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?
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.
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 further.)
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.
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.
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.
can the CLECs do to save themselves?
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.
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
Aggressively 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
technologies 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.
Sacrifice some of their entrepreneurial spirit for a little
A dot.com 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,
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.
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.