ISPs Should Still Consider Becoming CLECs

June 27, 2001 -- If Sir Charles Darwin were alive today and looked around at the telecommunications industry through the eyes of his Theory of Evolution, what do you think he'd see on this digital island?

Would he say that incumbent local exchange carriers (ILECs) are adaptable, simply responding to their environment slowly, like a Galapagos tortoise? Would he propose that CLECs and their data-only prodigy are currently in the midst of the process Darwin dubbed natural selection? Would Regional Bell Operating Companies be the only predatory sea lion-like species on this isles? And how do you suppose Darwin would view ISPs? Would and ISP be comparable to the dodo bird, haplessly going about its business until the final phase of evolution—extinction, or would Darwin observe something entirely different?

Communications domain
Despite what recent events might lead you to believe, the case for ISPs becoming CLECs—transforming from one species to another—has never been stronger

When the FCC took the ax to reciprocal compensation in April, ISPs lost their most-favored nation status with many local carriers.

Way back when the Telecom Act was amended, circa 1996, CLECs were granted survivalist clout. By their very nature, competitive and local to their surroundings, CLECs were far more adaptable to their habitat than RBOCs or incumbent carriers. By forming a symbiotic relationship with ISPs, some CLECs evolved toward living off local call termination moneys, rather than diversifying their diet on incremental revenues.

Fast-forward five years to today's environment, and ISPs are no longer the darlings of CLECs. Where ISPs could once benefit from favorable rates for IP traffic, finding decent upstream connections and rates has suddenly become much, much more difficult.

In fact, many ISP owners figure that they will have to increase their monthly bill to customers once CLECs start passing along the price of lost reciprocal compensation revenues.

ISPs find themselves looking at monthly bills from their CLECs, wondering why supposedly competitive telephone companies are any better than the RBOCs or ILECs. As a result, some ISPs owners are looking to sell, but others—a growing number of ISP owners—are now considering evolving into CLECs themselves.

Kingdom come undone
It is a simple premise: an ISP could be its own upstream, providing its own bundled voice and data services and striking its own interconnection deal. No longer is the ISP just a customer—now, it's an entirely different beast.

Or at least that's how the logic went. Somewhere between evolutionary logic and monetary reality lie a whole lot of issues that eventually forced more than one ISP to devolve and decide to stick with the ISP business.

Jessica Gothie is part-owner of Beford.net, a 2,000-customer ISP operating in Pennsylvania.

Bedford, a sleepy town of approximately 3,200 people, is 110 miles east of Pittsburgh. The small town lies deep in the heart of Verizon Communications territory.

After five years in the ISP business, Gothie thought the time was right to get the ball rolling on CLEC certification in the state of Pennsylvania.

Verizon, doing what it does best, was dragging its feet on digital subscriber line (DSL) service rollouts to small communities like Bedford. All Gothie needed to do was go out and get DSL on her own.

Heck, she could even get the Bell to pay for it, with money received from reciprocal compensation.

After a year spent following the paper trail laid by officials at the state's Public Utilities Commission, Gothie finally received her certification. Soon after, the foundation of her CLEC plans were rocked to the core.

That's when the FCC laid out its guidelines for reciprocal compensation pricing that established a net-zero rule of order. At the same time Verizon, seeing there was a potential rival in the Bedford area, quickly decided to roll out its own DSL program in Gothie's service area.

In the space of three months, there was suddenly no incentive to become a CLEC.

Phylum fo fum
As a competitive telephone company with little in the way of broadband data competition, Gothie could've raked in some pretty good revenues right after launching her CLEC. Now, starting a competitive phone service seemed like an inordinate hassle for the $500,000 minimum she would have spent on equipment and rollout fees.

"When you take (reciprocal compensation) out of the plan, it gets much less likely that it's going to make money," Gothie said. "I have better things I'd rather do with half a million dollars than go into the phone company business." She points in particular to the equipment costs needed to keep a competitive phone company competitive.

It's no secret that Moore's Law isn't particularly kind to ISPs or CLECs when it comes to equipment. Look at the Bells for proof of what happens when a network doesn't keep up with the technology, one of Gothie's reasons for getting out of the business.

"The equipment I bought when I started the ISP in 1996 has long ago been sent to the trash heap, and we've gone through two generations of equipment since then," Gothie pointed out. "I'd rather spend my half million on things that will last 30 years and you can still get revenue out of.

"I like the ISP business quite a bit, but in terms of maximizing revenue for investment it is not the most efficient thing I've ever seen," Gothie continued. "We are making money at it. However, I do not want to continue buying iterations and generations of ISP and telephone equipment."

Clearly, basing your business model solely on DSL or reciprocal compensation is not going to get you very far in the telephone world.

So what else is there? An ISP could make the argument that getting into the non-data world is a bad move if only the above two criteria are considered.

Part 2