Are CLECs Down For The Count? Don't Believe It

September 17, 2001

If you listen to the news, the obituaries on CLECs appear day after day. Both large and small CLECs are going under as the path to profitability and the ability to obtain additional funding have disappeared like wisps of smoke. Covad, Rhythms, Teligent, Winstar, and smaller players like E.spire and Essential have seen their business plans falter or disappear and are either going bankrupt or being sold.

It is not a happy time for CLECs, especially the ones that have fallen on hard times, as well as the employees and customers who believed in them. Many of the employees jumped on board for two reasons: 1) to get rich quick in the booming stock market via the IPO-everyone knew fortunes were to be made in telecom; and 2) they felt that developing a competitor against the ILECs was a sound business plan. In almost every case each employee had a negative experience with the ILEC and thought they could make a difference.

Customers are truly disappointed in the demise of many CLEC's or at least the demise of their ability to choose. In many cases they are forced back into relationships they really do not want. After all, they left those relationships for several reasons: lack of customer support, lack of enhanced services, lack of proper billings and lack of timely installations-in general, a lack of a lot. Unfortunately, customers of local services must obtain communications services to remain in business or stay in contact with the outside world. The failure of many CLECs and the questionable viability of those remaining leave many customers in a quandary. Do they take another chance with a survivor or go back to the old ILEC whom they really dislike?

But are CLECs really dead? According to many experts, there were too many CLECs and this is a natural shake-up occurring. They say that the CLEC market is several billions of dollars strong and the stronger companies will survive. Allegiance and McCleod have been touted as examples of stronger CLECs. Although they have had their problems, they will survive and grow.

But two factors influenced the shake-out of the CLEC market. One was the changing attitude of the venture capitalists that threw conventional business models out the window in their rush to fund companies whose business plans did not provide profits. The simple fact was that money was thrown at anyone who could twist the promotional tale and people believed the adage "build it and dollars will follow." Companies were built, but the road to profitability was a long way off. When these same investors clamored for profitability before further investment, they forced a company drunk with free booze to suddenly sober up and what a hangover they had.

Few companies can switch from a freewheeling, spend to get customers mentality to a focused methodical business plan with set goals and objectives. This is what the investors wanted to occur. And as with any addict, the CLEC, ISP, Internet companies started to fall like a house of cards as the revenues and the potential revenues were not near term. The suddenness of the withdrawal was more than many could accept. In some cases, the CLEC did go cold turkey and focus on building revenue, in others, the thought was that the change in attitude was a short-term phase. Unfortunately it was not.

The second reason many CLECs fail or struggle was inexperience. Not inexperienced in running a company, but inexperienced in telecom. People inexperienced in Telecom convinced themselves and investors that anyone could make money in the CLEC marketplace. A rate of return was essentially guaranteed. The regulators set a discount for the ILECs services and all anyone had to do was work within the margins.

Not a bad plan, but that means that a CLEC must work within the margins, build the base and then migrate to a facilities based carrier to obtain economies of scale. Unfortunately, those who struggle had a difficult time staying within the margins, whether a reseller, facility based or mixed carrier. Many of the CLECs did not understand the provisioning process. This led to dissatisfied customers, who in turn, spent a large potion of their time calling the customer service organization. The more calls, the more staff required, the more impact to the margin.

You could blame the ILECs for the problems of the CLECs, as many are doing, but the ILEC is only part of the problem. While the ILECs have not made it easy for CLEC's, they created an atmosphere of culpability as they have concentrated on consolidation of local markets and entry into the Long Distance markets. This concentration is at the expense of the support of their customers, the CLEC.

What many of the ILEC's forget is that a CLEC is a customer. At several points the CLEC actually pays the ILEC cold hard cash and if the ILEC would support the CLEC, they would eliminate a portion of the bad debt they currently incur by passing it on to the CLEC, while retaining a portion of the revenue.

The ILECs face the same revenue question as the IXCs did years ago when resellers first appeared. Why should I give up revenue to a competitor? The answer was blatantly simple. High quality, high revenue is better than low quality, high revenue. It was better to give up some revenue to a competitor who was also a customer than lose all the revenue.

But the ILEC's consolidation efforts have caused many unwanted results. Early retirements, layoffs and segmentation of business units have left a hodge podge of systems that are not compatible, and the experience to properly manage their integration has left as well. This has occurred even within sections of the original company.

This is not to say the ILECs are not at fault, as one might determine by their actions. The perception that even if competition is mandated, if I fight it or delay it, I still win. In reality, they will lose as their actions are perceived as noncompetitive and everyone knows that perception rules. Therefore, penalties will follow along with additional regulations which may result in splitting the ILECS into wholesale and retail companies.

For now, CLEC are not dead, but they must regroup. They must evaluate their processes and methods to protect their margins. They must gain experience in working with the ILECs and be viewed not as competitors but as partners in providing services to the end user. As the processes and margins are enhanced, future growth is assured. The IXC market proved that competition breeds innovation and reductions in price. The CLEC market can be on the forefront of the new technology wave and will bring exciting new services to end users.

Jim Marsh is a senior consultant for The Management Network Group, a telecom consulting organization.  Jim has worked in telecom for 15 years and is an expert in revenue assurance, risk management and fraud. Jim speaks and writes on improving operational systems and functions to improve bottom lines.