CLECs Enter Next Growth Phase

Posted: 07/2000

CLECs Enter Next Growth Phase

By John Windhausen Jr.The local telephone marketplace is undergoing a quiet but substantial transformation. The result could be even more creativity, chaos and, ultimately, competition.

From the macro perspective, the local marketplace seems bustling with activity. From revenue of slightly more than $1 billion in the year before the 1996 Telecommunications Act, CLECs have grown to become a $10 billion industry. If the forecasts are right, CLECs will grow eightfold to more than $83 billion by the end of 2001.

There is no doubt that telecommunications competition is progressing throughout the nation, generating benefits for consumers and the national economy as a whole. The competitive industry has grown by almost every metric analyzed–number of carriers, miles of networks constructed, revenues, market share and customers served.

According to ALTS’ (the Association for Local Telecommunications Services,
www.alts.org) estimates, there were more than 375 CLECs operating in the marketplace by the end of 1999, 333 of which were facilities based. These CLECs employed more than 70,000 people and deployed more than 800 voice switches and more than 1,400 data switches.

Indeed, it is the competitive industry that, in large measure, is responsible for the explosive growth in the Internet. It was not until the emergence of competitive DSL, frame relay and alternative local fiber optic and “wireless fiber” networks that the Internet boom really took off.

Until the emergence of competitive alternatives for Internet access, ILECs were charging up to $1,000 per month for a narrowband ISDN connection and $2,000 per month for T1 access. Today, due to competitive market pressures, ILECs can no longer get away with such outrageous monopoly pricing–the price of high-speed Internet access is now a miniscule fraction of what it was 10 years ago.

While this macro perspective provides good fodder for generalists, the view from the ground is even more inspiring. Only by looking behind the secret smiles and the glint in the eyes of the newest generation CLEC executives can you glean hints of the future.

The newest generation of CLECs cannot afford to adopt a “me too” business plan. The original pioneers, the refugees of MFS (now part of WorldCom Inc.,
www.wcom.com) and TCG (which was purchased by AT&T Local Services,
www.att.com), already have staked out their territory in the large markets. Allegiance Telecom Inc.
(www.allegiancetelecom.com), Focal Com-munications Corp.
(www.focal.com), Intermedia Communications Inc.
(www.intermedia.com), ICG Communications Inc.
(www.icgcomm.com) and many others are establishing roots in the market that could allow them to turn a profit in the near future. The fixed wireless carriers will deploy their antennas in the major metropolitan markets as soon as the building owners will let them. And, the cable companies are retrofitting their headends to provide cable modem service and a package of voice services too.

The more exciting developments are occurring below the radar screens of most Wall Street analysts and investors. This is where the most amazing technologies and business plans quietly are being rolled out.

It is these small, as-yet-unknown companies that are deploying voice over DSL (VoDSL) and voice over IP (VoIP). They are installing softswitches and edge switches. They are mining new frequencies to provide high-speed service in suburban and rural areas. They are providing low-cost basic telephone service using cellular spectrum. They are building owners and investors managing their inside wire to provide unique service packages to tenants.

These companies include Picus Communications
(www.picus.com), Prism Communications Services Inc.
(www.transwire.com), BroadBand Office Inc.
(www.broadbandoffice.net), Allied Riser Communications Corp.
(www.alliedriser.com), ARBROS Communications Inc.
(www.arbros.com), Advanced TelCom Group Inc.
(www.callatg.com), Western Wireless Corp. (www.wwireless.com), Advanced Radio Telecom
(www.artelecom.com) and many more.

These are the companies that are using innovative technologies or alternative business plans to attract new kinds of customers, or they are entering smaller, niche markets. Each of them is unique, carving out space in an overlooked or under-served subset of the market. Which of these will succeed is anybody’s guess. We can be sure that some will and some won’t.

The confirmation of this tremendous diversity and entrepreneurship comes from perhaps the unlikeliest of
all sources–Microsoft Corp. (www.microsoft.com). In the past year, Microsoft has provided significant
capital investments in several new DSL competitors, including Rhythms NetConnections Inc.
(www.rhythms.net) and NorthPoint Communications Inc.
(www.northpoint.net). In fact, Microsoft CEO Steve Ballmer recently commented, “There’s one thing that helps DSL a lot, which is you can get entrepreneurial companies doing DSL plays. … In some sense, you have entrepreneurs who are dragging DSL in kicking and screaming, so to speak.”

Kicking and screaming, yes. Creating cutting-edge technologies in the laboratory can be easy compared to interconnecting with the incumbent telephone company’s antiquated old network. The incumbent carriers have been slow, to put it politely, to cooperate with the new competitors. They challenge every regulatory decision designed to open local markets, find loopholes in every regulatory decision designed to open local markets, and refuse to devote the necessary resources to open local markets.

And where competition has made fewer inroads, incumbent carriers refuse to roll out their own new, affordable technologies and services where more lucrative, legacy technologies and services afford
ILECs’ greater profit margins. While every such ILEC action violates the spirit of the Telecom Act, the result is that competition is stymied at great cost to consumers and little cost
to ILECs.

ILECs cannot be blamed for their behavior any more than a fox can be blamed for killing a chicken. That is simply what their nature compels them to do. This is why there is still a need for vigilant regulatory oversight until competition is firmly rooted.

Just ask the carriers themselves. Every one of them will tell you that the key to survival and growth is execution, and execution depends on cooperation from the
ILEC. This remains ALTS’ primary concern.

The ILECs’ latest threat to competition comes in the form of reconfiguring the network to preclude competitive access.

There are many methods of deploying fiber into the network that CLECs can support. Most of the conceivable methods of extending fiber into the network would allow for competitors to reach consumers with their new, innovative and affordable technologies and services.

The ILECs, however, are attempting to deploy network architectures that would deny consumers the right to choose from the full range of technologies and services. There is an immediate need for regulators and all industry segments to join forces to ensure that next-generation network architectures do not thwart competition and its obvious benefits, for this is where innovation can either be stifled or stimulated.

The way to ensure rollout of new technologies and services is simple–give competitors the tools they need to bring the people affordable and innovative technologies and services. As long as Congress does not backtrack from the competitive paradigm set forth in the Telecom Act, and as long as regulators make the necessary policy decisions and take the necessary enforcement actions to foster competition, competitors and consumers cannot lose.

Historically, monopolists do not know how to treat customers or innovate in a competitive marketplace. ILECs have grown accustomed to being the only game in town. They will not readily shake their mantra: “We’re the phone company, we don’t have to care.”

Well now the incumbents and former monopolists will have to care. If they don’t care, the new competitors, deploying new, innovative and consumer-friendly technologies, will.

John Windhausen Jr. is the president of the Association for Local
Telecom-munications Services (www.alts.org). He can be reached at
[email protected].

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ROUNDTABLE

On SBC Communications Inc.’s bid to enter in-region long distance in Texas…”It now appears that [as of May 12] the efforts of SBC, competitive local exchange carriers and the Texas PUC have led to improvements in SBC’s interconnection trunking performance and to a better understanding of trunk provisioning by the various parties to the process.”

–Joel I. Klein, assistant attorney general, Antitrust Division, U.S. Department of Justice
(www.usdoj.gov)

“SBC Communications Inc.’s additional information on its 271 application to enter long distance in Texas does not cure the defects in its initial application and should be denied.”

–H. Russell Frisby Jr., president, Competitive Telecommunications Association
(www.comptel.org)

“AT&T must rely upon SBC to switch over, or ‘hot cut,’ orders accurately, reliably and timely in commercial volumes. To date, however, SBC has failed to meet or even approach that standard–and, thus, SBC has failed to give AT&T [or any other competitor] a meaningful opportunity to compete in Texas.”

— Jim
McGann, spokesman, AT&T Corp. (www.att.com)