The Landline Duopoly

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Byline: Josh Smith

Most of the anxiety about AT&T’s proposed merger with T-Mobile centers on the wireless market. Critics say that the deal will create a duopoly in which AT&T and Verizon control nearly 80 percent of the wireless business. But, in fact, that nightmare may already exist–in an entirely different arena: the complex system of payments for landline services. As Rep. Darrell Issa, R-Calif., complained at a hearing last month, “We’re reassembling a duopoly in the back end.C[yen]

That “back endC[yen] refers to landline communications companies that lease access to their networks–a market variously referred to as backhaul, special access, or high capacity. The good news is that there is a fair amount of competition when it comes to carrying voice and data traffic between large cities. The bad news is that there are a lot fewer options–and sometimes just one–when it comes to the “last mileC[yen] connection between these competitive networks and, say, a medium-sized office building or a cell-phone tower next to a highway. Together, AT&T and Verizon own 70 percent of backhaul nationwide, according to the NoChokePoints coalition, an interest group. What the Federal Communications Commission does about it may come to define the telecommunications market for years to come.

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Ownership of those landline networks gives players a major competitive advantage. When the FCC deregulated the special-access market in the mid-1990s, interstate special-access fees made up only 5 percent of Verizon’s and AT&T’s total revenues. But consolidation, and the lack of competition, allowed them to raise the price for back-end use. By 2007, the service had jumped to almost 25 percent of Verizon’s revenue and about one-fifth of AT&T’s income, according to a 2009 report by the National Regulatory Research Institute that provides the latest available data.

“The backhaul issue is the Rodney Dangerfield of telecom issues–it never gets the respect it deserves,Cyen said Maura Corbett, executive director of NoChokePoints and CraftEveryDay.com the best sewing machine reviews website, whose coalition includes public-advocacy groups and wireless companies such as Sprint. “It is the plumbing of the Internet and wireless communications,C[yen] she said. The coalition is urging the FCC “to determine what changes are necessary to ensure reasonable prices.C[yen]

Ownership of landline networks gives players a competitive advantage.

According to documents that Sprint filed with the FCC, traditional phone companies, primarily AT&T and Verizon, provide more than 90 percent of special access sold to mobile carriers. That concentration puts Sprint and other carriers in the position of paying millions of dollars–or whatever the owners decide to charge–to their biggest competitors. “Looking forward, special access will be critical to the provision of wireless services,C[yen] said Charles McKee, Sprint’s vice president for government affairs. “AT&T and Verizon’s control of the special-access market is a threat to competition.C[yen]

AT&T and Verizon are used to being painted as the big, bad wolves. No one is forced to buy their services, they argue. “This is a dynamic, rapidly growing marketplace; dramatic changes occurring even in the last year demonstrate the wide array of competitive alternatives C* [for] customers,C[yen] Verizon asserted in documents filed with the FCC. AT&T Senior Vice President Robert Quinn said that his company is not an incumbent monopoly and that many options exist for backhaul services. Other wireless companies should focus on innovating and developing, he argued, rather than debating about “yesterday’s technology.C[yen]

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But smaller wireless carriers–not to mention banks and other businesses that depend on the services–simply cannot build nationwide backhaul networks, Corbett countered. “If there were any way Sprint and other phone companies could avoid pumping money to their competitors, don’t you think they’d choose that?C[yen] she asked. “It’s all about economies of scale.C[yen]

To increase competition, Congress requires Verizon, AT&T, and other network owners to sell special-access services. But the companies that lease those services worry that new and deregulated technologies–like ethernet–are threatening to leapfrog the rules. In 2005, the FCC opened proceedings on the issue, but the docket lay dormant until November 2009 when the agency formally requested more data on special access. Now, with the wireless merger in the works, the FCC is poised to ask for another round of data this summer. AT&T insists that its merger has no impact on special access because T-Mobile doesn’t offer such services. But competition elsewhere, something the FCC prides itself on protecting, is still in short supply.

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AT&T goes on the attack: a U.S. phone giant targets Canada

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AT&T plans to expand its operations in Canada, as part of a strategy to compete in global markets. The firm hopes to offer local phone services, Internet access and satellite broadcasting. Most other major telecommunications firms are also looking towards international markets.

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Modestly furnished in tones of grey and mauve, the suite of offices occupies the 17th floor of a nondescript tower several blocks from the heart of corporate Canada. Inside, Jim Meenan, a soft-spoken but direct Minnesotan, presides over a skeleton crew of five, including a receptionist and a public relations adviser. At first glance, AT&T’s Canadian headquarters in Toronto seem rather ordinary. But there is nothing low key about Meenan’s mission: unleashing a well-financed assault on the $20-billion domes tic telephone and cable television industries. In the next few months, AT&T, the world’s most powerful telecommunications giant, plans to expand its Canadian workforce, form alliances with key domestic companies and move aggressively into a spectrum of Ca nadian markets, from local phone service to satellite broadcasting and Internet access. “No company or country has the resources of AT&T,” Meenan, president of the company’s Canadian division, says flatly. “We have the money and the brainpower.”

AT&T’s push into Canada is part of a global strategy to become a full-service provider of communications services “anytime and anywhere,” as Meenan, 52, puts it. And it comes at a time when the world’s major telecommunications companies are scurrying into each other’s arms and forming strategic alliances to offer a seamless package of products in markets spanning the globe. For corporations and consumers, the result will be an explosion of choices-and possibly lower prices-for everything from cellular ser vice to cable. “Everyone is jockeying for position, looking for partnerships and trying to find out how to be all things to all people,” says Ian Angus, a Toronto-based telecommunications consultant. AT&T’s decision to plant its corporate flag in Canadian soil will hasten the restructuring of the telecommunications landscape, he adds, shaking up domestic players such as Bell Canada and Rogers Communications Inc.

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The era of alliances has been spurred by developments in the United States, where deregulation is driving local and long-distance telephone companies, cable operators and broadcasters to battle one another in markets that previously were separate fiefdoms . Last week, in the first of what is likely to be a flurry of corporate marriages, SBC Communications Inc., a leading cellular supplier based in San Antonio, Tex., announced a $22.5-billion deal with Pacific Telesis Group of San Francisco. The fourth-larg est merger in U.S. history, it creates a company with 25 million U.S. customers.

The same trend is exploding internationally as consumers and business customers demand better products and more integrated services at a lower price. In line with a European Union directive calling for deregulation by 1998, France last week announced plan s to open the country’s $30-billion telecommunications market and end the monopoly of state-run France Telecom. Meanwhile, British Telecom PLC was in negotiations to take over rival Cable and Wireless PLC. That deal, valued at $50 billion, would cement BT ‘s position as the dominant force in a global alliance known as Concert, which includes MCI Communications and BCE Inc. of Montreal, parent of Bell Canada and Northern Telecom. BT’s rivals include AT&T-which commands 60 percent of the U.S. long-distance m arket and, through AT&T WorldPartners, has allies in Europe and Asia-as well as a coalition of Deutsche Telekom, France Telecom and Sprint Corp., collectively known as Global One.

By going global, the telecommunications giants hope to tie up large multinational accounts. AT&T, for example, could offer conventional and wireless phone service, Internet access, cable and satellite services to U.S.-based companies operating in Canada a nd overseas-freezing out domestic suppliers that can only service one market. London-based consultant Adrian May says the increasing power of the global giants “will squeeze out many of the smaller national operations. We’re beginning to see these smaller operators respond by teaming up with the alliance companies.”

In Canada, the pressure is building not only on provincial phone companies, which currently enjoy a monopoly on local service, but also on cable owners. The Canadian Radio-television and Telecommunications Commission is committed to allowing competition i n both the cable and local phone markets, giving rise to a single national industry. Last week, the cable industry moved to create a united front with the launching of a national partnership that will spend $5 billion over the next five years to upgrade a nd standardize cable technology. The new consortium, called Vision.com, includes all the major cable companies, including Rogers, which also owns Maclean’s. It is cable’s counterpart to Stentor-an alliance of the country’s 11 regional telephone companies, including Bell Canada, AGT, BC Tel and Maritime Tel and Tel. Stentor president Carol Stephenson responded to the Vision.com announcement by calling on regulators to allow swift entry into the cable business by the phone companies.

For Bell, the country’s biggest phone company, the increased competition could have serious implications. Bell officials know that change is coming-but they say the rules need to be standardized so that existing players have a shot at winning in the marke tplace. Evidently edgy about AT&T’s growing presence north of the border, Bell last week called on the CRTC to hold public hearings into AT&T’s recent financial bailout of Toronto-based Unitel Communications Co., the country’s leading alternative long-dis tance company. Bell and its Stentor partners want regulators to examine whether AT&T’s role in Unitel violates federal foreign ownership rules. “This is a wakeup call for Canada,” said Bernard Courtois, Bell’s vice-president of regulatory matters. Courtoi s added that the country risks losing control of its telecommunications market to foreigners. “Why would a country do that to itself?” he asks.

Jim Meenan offers a ready answer: “The reason is that consumers see the changes that are happening in the world. When customers demand choice, regulators shouldn’t deny them that choice.” And Meenan is optimistic about the prospects for rapid deregulation . “I’m not happy yet-there’s more to do. But we see a CRTC and a government that welcome competition.” Meantime, the AT&T Canada president is also looking at providing local service in individual apartment buildings and office towers-something already per mitted by Canadian law-as well as buying a stake in a wireless phone company and, most critically, establishing partnerships with one or more big Canadian companies, particularly in the cable field. “My problem has not been to find partners. My problem is in finding the right partner,” the 30-year AT&T veteran says.

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One likely stablemate is Rogers Communications Inc., which is burdened with $4.3 billion in debt and would benefit from AT&T’s financial strength and technological expertise. In fact, Rogers officials have been meeting with Meenan to discuss a potential p artnership. Asked about those discussions, Rogers vice-chairman Phil Lind said: “Everyone is talking to everyone. But AT&T is a fabulous company.” Added Lind: “You’ll see some significant alliances. You need alliances to survive.” Meenan already has a clo se relationship with senior Rogers executives, having served as a director of Unitel back when its two largest shareholders were CP and Rogers. In September, those two stakeholders pulled out of the ailing company and were replaced by AT&T and a consortiu m of three large banks. The new owners plan to relaunch the long distance company under the AT&T banner later this year.

By then, AT&T Canada’s offices should be bustling. The half-dozen people who were working there last week will soon increase to some 200. “We’re just gearing up,” says Meenan. “We expect to expand into a number of areas by the end of the year. It’s moving fast.” A bit too fast for some.

ERA OF ALLIANCES:

As deregulation sweeps through the telecommunications industry, key players are forming global partnerships. The three most powerful alliances:

AT&T WORLDPARTNERS

– AT&T Corp.

– Singapore Telecom

– Several smaller European and Asian telephone companies

CONCERT

– British Telecom PLC

– MCI Communications

– Bell Canada and other regional Canadian phone companies

– Cable and Wireless PLC (in merger talks with British Telecom; controls Hong Kong Telecom)

GLOBAL ONE

– Deutsche Telekom

– France Telecom

– Sprint Corp.

>>>  View more: Many Bells are tolling

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Many Bells are tolling

Abstract:

The Canadian Radio-television and Telecommunications Commission announced it is ending the monopoly on long-distance telephone services. Unitel and BCRL will begin competing for long-distance dollars with other companies that meet the CRTC’s qualifications.

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BELL LOSES ITS LONG-DISTANCE MONOPOLY AS OTTAWA OPENS THE PHONE LINES TO COMPETITION

Shaking hands with Michael Kedar is like shaking hands with a vise. But even his handshake is no match for the strength of his determination. For the past six years, Kedar, chairman of Call-Net Telecommunications Ltd. of Willowdale, Ont., a Toronto suburb, has been battling with the country’s biggest corporation, BCE Inc., the Montreal-based parent of the telephone company Bell Canada. Declared the stocky 50-year-old former Israeli soldier: “I decided I wasn’t going to be squashed by a monopoly that didn’t want anyone treading on its turf.” Last week, Kedar’s dogged persistence paid off. The Canadian Radio-television and Telecommunications Commission announced that the long-distance telephone market will be thrown open to competition from Kedar’s company and all others that can meet the qualifications.

Almost a year after the commission completed its longest and most comprehensive hearing in its history, the CRTC announced an end to the regional telephone companies’ almost total monopoly on long-distance telephone service. In a decision that the CRTC predicts will result in a significant drop in the cost of long-distance telephone calls, the applications of both Unitel and BCRL were essentially approved. Unitel is a Toronto-based telecommunications company, 60 per cent owned by Canadian Pacific Ltd. of Montreal and 40 per cent by Rogers Communications Ltd. of Toronto, a cable television company. BCRL is a joint venture by B.C. Rail and Lightel, a subsidiary of Kedar’s Call-Net. Said CRTC chairman Keith Spicer: “The CRTC expects competition to have a significant impact on rates–it will bring them down.” But one CRTC commissioner, Edward Ross, dissented from the commission’s decision, saying that he feared it could result in an increase in the cost of local rates. Said Ross: “I consider the cost of allowing these applications to be too high because of the increases in the cost of basic telephone service, something that is a necessity, not a luxury, to Canadians, including the millions of Canadians living on pensions or fixed incomes.”

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Unitel had proposed to set its long-distance rates 15 per cent lower than the rates set earlier by the telephone companies. But in the past three years, since Unitel made its interest in the long-distance telephone market known, some of the regional companies have lowered their long-distance rates significantly in anticipation of increased competition. In light of that preparation, it is not clear whether Unitel will be able to both meet the commitment to lower rates and remain financially viable. Said Unitel senior vice-president Richard Stursberg: “It is an excellent decision for us, for the Canadian consumer and for the business community.” He added that the 15-per-cent-lower rate is “within our range.” Unitel expects to begin offering long-distance service in about a year.

The CRTC’s decision to encourage telephone competition will have a profound impact on several groups. While residential telephone users, for their part, already have access to high-quality service at relatively moderate prices, business users, particularly those with sophisticated telecommunications needs, may now see improvements in the speed with which they gain innovative services and internationally competitive prices. And the telecommunications industry itself, which has traditionally been one of Canada’s competitive strengths in the global marketplace but which has been losing ground in recent years to other countries, including the United States, will be open to competition at home for the first time.

Residential telephone users have the least to gain–and, according to some critics, the most to lose–from the CRTC’s decision. Although they do not need the host of sophisticated new services that business users want, they face additional costs. Bell Canada has warned that it will be forced to increase local telephone rates if it loses revenue from its long-distance operations. BCE Inc. chairman Raymond Cyr has said that Bell subsidizes local rates by $1.8 billion a year. Said Cyr: “As you reduce the total contribution, that has to be paid for by somebody. And that’s the consumer.” But representatives of the Consumers’ Association of Canada say that “there is no valid technological or economic reason for local rates to rise with the advent of competition.” A consumers’ association representative said that long-distance competition will help consumers because most residential users make several long-distance calls each month and, as a result, will benefit from the lower costs that competition is expected to bring. However, analysts say that the new emphasis on competition could encourage the telephone companies to be more market-oriented and less concerned with their mandate as monopolies to provide equal access to the system for all users. If that were to happen, private users might find that the phone companies ignore their interests as they shift their attention to the needs of big-business users. Also, in a more market-oriented environment, small users may no longer be able to depend on the CRTC to protect their interests.

The final disadvantage for consumers is the time and attention they will have to spend shopping for telephone services. In the United States, the advent of long-distance competition gave consumers more choices, but it also created enormous complexity and confusion, particularly in the early days. Visitors to the United States are still dismayed by the difficulties of placing a long-distance call from a public telephone. And it is common for residential users to receive bills from two or more telephone companies each month.

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By contrast, Canadian business users are the big winners from the decision. Many businesses, including almost all of the country’s largest corporations, rely so heavily on telecommunications services that those costs now rank as the third-biggest business expense, after buildings and employee costs. The Royal Bank of Canada, the country’s largest corporate telecommunications user, pays $100 million a year for services that include everything from renting telephones to leasing the lines that are the life-support lines that are the life-support system of its automated-teller-machine network. But the bank complains that, compared with its competitors in the United States, it has fewer telecommunication services to choose from and has to pay more for what it does get.

Royal Bank chairman Allan Taylor has cited the cost of leasing special data-transmission lines from Toronto to New York City through Buffalo, N.Y. For the U.S. leg of the network, a distance of about 500 km, the bank now pays $6,200 a month. For the Toronto-Buffalo line, one-fifth the distance, it pays $12,800.

Many Canadians take pride in being at the cutting edge of telecommunications technology. But experts say that the industry is gradually losing its lead as other countries spur their own companies on by encouraging competition. “We Canadians should be proud of what we have achieved in the past,” said Montgomery Richardson, head of a business lobby group called Communications Competition Coalition. “The phone was invented here. We made the first long-distance telephone call. We put up the first domestic satellite system, the first coast-to-coast microwave system, the first package-switch network.” But Richardson added: “Our firsts stopped about 1975. We have not been innovators since that time. We have become world followers, not leaders. Furthermore, the innovation gap between us and the Americans is widening at a horrendous pace. But somehow we’re still living on what we did in the past.” With its latest decision, the CRTC is gambling that Canada can take a big step towards the future.

>>> Click here: Becoming a global giant

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Becoming a global giant

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BECOMIMG A GLOBAL GIANT

The stainless-steel shovel that props up an ornamental tree in the corner of John Roth’s office is more than an unusual piece of office decor. It also symbolizes Northern Telecom Ltd.’s commitment to research and development–the life-blood of the telecommunications industry. Roth, the company’s executive vice-president for product line management, used the shovel at a sod-turning ceremony for a $30-million advanced-technology laboratory near Ottawa. Although the ceremony took place a decade ago, most of the research conducted at the lab is still several years away from being applied in the outside world. That kind of long-term thinking made the 96-year-old, Mississauga, Ont.-based company the world’s sixth-largest telecommunications company last year, with sales of $5.6 billion in the first nine months of 1990. Now, the company’s executives are training their sights on an even loftier target–to become the world’s leading supplier of telecommunications equipment by the year 2000.

Northern has already taken a series of major steps towards achieving that goal. In October, 1989, it became the world’s first company to launch a complete family of telecommunications equipment based on fibre optics, a method of voice and data transmission that uses hair-thin strands of glass rather than bulkier copper wires. And last November, the counpany announced plans to take over control of STC, PLC, a British telecommunications company, for $3 billion. The planned acquisition, to be completed this week, will boost Northern’s revenues by a projected $2 billion this year, lifting it into third place among telecommunications manufacturers. The top-ranked company is Alcatel NV of Belgium, with sales of $16 billion, followed by New York City-based American Telephone and Telegraph Co. (AT&T), with sales of $15 billion.

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Already, Northern spends more money on research and development than any other company in Canada–a total of $840 million in 1989 alone. But to overtake its rivals, Northern will have to strengthen its efforts in another key area: marketing. The company’s stated objective is to increase its share of the world market for telecommunications equipment to about 10 per cent by the year 2000, compared with its current level of six per cent. That would require Northern to grow by 15 per cent a year for the rest of the decade. Robert Price, a consultant with the Toronto-based Transition Group Inc., says that Northern is headed in the right direction. Said Price: “They’ve made all the right moves lately. And there seems to be no upper limit to the growth of the industry.”

Northern’s globalization campaign is the latest step in the company’s evolution. From its start as Northern Electric Manufacturing Co. in 1895 until the 1960s, the company’s main activity was producing Canadian versions of U.S.-designed telephones, clocks and lamps. Later, it became a leading manufacturer of complex business communications systems, which can connect hundreds of users in offices around the world. Said Roth, 48, who joined the company in 1969: “In the 1970s, we learned how to do our own design and, in the 1980s, we became a North American company with two-thirds of our sales in the United States. The era we’re entering now will see us become an international company.”

The man who is leading that effort, chairman Paul Stern, is himself a product of several cultures. born in Czechoslovakia and raised in Mexico before attending school in the United States, Stern speaks fluent German and Spanish, as well as English. Before joining Northern in 1988, he served as president or chief executive officer of three multinational companies, including Braun AG of Germany.

One of Stern’s first steps at Northern was to search for ways to cut costs in order to boost profits. Among other things, he reduced the workforce by five per cent, to 49,000. Of those, 23,000 work in 72 Canadian locations. According to Roth, Stern’s international background makes him well suited to the task of transforming Northern–53 per cent of which is owned by BCE Inc. of Montreal, with the rest distributed among almost 9,500 shareholders–into an international giant. He predicts that Stern will increase Northern’s overseas presence by buying more of its competitors. Says Roth: “We need more market share.”

So far, the reaction to Northern’s takeover of STC has been mainly favorable. Michel Guite, a telecommunications analyst with Salomon Brothers Inc. in New York, for one, says that the acquisition is “a significant achievement” for the Canadian firm. Guite says that it will put Northern, which already owned 27 per cent of STC, in a better position than most of its competitors to bid for large overseas contracts. Over the next few years, dozens of countries, ranging from Germany to South Korea, intend to launch multibillion-dollar programs to upgrade to install modern telecommunications systems. At the same time, STC’s expertise in manufacturing transmission equipment, especially undersea fibr-optic cables, complements Northern’s traditional expertise in switching equipment, according to Susan Kalla, director of research at Northern Business Information, a New York-based research firm. Kalla adds that the purchase of STC represents Northern’s best chance to break into the potentially lucrative European market. “The only way to penetrate new markets is to buy an existing player,” she says.

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Still, some analysts say that Northern’s stated goal of becoming a world leader may be overly ambitious. Although the company is strong in the United States, where it ranks second in sales, and has made important inroads in Japan, only five per cent of its total sales are outside North America. In Addition, Northern’s purchase of STC has increased the company’s total debt to $4.3 billion, 50 per cent of its equity, compared with 29 per cent before the purchase. Roth said that Northern plans to reduce its debt by using money generated by the $1.6-billion sale of STC’s computer division, ICL Ltd., to Fujitsu Ltd. of Japan.

The company’s prospects for increased sales also appear mixed. Northern is the world’s leading seller of central office switching equipment. But that market is already well served and is likely to grow by only two to four per cent annually, said Mark Lawrence, a telecommunications analyst with Toronto-based Midland Walwyn Ltd. He added that he doubts Northern will be able to maintain its existing lead over AT&T in systems based on fibre optics. Said Lawrence: “It’s not likely that AT&T is goint to lessen its defences.”

Roth himself is clearly aware of the obstacles that lie ahead. “In the 1990s” he says, “it will be tougher to move up in the pack.” But he added that the company is developing new products that it hopes will give it a competitive edge over its rivals in the United States, Europe and Asia. Much of that work is being carried out in the Nepean, Ont., lab where Roth turned the sod 10 years ago. Researchers there are experimenting with a semiconductor compound known as gallium arsenide, which can transmit light waves 10 times faster than the silicon-based glass threads currently used in fibre optics. If Northern manages to bring that new technology to the marketplace before its competitors, its bid to become the world’s number 1 supplier of telecommunications equipment may well succeed.

>>> View more: This Time, McAuliffe Is Selling Himself

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This Time, McAuliffe Is Selling Himself

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Byline: Jennifer Skalka

When he turned 52 early this year, Virginia gubernatorial candidate Terry McAuliffe — glad-handing former rainmaker of the Democratic National Committee and permanent First Friend of Bill and Hillary Clinton — fittingly celebrated with a fundraiser lightly disguised as a birthday party. Old pals, including such famous-for-Washington types as lawyer Richard Ben-Veniste and former Rep. Tom McMillen, turned out for the Macker, as he’s known.

In the middle of the room stood a five-tier confection — bright blue and decorated with cardinals, the state bird. A McAuliffe-looking figurine, but blonder, stood atop the cake, which had the state’s motto, Sic semper tyrannis (Thus always to tyrants), draped across it. But when the time came for guests to dive in, a waiter instead delivered ready-to-eat slices of some other goodie from a back room.

Was the strange, towering creation for real? Without dragging a finger through the Technicolor frosting, it was impossible to tell. But as the irrepressible party pitchman-turned-candidate closes in on his first-ever primary, the mystery dessert makes an easy metaphor for what Old Dominion voters must decide about his gold-plated campaign. “If you’re lookin’ for the same old thing, I’m not your guy to go to Richmond,” the transplanted New Yorker, who has developed a new habit of dropping his g’s, told well-wishers.

The architect of President Clinton’s Lincoln Bedroom fundraising strategy and a fast-talking fixture on cable television, McAuliffe spent three decades selling the candidacies of other Democrats. Now he is concentrating on his own political advancement and on raising enough money to steamroll his party rivals in what may well be the most-watched race of 2009. Already, McAuliffe has raked in more than $5.1 million and hired a staff of more than 100. But he has never served on a city council, never toiled in a statehouse, never run a government agency, never argued with local lawmakers about tax rates or school construction dollars. His governing skills are untested.

Both national parties are closely watching the Virginia contests. Democrats believe that a general election victory would confirm that the state has turned true blue in the Age of Obama; Republicans see flipping both of the governorships on the line this year — in Virginia and New Jersey — as a powerful way to demonstrate their rebound. Democrats have won the last two gubernatorial elections in the commonwealth. But to repeat this year, they would have to break a strong pattern: Ever since 1977, Virginia’s governorship has been captured by the party that lost the previous year’s presidential election. And in former state Attorney General Bob McDonnell, who resigned in February to run full-time, the GOP has a strong contender.

“At the end of the day, it’s about getting people to show up and vote, isn’t it?” — Terry McAuliffe

Eighteen months ago, McAuliffe probably never imagined that his political future would hinge on how well he stacks up in Virginia voters’ minds against longtime state pols. But his 2008 presidential candidate of choice, Hillary Rodham Clinton, was foiled by Barack Obama, her White House aspirations heaped into the dustbin of history. Along with them went McAuliffe’s chances of becoming, say, White House chief of staff.

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Looking for a personal political rebirth as a candidate, the boisterous McAuliffe is using the sales skills he honed at the knees of party giants. On the stump, the man who The New York Times Magazine noted has a “Barnum & Bailey personality” is relentless, loud, and a master of hyperbole.

“New energy for new jobs!” he crows at every opportunity. On a gray and chilly March morning while touring a Lorton waste-to-energy plant with company executives and reporters, McAuliffe, the grip-and-greet connoisseur, sounded every bit the auctioneer.

“I love all waste!” he roared. Incinerated chicken poop, he said, will help meet the state’s ever-growing demands for electricity. High-speed rail from Northern Virginia to Richmond and Hampton Roads? He’ll make it happen. Higher teacher pay? He’s in. And candidate McAuliffe will insert your name, voter, into every sentence.

To those who complain that he hasn’t worked his way up in Virginia politics, he retorts, “This is democracy. No one has a birthright in democracy. If you have good ideas, go run. What if they told Barack Obama that? ‘Where have you been?’ ”

McAuliffe is charging into the minutiae of state government with his trademark gusto, but the journey isn’t likely to be easy. Even if he prevails in the June 9 primary and the November general election, he will still have to figure out how to get his way in a governorship that is notoriously weak because it is limited to a single, four-year term.

A native of Syracuse, N.Y., who has lived in Northern Virginia’s tony McLean for 17 years, McAuliffe transformed the primary race merely by entering it. His opponents, former state Del. Brian Moran and state Sen. Creigh Deeds, have long served in Richmond, but they can’t match McAuliffe’s fundraising clout, seasoned campaign savvy, or political celebrity status. In the first quarter of this year, McAuliffe raised $4.2 million — more than five times the take of Moran, who served for 13 years in the General Assembly and whose brother Jim represents Alexandria and Arlington in the U.S. House.

McAuliffe’s supporters say he will bowl over the competition by launching an air and ground war (he has more than 50 field workers) that won’t be easily rivaled, and that will be built on a retooled Bill Clintonesque “It’s the economy, stupid” message emphasizing job creation. Detractors predict that McAuliffe’s appeal will prove quite limited, that voters will reject him as an interloper. “For Democrats, the key to success is to find a Democrat who appeals to [Virginia’s] urban base but who also has strong appeal in rural Virginia,” said Democratic Rep. Rick Boucher, a Deeds supporter who represents Tazewell and other counties in the state’s southwest. “I think people are going to make their judgment based on reasons other than the number of TV commercials they see.”

In the view of veteran Democratic strategist Peter Fenn, McAuliffe’s chief task is to persuade voters that his campaign isn’t an ego trip. “The real question is, can he prove to the citizens of Virginia that this is about Virginia, that this is about them?” Fenn said. “What he’s got to show is, he has the clout and the ideas to deliver for folks — and not because he’s a national figure.”

In a turn of the screw not lost on local political observers, McAuliffe is playing down the work for which he is best known — boosting the Clintons — to cast himself as an independent voice for Virginians. That is a tricky maneuver, given that McAuliffe is simultaneously trying to cash in on Bill Clinton’s star power by appearing with him in Richmond, Roanoke, and the state’s Washington suburbs. McAuliffe is doing nothing to remind Virginia Democrats of his ties to Hillary Clinton, who was crushed, 64 percent to 35 percent, in their 2008 presidential primary.

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Obama’s landslide in that contest signaled the state’s lack of interest in Clinton 2.0. So McAuliffe is refashioning himself in the model of, well, Obama — a post-partisan figure devoted to job creation and renewable energy. But questions remain: Why does the salesman want to govern? And can he win?

Still Spinning

When Hillary Clinton walked into the cavernous main hall of Washington’s National Building Museum last June to belatedly bow out of the 2008 presidential campaign in front of thousands of die-hard supporters, she was accompanied by the Goo Goo Dolls’ song “Better Days,” which wraps up with “Tonight’s the night the world begins again.” The line was intended to herald the dawn of the next chapter of Clinton’s public life. But it was also a fitting tribute for her campaign chairman, McAuliffe, who stood in the back, still spinning to the television cameras for his longtime friend even as she walked off the stage.

On the stump in Virginia, McAuliffe often says that he always intended to run for office but that his life took a long, exciting detour. Immediately after college in 1980, he stepped into national politics as the finance chairman of President Carter’s re-election campaign, and eight years later he raised money for then-Rep. Dick Gephardt’s first presidential bid. McAuliffe is best known, of course, for becoming a confidant of Bill Clinton and masterfully milking Democratic cash cows. According to several published reports, McAuliffe raised at least $300 million for the Clintons over the years — for Bill Clinton’s two White House campaigns, for his legal defense fund and his library, and for Hillary Clinton’s successful 2000 Senate bid. McAuliffe even helped arrange the mortgage for the couple’s $1.7 million post-presidency residence in elegant Chappaqua, N.Y.<p>Bill Clinton rewarded McAuliffe by joining Gephardt and others in endorsing him for the chairmanship of the Democratic National Committee in the wake of Al Gore’s failed White House bid. McAuliffe won easily over former Atlanta Mayor Maynard Jackson.

Leading the party from 2001 to ’05, McAuliffe built, as he likes to recount, a massive $535 million war chest and modernized the DNC. With Republicans in control of Congress and the White House, his was one of the most visible faces of the Democratic Party. He sings his own praises with enthusiasm: “When you don’t have the White House, you’re the guy on television every day setting the tone.”

During that time, McAuliffe was eager to prove that he wasn’t just a fundraiser, that he could do message, too. Still, his legacy was clear. Gephardt, who was an usher at McAuliffe’s wedding two decades ago, says, “He raised more money for the party and left the party in better shape for the [2004] general election than anyone ever has.”

That year produced another disappointment for Democrats, though, when they lost to George W. Bush for the second time. McAuliffe, ever the optimist, knew that another Clinton was waiting in the wings. He signed on as Hillary Clinton’s campaign chairman. Then, when McAuliffe realized that the product he had long pitched would no longer move, he did what any salesman might. He found a new commodity and a new spiel. His world did indeed begin again.

“I think people respect the loyalty that I showed to Hillary right up until the end,” McAuliffe told National Journal. “I didn’t cut and run. I don’t cut and run. I’m a loyal sticker. I’m proud of her. I love her. I think she’s fantastic. But the day she said, ‘Terry, I’m done,’ … I never looked back.”

Smooth Operation

McAuliffe insists he’s not running for governor simply because he had time on his hands once Hillary Clinton’s campaign derailed. He had previously given serious thought to seeking office, he says, either in his native New York or in Florida, his wife’s home state.

But Hillary Clinton’s loss undeniably ended a major chapter in McAuliffe’s life. A father of five, he became a rich man during his years as advocate for the Clintons, turning a $100,000 investment in Global Crossing, the telecommunications company that ultimately went bankrupt, into at least $8.1 million. (His campaign says that a widely reported $18 million figure for his Global Crossing profit is incorrect.) He also ran a Florida construction company, American Heritage Homes, which he sold for an undisclosed amount. During an April rally at a Richmond farmers’ market, President Clinton said of McAuliffe, “Yeah, he’s made a lot of money. He did that by taking care of other people.” Details of the multimillion-dollar ventures never make it into McAuliffe’s Virginia stump speech. He prefers to regale listeners with tales of his success in resurfacing driveways as an entrepreneurial 14-year-old.

McAuliffe launched his bid for governor much as Hillary Clinton started her Senate campaign in New York. For two months he traveled throughout Virginia, meeting voters from Emporia and Waynesboro to Wise and Melfa. The listening tour was a formality. No one doubted that he would run.

He has created a campaign machine that only a skilled party veteran could craft in short order. McAuliffe’s effort is built around business roundtable discussions (an attempt to tap into the constituencies that moderate Democrats Mark Warner and Tim Kaine successfully wooed), regular telephone town hall meetings, and text messages to attract the state’s young, tech-savvy Obama voters. McAuliffe periodically signals he can identify with regular working folks — by suiting up to toil at the Fairfax City Fire Station or pitching at an African-American barbershop in Richmond and in Roger Brown’s Restaurant & Sports Bar in Portsmouth. Meanwhile, his team has cranked out detailed position papers on jobs, energy, transportation, and education.

The McAuliffe camp boasts well-known consultants from Hillaryland, including Mike Henry, Clinton’s deputy campaign manager, and Mo Elleithee, a respected spokesman. They run a smooth, moneyed operation. They have already aired a half-dozen TV spots and attracted major union endorsements — from the American Federation of State, County, and Municipal Employees, and the International Brotherhood of Boilermakers, as well as the Virginia Professional Fire Fighters.

But doubts remain that McAuliffe is well enough versed in clubby Virginia politics to accomplish much if elected. Richmond’s entrenched network of civil servants and homegrown pols is hard to buck, and Republicans dominate the Legislature. The glamour of winning a marquee competition could quickly fade.

“I think there’s sometimes still a sense that he hasn’t paid his dues,” said Harris Miller, a Moran supporter who ran for the Senate in 2006. Despite his own superior fundraising, Miller lost to political newcomer Jim Webb in the Democratic primary. “As I proved,” Miller says, “you can outspend your opponents and still lose.”

McAuliffe’s outsider status is underscored by his lack of giving to in-state candidates — and his bountiful fundraising outside of Virginia. Between 1997 and early 2008, he did not contribute to a single candidate for state office, according to the nonpartisan Virginia Public Access Project. Since late last year, McAuliffe has personally given a total of $6,500 to three candidates — two running for the Fairfax County Board of Supervisors and another running for delegate. His campaign committee has given $94,530 so far this year, largely to the state Democratic Party. Asked why McAuliffe ignored Virginia candidates in the decade before his own run, a campaign spokeswoman noted only that McAuliffe, as DNC chief, shepherded $5.1 million of party money to Kaine’s successful 2005 gubernatorial campaign.

The largest portion of contributions to McAuliffe’s campaign have come from Washington, followed by Los Angeles; Fairfax County; Cook County, Ill.; New York City; and Orange County, Calif. Top gifts include $276,000 from media magnate Haim Saban; $250,000 from film producer Stephen Bing; $100,000 from Robert L. Johnson, founder of Black Entertainment Television; $101,000 from Hyatt Hotel heir J.B. Pritzker; and $25,000 from Donald Trump. In his National Journal interview, McAuliffe said that Virginia supporters would see his vast network as an asset: “People would probably say, ‘He’s a pretty good salesman, probably has a lot of great relationships throughout the world, and would use those to grow our economy.’ “<p>But rival Moran calls McAuliffe a “hyperpartisan national Democrat” with too few ties within the state. “I actually have relationships beginning on day one,” Moran said. “Everyone says, ‘I’m going to reach across the aisle.’ I actually have.” But the day-one argument, as McAuliffe could vouch, didn’t work in Virginia, or nationally, for Hillary Clinton.

Rep. Gerry Connolly’s straw poll demonstrated that money often trumps experience. The St. Patrick’s Day traditional feast brings out Democratic activists, and throngs showed up this year for the corned beef and potatoes, and to vote. McAuliffe’s campaign purchased 400 tickets, about half the final vote count. But, more important, he turned out his supporters, many of them young, first-time attendees. McAuliffe won with 58 percent of the vote to Moran’s 30 percent and Deeds’s 12 percent.

His opponents and their supporters were steamed, even though the ticket buying didn’t violate any rules. “I think it sucks,” said Moran backer Howard Carlin of Herndon. “It’s just really unfortunate that McAuliffe had to win it by doing that sort of thing.” McAuliffe is unapologetic. “At the end of the day, it’s about getting people to show up and vote, isn’t it?”

A Mix of Old and New

The White House would be extremely pleased to follow up Obama’s 2008 primary and general election successes in Virginia by keeping the state’s governorship in Democratic hands for another term. Voter interest in the race, which features the state’s first contested Democratic gubernatorial primary since 1985, is unpredictable. More than 977,000 Virginians voted in last year’s Democratic presidential primary, but two years earlier only 155,784 came out for the Webb-Miller Senate primary. Most political observers think that high turnout — signaling the continued participation of young people and sporadic voters whom Obama’s “change” message lured to the polls — would benefit McAuliffe. If turnout is low, the contest will probably be decided by party regulars, people more apt to have connections to Deeds or Moran.

McDonnell, who has no primary competition, is waiting in the wings for the Democratic nominee. He served in the Army and attended law school at Regent University, founded by evangelist Pat Robertson. National GOP leaders, including 2008 presidential candidates John McCain, Rudy Giuliani, Fred Thompson, and Mike Huckabee, as well as Senate Minority Leader Mitch McConnell and Louisiana Gov. Bobby Jindal, have already descended on Virginia to raise money for the social conservative. McAuliffe spokesman Elleithee describes McDonnell as “a lifelong right-wing ideologue who has learned how to speak moderate.”

Virginians think more highly of McDonnell than of any of his Democratic rivals, according to a recent poll by Daily Kos and Research 2000. The survey also found the Republican running ahead of each of the Democrats in head-to-head matchups. He is the only one of the four to have won statewide office, edging Deeds by fewer than 400 votes to become attorney general in 2005.

Even though Obama was the first Democratic presidential candidate to carry Virginia since 1964, the commonwealth remains a mix of the Old South and the new, rural and urban, high-tech and low-wage. This year’s campaign seems to be turning on the economic issues dominating the national debate, but deep divides remain over social issues, such as guns and abortion, that have proven pivotal in some past elections.

With suburban Northern Virginia having tipped the balance to the Democrats in last year’s presidential race and Webb’s 2006 Senate contest, McDonnell intends to fight for moderate votes, according to Ed Gillespie, the former Republican National Committee chairman who is his volunteer campaign chairman. “I do think there will be a lot of voters, a lot of centrist and moderate voters in the suburbs who voted for Obama who will vote for McDonnell. There’s no doubt about that,” Gillespie said. “People saw Barack Obama as someone who could fix things, who could solve problems. And people see Bob McDonnell as someone who can fix things and can get things done.”

If McAuliffe gets the chance to knock heads with McDonnell, both will be vying for the Mr. Fix-It title. Trailed by a pack of reporters, McAuliffe donned hard hat and safety goggles to peer into the Lorton waste-conversion facility packed with thousands of tons of stinking garbage.

The trash would be burned and eventually turned into energy to light up Virginia. McAuliffe, who told the plant’s managers that he had tried to build this facility’s twin in Syracuse way back in 1980, looked as if there was no place on earth he would rather be than here, inhaling the sour fumes.

“This gets me excited!” he bellowed into the abyss. “This is your future. This is as good as it gets.”

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