Consolidating RLECs loom large over vendors

As rural carriers bulk up through consolidation, they are gaining more power over their equipment suppliers, not just in terms of increased purchasing power but — in some cases — in terms of concentrating large portions of a vendor’s revenue into the hands of one company.

For the first nine months of this year, 30% of Calix’s $144 million in total revenue came from a single customer: CenturyLink. Last year Calix’s two biggest customers contributed 25% and 11% of its revenue (presumably CenturyTel and Embarq, before they joined to form CenturyLink). And the year before that, the vendor’s top line was even more distributed: 22% and 15%.

Zhone Technologies, which has long had a broadly distributed customer base, got 20% of its third-quarter revenue from a single company; a year earlier, none of its customers contributed half as much.

That kind of concentration can be risky for vendors. When Occam Networks won a deal to supply Fairpoint’s broadband buildouts in the territories it acquired from Verizon, it was a landmark deal for the vendor. Occam, which had served a lot of small telcos and other service providers, already counted Fairpoint as a customer. But the carrier’s acquisition of Verizon assets in three states suddenly made it the country’s eighth-largest telco, and Occam counted the three-state broadband deal as its first Tier 1 win. One analyst estimated the vendor, which had previously reported $75 million in annual sales, could get as much as $80 million from Fairpoint during the first 18 months of the deal. Now, 18 months later, Fairpoint is in bankruptcy, owing Occam $1.7 million, and it’s not clear yet how much of that the vendor will recover.

The federal broadband stimulus program, which so far includes large rural telcos like CenturyLink and Windstream only in their disputes of funding applications, offers a way for smaller equipment players to diversify their customer base by adding states, municipalities and a range of other new players — but only in the short term. Rural carrier consolidation is sure to continue, allowing merged carriers to loom ever larger over their suppliers.

E-mail me at ed.gubbins@penton.com.