Nutmeg State was loosening restrictions on local and in-state toll calls, allowing new entrants as large as AT&T and as small as cellular operator Connecticut Telephone to storm the market. So far, 14 companies have been authorized to offer local service in the state, and 130 can carry in-state toll calls. And all of them are after New Haven-based SNET.

The stakes for the defender are brutally high: win or be swallowed. Bell Atlantic and Nynex, which cover all of the Northeast coast except Connecticut, have announced plans to merge. If the merger goes through on schedule by early next year, SNET, the hole in the middle of this telecom-rich doughnut, could be a prime takeover target. The two companies deny any interest in SNET, but they also question its ability to stay single. "We certainly thought we needed to be bigger to survive," says Nynex Chairman Ivan Seidenberg. "I don't know what they're thinking."

SNET's strategy: come up with the services, prices, and marketing that will keep customers from switching. It has no time to dither. Tele-Communications Inc. (TCI) and a handful of other competitors are already offering limited local service. Once the state sets local resale rates early next year, other rivals will start grabbing local-calling business. The incumbent's ability to handle the challenge will resonate far beyond its region--its fate could be an omen for the 900 or so non-Bell local companies.

Despite its small size, SNET has some important advantages. Because it wasn't part of the Bell System at the time of the 1984 divestiture, SNET was never subject to the same federal restrictions as the Baby Bells. It got the go-ahead from regulators to offer long distance in 1994; the Bells are a year or more away from chasing the same prize. Connecticut regulators also granted SNET the nation's first statewide cable-TV franchise on Sept. 25. The company expects to roll out service early next year, using a $4.5 billion fiber-optic and coaxial cable network able to carry voice, video, and data simultaneously.

SNET has wasted no time going after new markets. It began reselling Sprint Corp. out-of-state long-distance service in April, 1994. To date, SNET has signed up about 30% of its customers for the service and has 20% of the $550 million market for Connecticut's interstate calls, estimates Merrill Lynch & Co. analyst Richard C. Toole. He figures that in Connecticut, AT&T's market share has dropped from 60% to less than 50%, thanks to SNET. "The voracity with which AT&T is competing in Connecticut indicates they're not pleased with their market share," says Yankee Group Inc. consultant Boyd C. Peterson.

Indeed, based on what's happening in Connecticut, it looks like the local phone monopolies may be better competitors than many analysts expected. Not that SNET is the model of a modern phone company. Despite cost-cutting moves, at the end of the first half, it had 41.5 employees for every 10,000 access lines, compared with an average of 30.8 for the Baby Bells. Only 56% of its network has been converted to digital lines, which are critical for carrying new high-speed services such as fast Internet access. Neighboring Nynex has upgraded 81% of its lines with digital technology.

NICKEL RIDE. SNET is proving its marketing savvy, however. In May, when AT&T offered Connecticut residents a rate for in-state calls of 5 cents a minute, it took SNET just a day to come back with its own savings plan: billing all in-state toll calls in one-second increments rather than rounding up to the next minute, as AT&T does. In July, SNET offered $75 in free out-of-state calls for three months.

But SNET can't succeed on marketing alone. Ultimately, it wants to be able to offer local, long-distance, cable, wireless, and Internet services, all on one bill, with one service rep. It's gambling on the $4.5 billion network upgrade--due to be completed by 2007--to keep customers in its court with all sorts of interactive services, such as video calling and home shopping.

In the meantime, SNET is moving on the regulatory front to delay competition. In May, it tried to get itself classified as a rural phone company so that it could continue as a monopoly under a waiver set up by federal laws. Competitors were incredulous--Connecticut is one of the most densely populated states--and state regulators said no. In August, SNET tried again, filing court challenges to a federal ruling on the wholesale rates it must offer competitors that want to resell its service. Those challenges are still pending.

SNET knows that, at most, it can delay competition, not prevent it. "We recognize that all our markets will be open, and that's not a bad thing," says SNET general counsel Madelyn M. DeMatteo. AT&T, which aims to start testing local service in Connecticut by yearend, brings a lot of firepower to the contest, especially in terms of brand image. In consumer surveys, 70% of Connecticut residents said they would choose AT&T for all calling needs. "I don't get up every morning and climb in the bunker and worry about what SNET has done the day before," says David Bogue, AT&T's Connecticut vice-president.

SNET, though, has reason to worry. Competitors are likely to grab 15% of its $650 million a year in local revenues, says Lehman Brothers Inc. analyst Blake Bath. "We have nowhere to go but down in local," admits Ronald M. Serrano, head of corporate development for SNET. And companies from all over are eager to try their hands at local calling in Connecticut. "It's quite a fishbowl for testing in the telecommunications arena," says Terri Bryan, marketing director of TCI's Telephony Services Div.

To ready the company, CEO Daniel J. Miglio wants to diversify through strategic partnerships. SNET just joined Americast, a programming joint venture of BellSouth, GTE, SBC Communications, and Walt Disney. Miglio has also slashed costs 17% over the past four years and cut the workforce by 13%, to 9,000.

But all the partnerships and cost-cutting will not give SNET the marketing clout, economies of scale, or financial muscle of the telecom titans it is about to face. That may not matter, however, if one of these rivals decides it would rather buy than fight.

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