Competition Thrives in Windy City

Author:
Publish date:

Mayor Pat Gordon remembers the years before competition
came to Oak Forest, Ill.

Like 1997, when then-candidate Gordon's door-to-door
campaign kept turning up unhappy Tele-Communications Inc. subscribers in the south Chicago
suburb of 25,000 residents.

"The two things people were concerned about most were
property taxes and cable TV," he recalled. "When cable is the No. 2 item on a
person's list, you know you have a problem."

The gripes were typical: poor picture quality, shabby
customer service and no alternative provider.

Two years later, however, the situation has changed
dramatically in the middle-class community 25 miles south of downtown Chicago.

An overbuild by Ameritech New Media has prompted TCI (now
AT&T Broadband & Internet Services) to upgrade its 8,500-subscriber system, to
hold the line on rates, to improve customer service and to even begin offering free
digital programming to customers who are willing to stay with the company through the end
of the year.

"Competition keeps everybody on their toes,"
Gordon said. "Right now, TCI is scrambling to save a market."

What's happening in Oak Forest is indicative of the
competitive warfare sweeping Chicagoland. From fashionable Lake Shore Drive and Michigan
Avenue's "Magnificent Mile" to the housing projects of Cabrini Green, and
spilling out into 39 contiguous suburbs, many area consumers now have a choice of cable
providers.

AT&T ACCELERATES COMPETITION

Experts predicted that Chicago will be one of the most --
if not the most -- competitive markets in the nation. The city and surrounding suburbs
should be among the first to see local-exchange competition, having been designated as one
of the 10 markets for telephony-over-cable trials that will precede AT&T Corp.'s
return to the local phone business.

"Before AT&T announced its acquisition of TCI and
MediaOne [Group Inc.], competition here was proceeding at a snail's pace," Cable
Television and Communications Association of Illinois executive director Gary Maher said.
"Now, the market is going to get hotter than you can imagine."

AT&T officials are being predictably close-mouthed
about the Chicago test, conceding only that the marketing trial later this year will gauge
consumer reaction to a deeply discounted bundle of local and long-distance services
delivered over cable.

"We'll start with local and long distance, which we
feel is going to be the heart of our relationship with customers," AT&T spokesman
Mark Siegel said. "We want to see the best way to market to people, how they like our
offers, do we need to make changes."

But if AT&T's initial trial is any indication,
Chicago-area consumers may have lower phone bills in their future. AT&T recently
announced that it was lowering the cost of a single phone line for its trial in Fremont,
Calif., from $12.50 per month to $11.25 in order to compete with Pacific Bell.

In the meantime, Chicagoans can expect to see cutthroat
competition on the cable side, experts said.

The city is currently divided into five franchise areas. If
ongoing negotiations are successful, four will be served by two providers within one year,
and the fifth will have three, city officials said.

Two competitors are currently franchised to compete with
AT&T Broadband inside the city limits: ANM on the south side, and 21st Century Telecom
Group Inc., with a franchise running from the Evanston border to the Hyde Park area.

Other applicants include independent utilities that are
negotiating to use Ameritech Corp.'s lines to provide telecommunications services, Chicago
cable administrator Joyce Gallagher said. They are expected to be ready to present formal
business plans to Chicago aldermen within six months.

CHICAGO SUBS ENJOY LOW RATES

Even though ANM and 21st Century are still in
mid-build-out, Gallagher said, residents are already benefiting from their presence. Basic
rates throughout the city are $9 per month below the national benchmark, she said.
Additionally, consumer complaints have dropped significantly, signaling improved service
resulting from TCI's rebuild.

"We saw improvements when we saw new applicants,"
she added.

In the past, complaints centered on poor signal quality and
on customers' inability to reach TCI's call centers. Those have dropped off to only a
trickle, usually when the company changes formats on bills or takes its annual price hike,
she said.

TCI Great Lakes division president Steve Bryan said the MSO
addressed its service problems by upgrading its Chicago plant to 750 megahertz, and by
hiring 120 new customer-service representatives and schooling each on how to sell both
analog and digital products. Additional training is scheduled when data services become a
big part of the market.

The CSRs are housed in a new $10 million call center that
replaced the old centralized approach that had angry customers in various states talking
to CSRs in Denver.

"It's hard to expect a CSR in Denver to remember 40 or
50 channel lineups or pricing structures" Bryan said.

Even before its acquisition by AT&T, TCI was the
dominant force in Chicago, having engineered a series of deals that produced a cluster of
1.7 million subscribers and 3.2 million homes passed.

But with ANM in the market and offering 90-plus channels,
the focus is to "get these systems together and get them rebuilt," Bryan added.

"At a minimum, competition puts a certain urgency on
things," Bryan said. "Whether it's Chicago or Detroit, you can't have a
disadvantage in programming because the customer will switch for a very small difference
in channels."

AT&T FIGHTS BACK

In the meantime, the MSO has offset any disparity between
its lineup and ANM's with a digital package, as well as special promotions involving
bundled premium services, Bryan said.

AT&T Broadband will have a decided advantage when it
begins a full-blown rollout of its high-speed @Home Network cable-modem service. ANM is
only now looking into offering Internet access. And if AT&T's acquisition of MediaOne
goes through, that will mean the addition of up to 15,000 data customers in the local
market.

However, AT&T Broadband's biggest advantage will be the
world's most famous brand name, experts said.

"The AT&T name stands for service, assurance and
responsiveness, and it means a lot," said Hal Ross, chairman of Mapes & Ross, a
Princeton, N.J.-based research group.

The problem will be finding a way to attach that reputation
to its new cable operations.

"There are a lot of cable companies that don't have a
lot of equity with consumers," Ross added.

AMERITECH'S PRESENCE

ANM has undoubtedly been counting on just that. Since 1996,
Ameritech's video subsidiary has snared 21 Illinois cable franchises, including eight in
the past year. By last month, it had a cluster of 1.4 million potential customers under
contract and 11 systems up and running in the area.

The most prominent is a network capable of serving 500,000
residents in Chicago's Area 5 -- a densely populated, racially diverse group of individual
neighborhoods on the South Side where ANM said TCI has only managed a 50
percent-penetration rate.

"There's an untapped market there that considers
itself underserved by TCI," ANM vice president of public affairs Donna Garofano said.

In order to attract subscribers, ANM has had to tailor its
sales efforts to individual areas, she added.

In the neighborhood of Chicago Lawn, where the population
is predominantly Hispanic, ANM's printed material must be in two languages, and its sales
force must be bilingual. In the African-American section of Washington Heights, the MSO
brought in jazz vocalist Angela Stribling as part of an event to introduce its service.

ANM has also avoided advertising in the city's major
newspapers in favor of The Chicago Defender, Exito and The Beverly Review
-- smaller publications with better circulation rates in each neighborhood.

"The chance of reaching a more diverse audience is
much more focused," Garofano said.

Despite claims that ANM hasn't put a dent in the market,
Garofano insisted that the company has "gotten TCI's attention," noting that TCI
has begun giving away its $10-per-month digital package in Chicago, while holding the line
on rates in the outlying suburbs.

"The first couple of years we were here, it was like
[TCI] was asleep," she said. "But as we've started to pick up steam, you can
sense a reaction."

Earning the right to compete hasn't always been easy,
however. At times, it took some inventive negotiating with local regulators to avoid
duplicating services already being provided by the incumbent.

For instance, in the suburb of Naperville, Ill., where
Jones Intercable Inc. began building its institutional network in its 11th year in the
community, ANM got around having to construct a second network by offering to provide
something of "like value" when its franchise reaches its 11th year.

In other communities, it's paying an extra 1 percent of
gross revenues -- in addition to its 5 percent franchise fee -- which local franchising
authorities can then use for PEG-access (public, educational and government) purposes.

TCI regional vice president Steve White insisted that for
all of the skirmishes going on throughout Chicago, "it's still early in the
game."

White added, "There are still 1 million homes out
there that don't subscribe to cable, so now is the time to put up or shut up. The customer
will decide based on, 'Can you take care of me, meet my needs, give me what I want?' With
the AT&T name on our shirt, I like our chances."

Surprisingly, not every resident of the "Windy
City" knows they have, or soon will have, a choice in service providers. Calls to the
Chicago Board of Realtors on the importance of competition in the real estate market were
met with confusion.

Some major brokers, such as Magellan Development Group
Ltd., were unaware of their telecommunications options. That company signed on with 21st
Century to provide services to condominiums that it manages. But other brokers remain in
the dark.

"I didn't know I could call anyone other than
TCI," said Jim Kinney, managing broker for Rubloff Residential Properties, a downtown
residential-brokerage firm.

But increased demand for better technological services is
moving up on more landlords' wish lists. Kinney cited statistics indicating that Chicago
has the second-highest per-capita ownership of personal computers in the nation.

"Speed of connection is increasingly important. Folks
leave offices where they often work on T-1 to T-3 lines, then return home to work on a
28.8 [kilobit-per-second] modem. The POTS [plain old telephone service] drives them
crazy," he said.

Meanwhile, telecommunications issues are creating more
landlord-tenant conflicts. Kinney noted that he had a dispute on his desk where one
resident was litigating over the "insufficient" number of electrical and
telephone outlets in his building.

Still, he offered the opinion that access to bundled
services is not an overriding issue in the property market at this point. It may become
one sooner than landlords want, however.

According to Chicago officials, Illinois is an equal-access
state. This wasn't much of an issue when there was no competition. But now, there are
options. And according to state law, all it takes is three building residents to complain
to the city, and the municipal government will step in and compel the landlord to open the
building to another telecommunications provider.

But residents have to learn that they have power over a
landlord at their disposal.

ENTER 21ST CENTURY

21st Century is trying to walk the tightrope between
educating residents and antagonizing building owners. When the company is ready to serve a
building, it sends postcards to potential customers. Interested residents return them to
the company, which forwards them to the landlord, 21st Century vice president of marketing
Marc Miller said.

So far, 21st Century has 88 activated miles of plant and
23,425 "active customer connections" out of 119,500 homes passed.

Some of those connections came through its February
acquisition of EnterAct L.L.C., a privately held Internet company based in the city. That
operation became 21st Century's business-services group, allowing the company to expand
its commercial offerings to include Web hosting, Internet consulting and networking.

Internet connections have doubled during each of the last
two quarters, and they now represent 2 percent of marketable homes passed.

21st Century came to the market with a compelling video
offer: $29.45 per month buys 170 channels, including 89 entertainment services, 23 audio
channels and 59 informational channels, like on-screen newspapers. It also offers Zenith
Electronics Corp. cable modems or dial-up Internet access service.

The company's most recent product addition is telephony. On
May 10, 21st Century began providing customers local and long-distance service
over its $250 million fiber optic network. The potential market includes 350,000
households and 450,000 business lines.

The company vowed to undercut Ameritech's phone rates by 15
percent. If consumers select a second service, such as cable or Internet access, the
discount dips to 20 percent. If subscribers take all available 21st Century services, it
reaches 30 percent off the local portion of their phone bills.

21st Century is nearing completion of its network-backbone
construction in Chicago's commercial Loop area -- a move that should enhance commercial
sales while lowering costs as services are migrated to its own network.

Miller said marketing is still low-key -- mostly direct
mail and a few promotional slides in movie houses. Penetration increases from a variety of
sources, he added.

"We're picking up a little of everything, from
'nevers' to people who just want a better choice ... word-of-mouth is a great tool,"
he said.

Of course, the kind of relentless competition sweeping
Chicagoland can have its drawbacks.

In Oak Forest, for example, AT&T Broadband's massive
upgrade and ANM's build-out of its competing system have created "a whole new set of
problems," Gordon said.

On the west side of town, where most of the utilities are
underground, AT&T Broadband has "stirred up a hornets' nest" by repeatedly
severing buried cables. The situation got so bad that the city considered calling a
temporary stop to the project.

On the other side of town, meanwhile, locals were up in
arms with ANM over trampled yards and technicians who were straying onto private property
unannounced.

But even with those headaches, Gordon said, he wouldn't
want to go back to the old days, although he wondered if AT&T Broadband's efforts to
shore up its customer base are going to be enough.

"I don't know. It may be too little, too late. People
here were really upset," he said, recalling his 1997 campaign. "I know one
thing: It's going to interesting once they are both up and running."

Related