November 1, 2009

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November 1, 2009

Ted Smith, Stoel Rives, LLP Gary Nieboer, Integra Telecom Myron Perschon, Cache Valley Electric Steve Proper, Comcast Eric Isom, Qwest Travis Starkel, Qwest Matt Reed, Telesphere Layne Sisk, ServerPlus Steven McGhie, Utah Broadband Rex Knowles, XO Communications Spencer Cox, Western FiberNet Nate DiPalma, Leave Me On Hold Matt Horlacher, Holland & Hart The ability to be connected wirelessly with speed and reliability is revolutionizing the way we do business, and the way we live. At this year’s telecom roundtable, Utah Business brought together a varied group of industry players to discuss the most pertinent issues facing the industry, including government regulation, technology convergence, Internet Service Provider trends and VoIP issues. The group also discussed the overall health of the telecom industry and up-and-coming products. We’d like to give a special thank you to Ted Smith, partner at Stoel Rives LLP, for moderating the discussion and Holland & Hart for hosting the event. How is Utah’s telecom industry handling today’s rough economy? KNOWLES: I know that it's a difficult time for a lot of customers. They're having a hard time coming up with money to invest in things they want to do and that they need to invest in. And their decision time frames have been expanded quite a bit—they’re taking longer to make decisions. They want to make sure they spend their money prudently. But with that said, my company, XO Communications, is actually seeing growth. Our revenue is still growing and we're still investing in capital. So though times are tough, the biggest change we’re seeing is our customers are looking to spend their money more wisely. And we think that the products we're offering facilitate that. We’re seeing a lot of people moving toward Ethernet, IP, VPN type, MPLS type networks. And they're spending a lot of money to try and get those up and running. We have customers who have enough demand that we're investing and getting them on our own network whenever possible. We're spending money on actually making the connections, adding fibers, to our highest demand customers. So, we’re spending money that way. We're also expanding our national IP network and expanding that capacity quite a bit as well. We've spent $450 million in the last couple of years on a variety of those types of capital expenditures. ISOM: Obviously the telecommunications industry has been a very competitive industry. And I think the downturn in the economy has made it even more competitive. At Qwest there are basically three focuses we'd like to point out. With the downturn in the economy, we've tried to focus on retaining customers and making sure that we work on perfecting the customer experience, making sure that we listen and are providing what customers expect and the services and the products they need. And then, obviously, we're also focusing on our anchor service of high speed Internet, working on our fiber-to-the-node deployment to increase bandwidth and provide the types of speeds that customers are wanting. We then are looking at reducing expenses and streamlining operations and creating efficiencies. So those are three focuses that we've looked at in the downturn of the economy. SISK: My company, Serverplus, provides services to the providers. What we're seeing is a significant increase in interest in outsourcing in order to lower costs. We had our best first half of the year we've ever had since we've been in business. It's because we're seeing people saying we've got to figure out how to cut costs, we've got to figure out where those efficiencies are. So for us, it's been actually a great boon—we've had our best year. McGHIE: I think telecom is a good industry to be in during this kind of an economy because communications don't go away. People still have to communicate. My company, Utah Broadband, is in the Internet business. If you take just the Internet business and you look at it either on the residential or the business side, communication is always important. For residential consumers, even if they lose their job, the last thing to go is the Internet because they need it to find a job. To businesses, on the other hand, communication and the Internet are critical. So really, as Eric [Isom] pointed out, it's really more about the competitive environment, not about attrition in the market. COX: And adding on to what Rex [Knowles] said, what we're seeing with consumers being more careful with their dollars is that they're actually focusing those dollars internally. They’re spending on entertainment, the Internet, videos—those types of things. People aren’t going out as much and they aren’t travelling as much, but they still want those escapes. Overall, we're definitely seeing a growth there because they're willing to spend more on broadband and video. PROPER: I agree with that statement. There's been much publicized cord-cutting that was spoken of early on going into the economic downturn, but we just haven't seen it on the video side. It's not to say we haven't had to make adjustments. From a company perspective, Comcast finished pretty well in 2008. Our operating folks saw the downturn coming and made the operating adjustments necessary. But we find that on the video side, in particular, people are making value assessments and judgments in terms of where they spend their entertainment dollars. Studies have shown that consumers are watching more video than they ever have—it’s where they're watching videos that has changed. They’re not necessarily just watching their TV anymore. They’re watching on the Internet and even on their mobile devices. What this means is that there is opportunity out there. SMITH: It would really be interesting to see if more people are going to theaters or watching movies at home. It is obviously more economical to watch at home, but people enjoy going to the movies. With the economy being down and the convenience of being able to bring movies into the home via cable or wireless—there are many ways to get entertainment—and I’m sure it’s having an impact. PROPER: I agree. In fact, one of the products that we're looking at is the Internet. Some folks have said, "Well, isn't the Internet going to be a bit of a competitive challenge to the cable operators of the world?" We see the free video right now as a product in development. If you'll recall the Napster days, when the audio business was free—we see similarities with today’s Internet videos. We're developing a product called On Demand Online. This product authorizes Comcast customers’ computers to be able to download On Demand services from their computer. So, if you receive HBO, for example, you would be able to download all HBO On Demand content. And not just at your home, but even if you’re on the road. The technical quality is far superior than just the standard streaming video you would see today. It's quite remarkable. ISOM: Steve [Proper] made a comment that made me think a little bit. Oftentimes during downturns in the economy, individuals look at ways to increase efficiencies—and today’s technology has really enhanced efficiency. More and more organizations are realizing how efficient their operations can become by using the Internet. I think state government is an example of an organization that’s turning to the Internet to become more efficient by having more individuals complete services online. And businesses also look at ways to automate or implement technology to increase efficiencies. Whether it's telecommuting or online services, individuals and businesses are using technology and looking to the Internet and other advancements to save time and money. REED: Despite the recession, new technologies are still emerging. Technology is still creating new jobs for people in the telecom industry. And advancements are giving customers more of choices. For example, we’re seeing things like VoIP come out. Overall, the telecom industry and the development of new technologies are still doing strong in this economy. NIEBOER: From Integra's perspective, the industry is doing well. We're seeing higher sales than we've ever seen before. The main issue that we are having to deal with is seeing a lot of our customers going out of business. So even though we’re doing OK, our customers are not, which impacts us. Dealing with late receivables and customers that are really struggling and even shutting their doors is probably the only thing that’s really stopping our growth. We're expanding, putting in new technologies, upgrading all of our existing networks, as well as expanding into new areas. While we do that, we're also picking up new customers. But we can’t dismiss that a lot of customers are going away because they’re going out of business, and that keeps us from being able to get the growth that we'd like to see. Many of the state’s telecom companies have experienced mergers and acquisitions during past years. Is this trend still occurring? SISK: We're actually seeing quite a few acquisitions and mergers. But they're not necessarily because two equals decided to merge; it's because somebody doesn't have the finances and somebody else is stepping in to take over. And that's happened fairly frequently. No one wants to advertise that it’s happening, but it is. NIEBOER: I think we're on hold for a short period of time. Capital markets are certainly tight. They were a lot tighter months ago. And I think the structure of deals in the future may look a little bit different as well. In the past, there was a lot of debt that funded acquisitions. Now I think you could see more stock swaps. But I think we're a ways out before we really start seeing the action happen again. But I do think it'll happen again. KNOWLES: What I'm seeing now isn’t so much the big guys acquiring the little guys, but companies like Verizon trying to get rid of some of the more rural areas so they can focus on their core, large areas and not worry about universal service issues and things like that that they might have in the past. They’re trying to get rid of their non-prized territories. So, it’s really that the industry is experiencing restructuring. Are your medium- and large-sized customers still buying technologies from you? REED: The [telecom industry] will continue growing as long as that new technology really brings a value to corporate America, whether it be through features or whether it be efficiencies—such as converging the cell phone and the office phone and the computer into one. Wherever there can be efficiencies, the business community is open to new technologies. KNOWLES: We've seen that customers are looking to spend their money more wisely. They're moving away from the traditional services where you have to have your telecommunications network separate from your data networks. Customers are actually getting a lot more capacity than they had before. And they're using it all for the variety of services they're using. So they're actually saving money by spending more money with us. Which is why the telecom industry is doing well. Overall, telecom has become more efficient for them. And it's actually given us an opportunity to sell our new technology because it's better for the customer. PERSCHON: I think that the customers that are out there are looking for the best value they can get right now. We've been very fortunate as a company because of how we go to market with our customers, we've actually seen a 15 percent increase this year in our telecommunications side of our business. COX: I think every rural LEC has upgraded to a new soft switch technology over the last year and a half to two years. The two major players on the soft switch side that we've seen deployments here in Utah have been MetaSwitch and Nortel. On the data side, there is a lot of Cisco equipment, a lot of Juniper equipment and a lot of different routers, gateways, and other things that are going in there. But as far as the LEC side goes, Nortel is still the big player. NIEBOER: I think the legacy switches, in a way, are being replaced. For example, we just ordered switches in all of our markets. And the long-term plan is to replace all the legacy switches we placed in the last five to 15 years. So we're doing that today. The technology in the 5e, as an example, is no longer really supported all that well and getting parts is going to start being difficult soon. So some of that legacy equipment is going to be replaced with different technologies and different equipment. McGHIE: We actually find right now is a good time to invest and to make infrastructure upgrades. Inevitably, the market will shift and growth will happen. People upgrade different things. This is a good time for that kind of investment. And that's what we're doing. Are your suppliers, given economic conditions, willing to be more flexible with pricing? Are you finding deals out there to keep products flowing? McGHIE: I don't know that we're finding deals like the housing market on equipment, but people are more anxious to make sure there is product flow, so there are deals out there. But I wouldn't say it's bargain basement stuff. PROPER: I would add that in order to continue to stay competitive with products and services, it starts with the network. At least speaking on behalf of Comcast, we've always been a pretty capital intensive business, but increasingly so. And it starts with the network. So in order to stay competitive, provide products, provide the services, it requires investment—there must be a continued investment in the network. And we haven't seen that slow down a bit. ISOM: At the end of 2007, Qwest started deployment of fiber-to-the-node. In 2008, we had our first full year of fiber-to-the node deployment and then we've continued that this year and plan on continuing it in 2010. But in addition to deploying facility to allow us to increase speed, in July we announced that we were going to be offering download speeds up to 40 megabits per second and upload speeds up to 20 megabits per second. Qwest also announced that we are going to launch a fiber-based Ethernet backhaul service designed for wireless service providers. And that will leverage our fiber-to-the-node deployment and allow Qwest to take fiber out to the cell sites and be able to help wireless meet the increased demands. Is cellular communication going to continue to be a huge growth driver? What are the new wireless services we're going to start seeing? COX: There is growth occurring in the wireless industry and there is some pretty aggressive growth into the rural areas. T-Mobile has had a really aggressive build out over the last year, adding new towers. I think we're all in the same game. And it's faster speeds and more applications. We, too, are delivering Ethernet to cell sites. The kinds of bandwidth that they're consuming in these cell sites are really increasing rapidly. And so when we talk about where we're headed, it's the Internet and it's applications are faster and smaller. The iPhone has been a tremendous boon to AT&T. Nobody knows exactly when it's going to be available to the other providers, but probably within the next year. And those devices are driving growth as well. It's one of the reasons it's hard to crack into the wireless market, especially as rural carriers, these exclusive deals for handsets. McGHIE: People used to have to have laptops wherever they went to be able to access those applications. And now they just pull out their phone and can do the same thing on their phone. So there is a huge swing going that direction for sure. COX: For the first time ever, during the past year the cell companies have actually seen their voice minutes drop because people aren't talking to each other any more. Instead, they’re using other forms—like text messaging and emailing—to communicate. And that's a driver of technology. McGHIE: I went down to my kid's room and he's got three or four friends and they're all laying on the bed texting. Kids don’t talk. SMITH: It is an interesting phenomenon how the devices we have tend to define our interactions. This whole new texting world and the language that it has created is an interesting phenomenon. With faster speeds, greater capabilities in the handsets and the networks, there is going to be more and more and more things we're going to be able to do on a very small device. COX: That’s all true. And again, the convergence of those devices with the devices in the home is really the next frontier. The question is, how are we going to converge all of these different technologies? That's what people want to know. People want one carrier— they want somebody to bring all of that to their home. Is it going to be the set top box that drives all of that? You know, there is all this great video available, but I want to watch it on my 54 inch plasma I just bought. I don't want to watch it on my computer. And so what device or how are we going to converge all of those? Am I going to be able to text on the television while I'm watching my shows? Am I going to be able to do those different things? And that convergence really, I think over the next five years, is kind of the cutting edge of what we're seeing. Discuss the niche services you provide. DiPALMA: We opened our doors about four years ago. So this our first recession. Fortunately, we can report that we've grown significantly each year since we've opened. The last two years haven't been an exception. But we feel it's slowed quite a bit as a result of the recession. That said, I look at this time as a positive because it's really forced us to become smarter. We created our business concept really on accident. Somebody asked us to make a creative message, “creative” being the key work, for their hold time. And so it replaced the music or someone talking that we’re all used to listening to during hold time. So, we made a creative message for this company and it was a great success. People were actually asking to be put back on hold. We don't really do music or someone talking over music because that approach has been so over saturated that the customers come to expect to be bored. So we create the opposite. We'll isolate who the person is that's on hold in a particular department, it can vary, everything from accounting, to sales, to tech support. Everybody is different. They're all calling in for a different need or a service. And we'll come up with creative suggestions for that company on what they could do, everything from plays to movies to soap operas to musicals to brain washing. I mean, it could be anything. You know, whatever a customer really wants to achieve. They may want to deliver that customer crying. You know, we get requests all the time that are bizarre. But we'll look at that as an opportunity to achieve something. So it's really an advertising space. It's a medium that nobody has really done anything with before. SMITH: Advertising, but not boring. DiPALMA: Our goal was to accomplish something other than putting listeners to sleep or making them hang up. We're looking at average hold times in the five-and-a-half-minute range in call centers, where the average hold time in America is 42 seconds. So, something is happening. PROPER: Being a national company, we have partnered quite a bit with Utah companies that have a certain skill set perhaps we don't in certain areas. Many Utah companies have a lot of niche services that we're looking at and tapping in to. SISK: There are a lot of useful, niche services in Utah, and they’re good because they create differentiation for those companies. We recently made a change and put Bill Cosby on our hold queue instead of hold music. Well, if people say, "That's great," and they come on the phone happy, then they will remember that experience. It's very important. As we are beginning to see a possible end to the recession, are you experiencing differences in customer buying habits? PROPER: If customers see value in the products and the services that you're providing, then they’re going to buy. If there is cost savings and they can add up their monthly bills and see that this is going to cost less and they're getting equal to or better product or service, then they’re going to buy. But when it comes to a value assessment on the video side, it comes down to where the entertainment dollars are going to be spent. DiPALMA: We have a package that's under $500. So we may see the trend of customers coming back before some companies that offer different, more expensive services. And we've definitely seeing more customers. We're in every state in the country and we have thousands of leads that are now kind of waking up. I wouldn't say that they’re saying, "Oh, the recession is over," or anything like that, but there are improvements. NIEBOER: Beginning in October last year through March of this year, we experienced a significant number of our small business customers reducing their phone lines from five or six to one or two. And we're not seeing the requests anymore to reduce, or at least not as such. Now we're actually seeing some of those customers come back and say, "We want to add back one or two of our lines." We have a statistically-significant amount of customers who had to downsize and are now coming back. So, it looks like the economy is turning. ISOM: Years ago, it seemed like the ability to communicate with someone was very important—having telephone service was extremely important, it was a vital service. Today, even with the down economy, the Internet has turned into a critical source of communication that people need. And, not just for entertainment or to be used as an information source. The Internet is being viewed as a critical service that needs to be provided and needs to be available. REED: Not just the Internet, but the bandwidth requirements now have just skyrocketed. We’re seeing a lot of high bandwidth requests—requirements are just going up and up. What are the new big things coming down the road? COX: I think that integration is so critical. There are great applications out there, it now becomes how do we join them together? We’re working on a home integration system. The idea is you have this home network where your plasma TV becomes your digital video frame or your digital picture frame. So you can pull up your pictures and show people. You can also get on the Internet there and watch video, but you can also watch traditional television on there. You can get your voicemail on that screen that's prominently displayed in every home. Those types of applications are going to be a driver. The next driver will be speed. People want more and faster. PROPER: I'd add to the network speed. I mean, we've started rolling out across the country our DOCSIS 3.0, which is upwards of 100 megabit download speed. And we expect to have that fully deployed throughout our entire footprint by the middle of next year. And we don't know what people are going to do with that. It’s arguable that when speeds were slower in years gone by that there were limitations to innovation as to what could be done. So, once you sort of take that quantum leap into making it, figuratively, unlimited, it brings down those barriers in terms of what might be able to be done as well. I think it's the consumers' businesses that'll be telling many of us what the next big thing is or what the next big idea is that they want. McGHIE: We're very much a now society. So it's not so much some great, big quantum change that's coming, but it's really how do we optimize that now? REED: I think a major change is cloud computing. You see a lot of technologies kind of in the cloud. For example, there are now On Demand movies—people don't have to go to the store and rent a movie. And on the telecommunications side of things, you don't have to necessarily buy a phone system anymore. You can have the intelligence in a soft switch and connect via bandwidth. So all of your applications are in the cloud. COX: I think it's critical to point out that there are many small businesses and they expect those same services as large businesses—they want to act big and everything that larger companies have. But, they don't have a dedicated IT staff to make these things work. So there is an opportunity for all of us to provide that expertise to these small businesses as they grow, to provide those services in the cloud. SISK: Another component is how do we get that adoption rate to the people who don't understand the technology? When we can make technology simpler, that's when we really have made that next step. Discuss regulatory issues. What major changes are you seeing? KNOWLES: The things that we thought were big issues three or four or five years ago haven't been resolved, aren't even on the table right now because everything's been surpassed by the National Broadband Plan is being put together. And that's where all the focus is. Once they get the Broadband Plan put together, then I think that some of the other issues, like the USF (Universal Service Fund), which is how do we assure that the customer out in the rural area who doesn't provide a lot of revenue is going to continue to get service, will be worked out. COX: There are some problems with government regulations. The Telecommunications Act of 1996 was obsolete the day it was passed. Obviously, as rural carriers, we have a huge reliance on intercarrier compensation and universal service. And that remains true today. And we are all diversifying as much as possible to be less reliant on those because we know they're not going to be around forever. We don't know what kind of transition there is going to be to a world in which it's a bill and keep world or there is no universal service. Now, they want to use universal service for broadband deployment. Where that goes, really, is anybody's guess. We just know there is going to be less and less of it as the years go by. PROPER: The new FCC chairman just recently talked about further discussions on the whole net neutrality issue. And we're still not sure what that all means. Everybody manages their network in some form or another, presumably in an effort to provide the best customer service that you can. ISOM: Obviously, Qwest is in support of an open and robust Internet. If there will be further regulation, obviously, I would prefer that it be carefully thought out and lightly exercised. KNOWLES: One thing that comes to mind regarding regulation from XO's perspective is the use of the copper network in the future. There is a lot of capacity that's still available in that copper network, and we want to make sure that that is retained. And the availability to provide Ethernet over copper is one of the things that XO is using potentially. And ensuring that that copper network is not prematurely retired or taken out of service for any type of competitive purposes or things like that is always something that we're trying to maintain some vigilance in looking at. Has regulation moved from state commissions to the FCC? How has that affected business in Utah? PROPER: Well, that's been the case here, generally speaking. COX: And much to the chagrin of the state regulators, I would add. They're not happy about it, but it's a trend. States are losing more and more of their ability to regulate locally. KNOWLES: I think a lot of what the state regulators have done in the past has been more of the retail regulation—taking care of end user customers. And a lot of that is being supplanted by a more competitive environment at the retail site. What's really becoming more and more of a focus in regulation, to the extent that it still exists, is more on the wholesale side and how carriers interact with each other. And I think the FCC has taken the position on a lot of that, that they want a holistic approach for the country. ISOM: We’ve been appreciative of the Utah State Legislature and Public Service Commission in allowing complete pricing flexibility on the retail side. They've been supportive of that opportunity and an ability to compete. Discuss VoIP (Voice over Internet Protocol). As broadband connections become more and more ubiquitous, what is your general thought on VoIP? REED: VoIP has had different connotations over the years. VoIP is an Internet protocol that allows language routers to talk to each other. So if you put it over a private network, you get a higher quality of voice. You don't have the choppiness that sometimes you see with previous providers. DiPALMA: We've seen something really neat with voice over IPs, particularly for small- to medium-sized business, where people put hold music on a box, you know, plugged into their phone system in the back. With voice over IP, you're far more frequently able to put little audio pieces in multiple locations and create a navigational audio experience. KNOWLES: That’s all we sell anymore. We invested in our VoIP network about five years ago. Everything we're selling that's new is VoIP and I think the customers all are aware of that. And business customers, that's all they want. Nobody's looking for the old, traditional PRIs anymore. PROPER: And in our world, it's not just voice anymore, it's video over that same network. So certainly a lot of our competitors have gone to that. Which brings in the whole regulatory question with regards to VoIP, which still is being debated. COX: There is a critical distinction whether you're talking about Vonage play, which is voice over the public Internet, and there's a good, long debate about whether that's ultimately going to be successful. But the VoIP that works is the VoIP over these private networks. And we're all using it somewhere in our network, whether it's backhaul, whether it's middle mile, whether it's the end user, we're all using it. Do you see that structure of Internet Service Provider (ISP) evolving? NIEBOER: I think that ISP changed some time ago. There are major players now that do all of that. So you've got one company that's providing the Internet access, as well as the support, the e-mail, the hosting of all the applications and even data storage—pretty much anything that the business needs now. I think most of us have picked up all the different niche pieces and we now offer it as a full service. And I think that's been for a number of years. McGHIE: Ultimately, the customer has to have some way to get to the Internet, so there must be a service provider. You've got to have somebody at the other end to help and make sure the link is working and that they can access what they need to do. Ultimately, there is that needed gateway. KNOWLES: From a business perspective, all of our customers are coming to us for the whole package. STARKEL: And I think that's the key. The more things you can do, the more you can bundle services together, the better off it's going to ultimately be for your customer. What do you think the biggest telecom changes are going to be during the next three years? COX: I think it's the way we interact with our customers. Social networking is really starting to change the telecom landscape. Using social networking instruments, like Facebook and Twitter, to interact with our customers and for customer service is going to be a major change. I think it will change the face of our businesses internally and externally. ISOM: There are individual customers who have different needs and different schedules and different ways that they would like to communicate, whether it's on Twitter, over the phone or online. I think making those options available to customers is appreciated. McGHIE: I think mobility and speed are probably the biggest trends that you'll see from a consumer standpoint in how they will access their applications. REED: I think also convergence—the cell phone, the office phone, the computer, being able to talk to each other.
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