UNE-P Resellers: It's Your Move

By Khali Henderson

Just as death comes to a ailing relative, so comes UNE-P’s demise - expected but nonetheless painful. While some resellers relying on the embattled resale platform are hopeful to negotiate with their reluctant suppliers, most have resigned themselves to transitioning from UNE-P and have begun planning, if not executing, accordingly.

The FCC rules released in the Triennial Review Order a year ago preserved wholesale access to the Bells’ local networks at government-mandated rates unless public utility commissions found specific competitive triggers were met to justify easing the regulations. On March 2, a federal appeals court overturned those regulations and they were vacated in mid-June. Competitors have appealed the decision to the Supreme Court, a move rejected by both the solicitor general and the FCC. The primary target of the court’s ruling was the controversial UNE platform, which now appears to be on its last legs since new pricing proposed by the ILECs reportedly is not viable.

Among the likely alternatives are moving to a UNE-L/switch-based model common for facilities-based CLECs, installing softswitches to provide VoIP over UNE-L or wholesale DSL, and reselling hosted VoIP or TDM services from a facilities-based CLEC. What may be the right move for one company could be wrong for another depending on the market, line density, customer base, capitalization and other factors. Absent guidance from the FCC in the form of new rules clarifying pricing and availability of UNEs, migration is further complicated.

“Gross margins for UNE-P in my home state of Illinois are tracking at about 50 percent, enabling a CLEC to build its customer base on a pay-as-yougo basis,” says Sue Platner, president and COO of The Northridge Group Inc., an industry consulting firm that has studied the issue in detail (see table, Comparing the Alternatives). “That’s why it’s been a great entry strategy for CLECs. The proposed ILEC commercial rates for UNE-P accomplish the same thing, but at much lower margins. The question is can CLECs operate on 35 percent gross margins with UNE-P? I don’t think they can do it without at least 45 percent margin. Even then you need big market share and scale to get efficiencies.”

Platner’s research will be presented in a workshop at the upcoming CompTel/ASCENT Conference & Exhibition (see sidebar, below).

Jack Knocke, vice president of operations for Direct Line Communications, a UNE-P provider that serves the Northeast using UNEs from Verizon Communications Inc., says that negotiations are still on the table with the ILEC in an effort to protect its embedded base of business users.

“We are considering moving some customers, be we are not doing anything drastic now,” says Knocke. He concedes he is “not terribly optimistic” at the prospects that the companies will reach a long-term wholesale agreement.

He also is dismissive of UNE-L and special access alternatives. “Right now we are pretty high on VoIP,” he says, but declined to discuss specific plans.

“While a lot of people are unnerved [by the court’s decision to vacate parts of the FCC’s Triennial Review Order concerning UNE-P], we’ve had plans for months. The [court’s] decisions are only accelerating our timelines.”

AT&T Corp., the most visible of the UNE-P resellers, has been more forthcoming about its plans, signaling its strategy by pulling out of numerous markets, rolling out VoIP and striking wholesale deals with competitive LECs (see story). AT&T announced a long-term agreement in principle with McLeodUSA Inc. by which AT&T would provide local phone service over McLeod’s network in selected states. There is a caveat. AT&T and McLeodUSA are asking the FCC to preserve access to network components controlled by the Bells, including DSO, DS1 and DS3 loops, at stable rates (see story).

“We have prioritized each of our markets based on a set of assumptions, and we are waiting to see what the rules are and the pricing is and we will begin to take action in the latter part of this year,” says Stephen Gray, president of McLeodUSA in an interview with PHONE+. He says most of the AT&T lines in question are residential.

Gray says AT&T may not be the only wholesale deal McLeod enters with a UNE-P reseller, but said it is unlikely to be a broad initiative for the CLEC, which operates primarily in territories of Qwest Communications International Inc. and SBC Communications Inc.

AT&T’s migration to competitive facilities is mirrored by other UNE-P Providers. PAETEC Communications’ year-old reseller program is attracting “predominantly UNE-P shops that know their costs could go up,” says PAETEC COO E.J. Butler Jr. Between February and June 2004, PAETEC ordered 400 T1s under special access tariffs on behalf of its resellers. “The bulk is UNE-P guys moving old customers or signing new customers,” he says.

PAETEC uses special access from ILECs or CAPs to provide local services to its large business customer base. It also uses UNE-P in a few states to accommodate some multilocation clients with smaller offices that don’t qualify for special access. While PAETEC’s margins on those customers will be cut in half once the rate hikes kick in, Butler says it’s a small part of the business and PAETEC has not decided whether or not to move them off the UNE platform.

Meanwhile PAETEC is helping other UNE-P providers transition their business customers. “We are no help to residential UNE-P resellers,” he says.

“Our product doesn’t address five lines and below, and it only works for users with six to 10 lines if they are within a mile or two of our PoP.

“We are buying from the ILEC under their tariffs. While we are up for the best deals, it still is cost-prohibitive to serve smaller customers.”

Butler says UNE-P providers also should consider offering integrated voice and data over T1 as well as other network-based applications like firewall and email to certain SMB customers in order to cost justify special access rates.

Manhattan-based McGraw Communications Inc. is one UNE-P reseller that is considering integrated T1s for some of its lower line-count customers.

“Half of our UNE-P base is using T1s, so it’s easy to move them to another provider. On the line side, we are considering them on a case-by-case basis,” says President John Cunningham. Where multilocation clients have offices using POTS lines and can’t quality for an integrated T1, Cunningham is hopeful that McGraw will have come to terms with Verizon “so that with a slight line rate increase to the end user, we won’t have to migrate them off UNE-P.”

Even with a modest increase of about $2 per line, he says, the customer would still pay more to move to Verizon, he says.

XO Communications Inc. also is targeting SMB-focused UNE-P resellers with its four-month-old wholesale offer it acquired from its Allegiance acquisition.

“We’ve added a handful of customers,” says Ernie Ortega, XO’s president of carrier sales. “A few are UNE-P resellers that were serving SMBs and others just want to get into the local business.”

Ortega says margins, at 25 to 40 percent, are within 10 percent of what UNE-P resellers serving businesses are accustomed to. He says XO’s footprint with 900 PoPs is an obvious choice to augment a CLEC’s own network.

While XO expects to get its share of deals from business-to-business UNE-P providers where they cannot justify becoming facilities-based, the influx of inquiries is coming from UNE-P providers selling residential services.

The company is investigating addressing the consumer market. “That’s going to take some time,” says Ortega. “It’s not guaranteed, but we are hopeful to figure it out.”

Don MacNeil, director of operations – carrier services for XO, says the challenges are specific residential back-office requirements and the low traffic volumes. “The question is what can we do through automation to scale its plus what network architecture changes are required to aggregate service? That’s what drives the economics,” he says. MacNeil says UNE-P resellers with established back-office systems have expressed a willingness to be creative in working with XO toward a solution. He says the carrier will have a better idea of its plans in this regard by the end of the summer.

One residential UNE-P provider wrestling with limited transition options is Dialog Telecommunication Inc. of Charlotte, N.C. Like AT&T, its plan starts with exiting markets - 30 of them, which are in low-density areas. “We will keep customers in service, but we have stopped taking new customers,” says Chairman Patrick Eudy, noting that with the limited timeline Dialog cannot build the density needed to transition to a facilities-based model. In Owensboro, Ky., however, the company’s high concentration of customers will allow it to economically support the move to UNE-L and its own switch.

Eudy says Dialog also considered broadband wireless and VoIP-based strategies, but concluded that the technology “isn’t there yet for operators like us.”

As for the proposed commercial UNE-P rates, he says the resulting gross margin is tough to swallow. The $7 increase in the BellSouth Corp. rate takes up 70 percent of Dialog’s gross margin, he says. “They are not willing to negotiate,” Eudy adds, claiming to have sent five or six proposals to the Bell company only to be referred back to the agreement first floated by the ILEC.

In April, the reseller started making network plans based on UNE-L. Based on his earlier experience at another CLEC, Eudy figures his company needs about 1,000 lines per CO to make it work. “What our thinking is is to approach other carriers to buy up some of their customers,” he says, referring to a logical clustering strategy that may start off a flurry of customer base swapping as providers struggle to achieve necessary economies of scale.

Eudy is worried about the transition to UNE-L, having done it once before at a previous company. “Cutting over from UNE-P to UNE-L is critical because there is no way to ensure a quality of service during the transition. Without that we will suffer customer dissatisfaction,” he says, noting that poor service not only impacts current customers but impacts sales.

This concern is shared by others that are similarly situated. AT&T and McLeodUSA are on record seeking assurances that the Bells will switch large volumes of customers from their networks to a competing provider in a timely manner and without errors. “We would hope and expect the FCC would set a standard with respect to the batch hot-cut process where they would be operationally efficient and economically fair and it would present itself in a way that’s customer friendly,” says Gray.

McLeod, for its part, already has migrated several hundred thousand of its own UNE-P lines to UNE-L and has found the process operatinally workable. “We would like to see the number per day, per market increase,” he says. “We also think the economics are too high at this time.”

The charge per order varies from state to state, market to market, he says, noting the range is from $25 to $90. “We’ve made proposals and had discussions with the two predominant RBOCs that we deal with - SBC and Qwest - regarding a volume-driven discount, so the more lines that we convert, the better the charge would be,” Gray says.

No takers yet. But, he says, “We are hoping the FCC will set a standard that everyone will agree to.”

The UNE-L model is likely consideration for many UNE-P resellers, but it isn’t a simple answer. It requires purchasing a switch, advance buildout of colocations and other infrastructure, such as transport, SS7 signaling and OSS. On a difficulty scale of one to 10, UNE-P is a 4-5 while UNE-L is 8-9, says consultant Platner of The Northridge Group (see table, UNE-P vs. UNEL). “It’s going to take these players two years to transition. No flash cut is possible,” she says.

In mid-June, vendor Integral Access announced plans to help provider lower the capex and opex required to migrate customers from UNE-P to softswitch-based services over UNE-L. The company has added new functionality to its PurePacketNode, its CO-based access aggregation platform, to support residential broadband and IP telephony services.

For example, it provides a high-density POTS/ADSL2+ combination service for integrated voice, data and video delivery. It also has extended the provisioning capabilities of PurePacketOMS with remote provisioning of individual customer lines and integrate loop testing and qualification.

PurePacket also can be configured to interconnect to multiple IP telephony service providers and ISPs.

The upgrade represents Integral Access’ foray into the residential market, says Guy Chenard, Integral Access’ vice president of marketing and business development. He says that proposition is targeted to some of the larger players that have some money to throw at the problem. One option is to rent colo space and move the access lines to the PurePacketNode and use a softswitch. “If they don’t want to get a softswitch, they need a wholesale provider, but they could still own the access piece,” he says.

Many UNE-P resellers such as AT&T and McLeod have announced plans to move to a softswitch-based infrastructure in support of VoIP services.

Platner says while VoIP can be an attractive alternative, it requires significant advance planning and infrastructure, not only softswitches and gateways but also equipment - DSLAMs and routers - to enable broadband and CPE, such as IADs and DSL routers (see table, UNE-P vs. VoIP).

In a hypothetical consumer market case study for VoIP, Northridge Group found capex of about $7 per month per line and gross margins of 14 percent, assuming a 2 percent market share in the Chicago LATA.

A variation on this theme, of course, is the “bring your own broadband” model popularized by Vonage. Using the same assumptions, Northridge Group found significant reductions in capex and a gross margin of 30 percent using this model.

In addition, many providers are partnering with last-mile providers to offer VoIP and access as a bundle, says Craig Schlagbaum, vice president of channel development for Level 3 Communications Inc. Level 3 is working with several UNE- Providers service SMBs to migrate those customers to Level 3s hosted IP Centrex service, (3)Tone. In May, for example, Level 3 announced an agreement with Pac-West Telecomm Inc.

McGraw also has signed with Level 3 but company president Cunninghan says migrations of UNE-P customers to (3)Tone will be application, not economically driven. He cited centralization of administration, billing and adds/moves/changes for distributed customers as examples.

Schlagbaum says a bundled offer combining (3) Tone and Level 3’s DS1 access is expected to be rolled out at the end of third quarter.

Other wholesale VoIP players also are offering end-to-end solutions including loops and transport.

Ron Harden, executive vice president for VoIP wholesaler Volo Communications Inc. says UNE-P CLECs are a sweet spot for the company’s services. “We can go them and enable them practically overnight,” he says.

John Wind, senior director of marketing for Volo, says that unlike Vonage, which is positioned as a revenue enhancement for service providers, Volo’s offer represents revenue replacement with margins of 35 to 50 percent, which is comparable to UNE-P. Volo operates its own network, which will have 22 PoPs by the end of the year. In addition, Volo also leases network from Level 3 and MCI.

Service providers that “join” Volo’s VoiceOne network soon will get IP PBX functionality free.

“Our philosophy is to help our customer get traffic on the network. We want to provide them with the tools,” Wind says. The free IP PBX functionality will be available at the end of third quarter on an exclusively wholesale basis. Resellers can pass on the service or mark it up. Volo charges the reseller for usage and flat per-user fee. A Web-based interface, Comm Desktop, enables customers to add users in real time.

“Clearly the VoIP opportunity is huge,” says Harden. “CLECs are in trouble with UNE-P and even UNE-L. They see a relatively short 12-to18- month window before they are going to get squeezed.”

Wholesaler New Global Telecom also is seeing an uptick in interest in its services from UNE-P resellers. “We have been inundated with calls from CLECs in the wake of [the court’s decision]. We can’t pick up the phone fast enough,” says Tim Bradley, senior vice president of VoIP product, for New Global Telecom. “They have to find a new solution, and VoIP is the obvious choice.”

At SUPERCOMM, New Global Telecom announced release 3.0 of its 6DegreesIP suite of managed wholesale VoIP services, which includes the VoiceConnect and VoiceSelect services for direct-to-IP origination and termination. The VoiceConnect service includes local calling, and domestic and international long distance. DIDs are available in 385 rate centers in 48 states, and the service provider expects to expand that over the course of the year. VoiceConnect includes support for 911 and local number portability, and is offered on a seat and per-minute basis. VoiceSelect is an a la carte selection of direct-to-IP origination and termination, without 911 support.

A hosted retail billing service is integrated with the new version. It includes a front-end interface for one-time online provisioning, rated call record information, electronic bill presentation, invoicing (paper and electronic), basic CRM functionality (including trouble ticket interface) and optional payment processing.

Additional reporting by Josh Long and Tara Seals.

Want to Know More?

Virgo Publishing, publishers of PHONE+ and XCHANGE magazines, is teaming with The Northridge Group Inc. to present a workshop on the evolution of the UNE-P provider at the CompTel/ASCENT Fall Conference & Exhibition in Miami.

Set for 3-4:30 p.m., Sept. 12, the workshop will feature more of Northridge Group’s in-depth analysis of UNE-P migration strategies featured in this article.

Northridge Group President and COO Sue Platner will present a case study based on a hypothetical UNE-P reseller operating in the Chicago LATA and considering the following options:

“There are potential paths to success for consumer-based CLECs, but it requires CLECs to understand their options and how to manage the cost drivers in the much more complex facilities-based environment,” says Platner. “In any case, it is critical that UNEs be preserved as an option for CLECs. If CLECs were forced to use special access because UNEs were eliminated, the cost structure would not allow a consumer-based CLEC to earn enough margin to justify offering service.”

The impact of a move to special access pricing also is presented in the case study analysis as are strategies for optimizing gross margins.

UNE-P CLECs serving both residential and business customers will be on hand to validate the Northridge Group’s analysis based on their own assessments in other markets throughout the country.

For more information, visit: www.comptelascent.org/events/miami-fall04