Report: CLECs holding steady

It may be a cliché, but where competitive local exchange carriers are concerned, there is still good news and bad, according to two longstanding industry experts.

Terry Barnich and Craig Clausen of New Paradigm Research Group have just published the 19th edition of their annual CLEC Report, and they found reason to have hope--and concern.

"CLECs grew in certain respects, and the general failures tapered off," said Clausen in a telephone interview. "Consolidation is progressing, and some companies have shown incremental increases in revenue."

Only three CLECs declared bankruptcy this year--Corecomm (ATX), RCN and Choice One--down from four in 2003 and 47 in the two years prior to that. Overall revenue was flat at $38 billion, due to increased price competition, even as access lines grew by 9.1% to 37 million lines in 2004, or 18% of the market.

Continued consolidation has helped stabilize the market by eliminating some oversubscription, Barnich said, while the numerous bankruptcy proceedings have enabled surviving CLECs to emerge with better balance sheets. But many CLECs still face the challenge of reducing operating costs.

"Bankruptcies have relieved companies of interest obligations, and they have all cut back on capital expenditures, but many still have fairly high operational costs," he commented. "They are still being forced by technology to spend capital, at a time of declining prices. So the squeeze is being put on all of them."

Those companies that can’t control operational costs are the ones who will remain most vulnerable going forward to being consumed by a larger CLEC or simply shutting down.

On the positive side of the ledger, there is still opportunity, Clausen said. "Finding a niche strategy is increasingly important," he said. "What they have to do now is be the innovators again. If they try to go head to head, they are not going to win. Given recent regulatory events, the RBOCs will continue to gain pricing flexibility."

And while regulators have closed the door on UNE-P--the method of resale that favored many CLECs --that has a bright side as well, Barnich said. Regulatory certainty has made clear the transition that lies ahead, and ended "the inter-Nicene struggle between UNE-P players and facilities-based carriers."

Many CLECs, such as Z-Tel, are turning to voice over IP, and working with equipment vendors to determine how to best deploy the network facilities needed to support VoIP over broadband connections, which customers purchase independently.

"CLECs are either going to make the transition or sell their customer lists through consolidation or go out of business," Barnich said.

Clausen expects most capital expenditures by CLECs will go to VoIP equipment, although NPRG isn’t predicting any sudden spending sprees. Capital expenditures by CLECs in 2004 fell 50% from 2003, down to $2.4 billion. NPRG expects an 8% to 10% increase in 2004, but that’s not much more than network maintenance money, Barnich said.

Downtown business areas remain prime turf for CLECs, in large part because there remains more demand and less competition there, he adds. "There’s plenty of competition for the consumer market," Barnich said, "but in the downtown business areas, there’s no cable company and most businesses aren’t going to use wireless."

The CLEC Report 2005 is available on the New Paradigm Research Group’s Web site, www.nprg.com.