Rescuing the CLECsAs has been widely reported in the press, the telecom
industry as a whole and the CLEC industry in particular have come upon some
difficult times. For example ICG, the fifth largest CLEC in terms of revenues,
recently filed for Chapter 11 bankruptcy protection. The stocks of most other
CLECs, including e.spire, Teligent, US LEC and Focal, are down at least 40%
since their all-time highs in March.
Why is it that CLECs have experienced
this recent misfortune?
The over-arching reason for this decline is that,
from the beginning, the CLECs have created themselves to be mini-ILECs. Nearly
every CLEC has built circuit-switched networks that provide no technical cost
advantage over the incumbents' networks. CLECs generally lease the "last mile"
connection from the ILECs and install switching equipment inside the ILECs'
central offices to carry the traffic. From a technology standpoint, there is
little to no difference whether a call is carried over the ILECs' vs. the CLECs'
networks, so the cost advantages of a CLEC's network are not obvious. The cost
of building these networks is immense. From 1997 to 1999, the top 10
independent CLECs spent on average $1 billion on CapEx, half of which was spent
in1999 alone. In addition, the CLECs do not have the vast economies of scale
that the ILECs possess, and few would argue with the premise that telecom is
scale-intensive business. A CLEC's cost position is further eroded by the need
to promote its services. Without an established brandname or clear technical
advantages, CLECs must spend much more than the ILECs on sales and marketing.
Customer acquisition costs for CLECs on average have been $390 per net line
added, more than twice the $185 spent by ILECs per net line added.
should be noted that the CLECs cannot be terribly faulted for this network
strategy. Two years ago, any other technology but circuit switching was not
sufficiently reliable. Packetized voice technologies are just beginning to
reach quality of service levels of POTS service, and gaining the trust of the
customers that packets are reliable enough for voice will delay adoption even
As a result of their attempts to create mini-ILECs, CLECs are
left without a lead product with which to convert new customers. Their product
offerings actually are not as robust as their incumbent competitors'. The CLECs
cannot expect to take significant market share from the incumbents until they
can offer a superior lead product that generates a compelling reason for
customers to switch over to them.Another set of reasons for the recent
demise of CLECs are the multitude of operational issues that they have
encountered. The easy culprit of these difficulties is the local ILEC. The
impediments that the ILECs have created for the CLECs in ordering, provisioning
and billing for services have been well documented. In few other industries is
one's primary supplier also its primary competitor. The ILECs have played the
balancing act between providing mechanisms for competition to enable their entry
into long distance and constructing sufficient impediments so that the CLECs do
not steal significant market share. As a result, the average install interval
for a CLEC, which is between 30-60 working days, is almost twice as long as the
20-38 business days for an ILEC.
However the issues surrounding
interfacing with the ILECs is only part of the problem. CLECs have had to face
the stark reality that LOCAL SERVICE IS REALLY DIFFICULT TO PROVISION. Compared
to local, long distance is a breeze. Most CLECs have experienced a rude
awakening when they realized this fact. In an attempt to engender an
entrepreneurial spirit within these start-ups, the CLECs (understandably) have
shied away from hiring former Bell employees in favor of younger netizens. The
problem with this approach is that few of these netizens have the experience
with and knowledge of complicated local services. As a result, the CLECs find
themselves in a difficult Catch 22.
So what can the CLECs do to save
1. Revisit the basic economics of the business model
Most CLEC business plans were created 3-5 years ago, during a much more
favorable lending climate. Market conditions have since reversed however and
the easy financing, still attainable even a year ago, is no longer available.
This has increased the difficulty in obtaining financing for CLECs and increased
the cost of capital. As a consequence, many CLECs have found themselves ms with
half-executed business plans and no financing, or prospects of obtaining it.
Additional financing needed to fully execute business plans, if available,
carries a substantial price tag that not many CLECs can afford. The first step
to resolving this dilemma is to reevaluate the basic economics of a CLEC's
business plan in face of the changed market conditions. Each CLEC has to
validate that at the customer level its mix of products can provide sufficient
revenue to cover its variable costs and to defray its fixed costs. This is a
"back to basics" approach, with realistic assumptions, that will determine
whether the business model is still worth backing.
2. Understand the
customer base better
Thus far, in an effort to meet aggressive growth
targets, CLECs have taken an opportunistic approach to acquiring customers
rather than systematically segmenting the potential customer base. Segmentation
Analysis has to be performed to understand the profiles of the various customer
sets in terms of size (number of employees/lines), industry (SIC code), telecom
intensity, etc. Service offerings and marketing efforts can then be matched to
the needs of each segment, or groups of segments.
implement new technologies
CLECs can utilize new technologies to provide
them with a cost advantage over their incumbent competitors. Fixed wireless
technologies have been only moderately successful because they bypass (in other
words, duplicate) the existing local network. On the other hand, packet
technologies, such as VDSL and Voice over DSL/IP, stand to provide more success
because they leverage the existing network rather than compete with it. Voice
over DSL/IP provides a cost savings for small and medium size enterprises by
eliminating the need for a T-1 to offer multiple lines.
also are necessary to provide CLECs with attractive lead products that give
customers a compelling reason to switch their services. VDSL presents the
opportunity to offer new and enhanced services such as video conferencing and
interactive TV over a single line. ILECs have been slow to adopt these new
technologies due to a lack of focus and a general resistance to new services
that cannibalize their existing services.
4. Sacrifice some of their
entrepreneurial spirit for a little professional expertise.
atmosphere is desirable, but not at the expense of missed install dates and
incorrect bills; not to mention a depressed stock price. The CLECs need to tap
into the ILEC resource pool and pluck out the few good people who could excel in
a start-up environment. At the same time the CLECs need to improve training and
systematize processes. Many customer orders are escalated through the process
in order to be installed on time because a particular customer or sales person
has screamed the loudest. While it is admirable that resources are summoned to
push the order through, the result is two-fold:
- While the
service date is met on that one particular order, the needs of several other
(often equally important) customers are not met,
- Eventually nearly all
orders are escalated and pushed through the process, leading to a complete
break-down in processes.
- The goal suggested here is not to eliminate
individual drive and entrepreneurial spirit, but rather to provide more
structure around it.
The next year will be a pivotal time for the industry as the various CLECs attempt to raise additional required capital. These proscriptive recommendations begin to attack the unenviable position in which the CLECs find themselves - trying to reach sufficient scale with a differentiable product so that they can begin waging a formidable battle against the ILECs' dominance.
To discuss or for more information regarding this article, please contact Rob Fisher (301-664-7777)