The case for building a super-CLEC

May 21, 2002 12:00 PM, Robert A. Saunders

It's no secret that a number of competitive telecom carriers are liquidating their assets. Although the demise of these companies certainly represents a blow to their investors and will undoubtedly cause even greater skepticism among potential CLEC customers regarding the prospects for survivors, there is a silver lining to this dark cloud. A substantial opportunity now exists for a consolidator to "roll up" defunct competitive local exchange carrier assets to create a semi-national super-CLEC.

The Eastern Management Group's research shows that 95% of all Chapter 11 bankruptcies ultimately result in asset liquidation, therefore guaranteeing that a host of additional properties to be made available for sale in the near term. By buying up several large CLEC networks, a company could quickly put itself in a position to capture a sizeable, if not dominant, share of the SMB market, i.e., businesses with between 10 and 250 employees. The Eastern Management Group believes the time is right to begin consolidating CLEC properties. In today's market, a CLEC consolidator could acquire valuable facilities and revenue-generating customers for as little as 1 to 2 cents on the dollar, depending on who's selling. 

Industry data shows that despite the hyperbole and pessimism swirling in the press, competition in the local market is here to stay and opportunities exist for carriers to leverage market conditions to ensure even grater success. Although the number of CLECs in the market continues to drop--down 50% over 18 months according to The Eastern Management Group's recently released competition report, "Competition in the Telecom Sector: CLECs, Cable and Wireless Are Making Waves Despite the Downturn"--competitive market share continues to rise. CLECs now serve a quarter of access lines in New York, 21% of access lines in Illinois and 20% in both Texas and Massachusetts, and penetration continues to grow nationwide. 

Healthier market conditions are resulting in an environment where existing competitors can thrive. As more carriers exit particular markets, CLECs are finding that irrational pricing is evaporating and it is easier to close sales since the competition for particular customers is lessening. A year and half ago, CLEC sales reps were banging into one another in the elevators trying to pitch clients; now they find their jobs are getting a great deal easier (putting aside the challenge of convincing customers that they will be around for longer than a growing season). 

Furthermore, technology is facilitating a broadening of the customer base. T-1 based integrated access, made economical by gear from companies like VINA Technologies, allows competitors to pursue customers with a few as four voice lines, whereas these customers would have been persona non grata a few months ago. A super-CLEC could put its newly acquired assets to use pursuing this more expansive "very small business market" through wholesale T-1 with comparatively little effort, while continuing to serve larger business customer through pure facilities-based service. 

By focusing on facilities-based strategy, any consolidator would insulate itself from potentially damaging regulatory uncertainty looming as the Federal Communications Commission considers scaling back competitor access to certain types of entry such as the unbundled network element platform. This is a smart move since many investors have begun to consider strategies built on a rickety regulatory platform a veritable "third rail" for investment.

Robert A. Saunders is a senior analyst with The Eastern Management Group, Inc., a management consulting firm focused exclusively on the communications industry. He can be reached at rsaunders@easternmanagement.com.

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