CLEC Lock-Out . . . A Vision Of Things to Come?

Competitive local exchange carriers (CLECs) have changed the telecom landscape, creating a competitive atmosphere and fostering innovative new products and lower prices.

However, a threat looms on the horizon that potentially will damage the significant inroads CLECs have made into telecom markets.  The bottom line: A new breed of unregulated telecom providers currently has the ability to lock you out of accessing your primary customers.

How do facilities-based CLECs choose which cities to market and build networks in? 

First, let’s take a look at how CLECs choose cities for their services.  Do they select the cities based on their posh location, or whether their executives live there, or whether it just appears there ought to be lots of business there?

I think not!

Facilities-based CLECs target cities based on in-depth financial models that include, among other things, the number of buildings to which they can build fiber laterals from their fiber loop.  The loops generally are constructed within the business districts of a particular city, such as downtown or an industrial park area.  

The model includes the projected revenue forecasted from each building, the time to market, whether the services to be marketed are resold, on-net or a combination of both, and the cost of providing these services.  The CLEC formulas vary depending on company policy and vision, but they still all count on building connections and selling services to the building tenants thereafter.

What if a CLEC is locked out of the major buildings in a given city? 

Would “CLEC lock-out” change this paradigm? Would the facilities-based CLECs skip the city where access to the major buildings is blocked?  What if a CLEC constructs a fiber loop and installs a Class 5 switch, then finds itself locked out of the major buildings in town? 

The above scenario is quietly starting to take place.  A new breed of telecommunications provider is sneaking up on unsuspecting CLECs.  This new breed operates beyond the demarcation barrier, providing its own services, on its own network, with its own switch.  It provides all services on-net reaping the rewards of high margins unobtainable using unbundled network elements (UNEs) or through resale.  These new companies are where Shared Tenant Service providers had hoped to be many years ago.

Today, upstart organizations are becoming, essentially, CLECs within individual buildings.  Some people refer to these companies as Telecommunication Service Providers or TSPs.  They partner with real estate management organizations to wire buildings with fiber optic cable.  They install switching, Internet equipment and provide building tenants with services such as local dial tone, Centrex, ISDN, long distance, wireless voice services, dedicated Internet access, advanced Internet services, including remote access, virtual private networks (VPN), Web hosting, video and E-business solutions.  Thus, they are competing both with the local ILEC, and with CLECs, with their exclusive arrangements.

This partnership between the TSP and the building owners may be exclusive and present a barrier to CLECs on the street.   CLEC organizations such as Broadband Office and Gillette Global Network, and real estate management companies such as Apex Site Management provide full service packages to the tenants within the buildings they control.  These companies have numerous buildings under contract and many already in operation.  They do not want the ILEC or CLECs in town to market to what they consider to be their customers.  The only service from a CLEC or ILEC they require is building access and connection to the world via a broadband connection.  On the other hand, wireless access may eliminate even the access revenue for the wireline providers.

The January 1998, issue of Buildings magazine stated:  “Tenants don’t just want plug-and-play computers.  They want plug-and-play buildings.” It also said, “The smartest building is the one that’s 100-percent leased.”  This issue also cites Ultra-Net, a Marlborough, MA company that installs a black box in a building’s basement, free of charge, to provide high-speed Internet access where building owners and tenants are billed for usage.  Also included is OnSite Access, a New York City company that wires buildings for high-speed voice and data, then pays the building owners a commission based on usage.  Of course these examples are in Tier 1 cities.  What happens when they reach the Tier 3 cities?

Although some states such as Connecticut and Florida are trying to prevent CLEC Lock-out through legislation, there are still no state level rules . . . The jury is still out.

However, according to Real Access Alliance, “at the federal level, 27 Members of Congress wrote to FCC Chairman William E. Kennard noting that they believe market forces will ensure that tenants will be able to enjoy choice of telecommunications carriers and asking him to refrain from advancing any regulatory mandating the terms and conditions under which telecommunications providers would be granted access to private buildings.

“A forced access rule under consideration by the FCC would violate the constitutional rights of property owners and is anti-competitive, according to Real Access Alliance experts who testified during a hearing of the house Judiciary Subcommittee on the constitution.” 

Even the Federal and State governments can’t agree.

CLEC lock-out is as simple as an exclusive agreement between a telecommunications provider and the owners or management of a building. 

According to the Association for Local Telecommunications Services (ALTS): “There are over 750,000 commercial buildings in the US.  These buildings contain most of the business customers.  In addition, about 30 percent of residential customers live in multi-tenant buildings.  Without access to these buildings, CLEC networks would be of little value because they could not connect their services to the consumers. 

Competitors have worked diligently to reach customers who do business at or reside in these locations.  Nextlink leads the CLECs so far with connections to more than 17,000 buildings -- or only about 2 percent of the nation’s total buildings.  Most other wireline based CLECs connect to 5,000 or fewer buildings. 

Graphic K gives the total number of buildings reached by the wireless CLECs.  This group includes such companies as Winstar and Teligent.  At the end of 1999, these CLECs had access rights to over 15,000 buildings -- from around 2,250 in 1997.

While the regulatory bodies wrangle, the CLECs construct networks, and the ILECs reinforce their defenses, the TSPs are quietly creating partnerships with architects, real estate management companies and building owners. 

The CLEC city selection criteria and financial formulas may not be valid if access to the business community is not possible.  Therefore, alliances and partnerships may be the secret weapon in the race to the premier buildings in a targeted city.

My next column will discuss the effect of this movement of network intelligence from the ILEC or CLEC Class 5 switch to the targeted buildings as a result of the TSP’s on-site switch, SS7 and IP influences; and, what the effect of this reconfiguration may be on the reference points of all tariffs.

Philip E. Balevre is the Chief Operating Officer of Cornwell Consulting Services, a telecommunications and Internet technologies business consulting organization. Balevre has been in both the regulated and nonregulated segments of telecommunications as an executive in CLEC, Long Distance and Internet organizations since 1970. Balevre is the founder of Service Access Corporation.