Study: Margins decline in small telcos’ CLEC operations

Although Independent telcos have fared better in the competitive local exchange carrier (CLEC) market than many other companies, that business has been disappointing in recent years. Margins on Independent telcos’ CLEC lines of business decreased 25% in 2008, according to a new study of 196 small US telcos conducted by the Telergee Alliance, a network of seven certified public accounting firms with telecom specialties.

The 2009 Telergee Benchmark Study, made available exclusively to clients of Telergee firms and to TelephonyOnline, found that slightly less than one quarter of independent telcos have CLEC operations, which comprise a median of 26.1% of the carriers’ total lines. CLEC lines generated a median annual revenue of $696, in comparison with a median $1270 annual revenue per ILEC line, the Telergee researchers found.

“What’s happening is, as the players get established, there is a bit more competition for some services, which may put top-line pressure on the pricing,” said Cliff Abbott, a principal at Berry, Dunn, McNeil & Parker, a Telergee member firm. A trend toward more price discounting through service bundling also may have taken a toll.

A general migration away from landline to wireless service also may be partly responsible for the lackluster performance of telcos’ CLEC operations. “The wireless carriers are getting more of a foothold,” Abbott said. He noted, for example, that some wireless carriers may test the market in rural areas by installing a portable cellsite to determine if they can generate interest.

Wade Wilson, a partner with Bolinger, Segars, Gilbert & Moss, another Telergee firm, agreed that price competition has prevented independents from raising prices in their CLEC units, even though expenses have continued to climb. He noted, however, that CLEC operations sometimes continue to generate substantial cash because depreciation comprises a large part of their total expenses.



“A lot of CLEC operations are surviving and are able to make loan payments because of that, but they’re not making much net income,” Wilson said. “The key, at some point, will be to be able to raise rates.”

A few companies, however, appear willing to buck a trend. Abbott pointed to Union Telephone Company—a New Hampshire-based telco that sold its ILEC operations to TDS Telecom but retained its CLEC business.

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See TelephonyOnline for additional coverage of the 2009 Telergee Benchmark Study. Read part one and part two. Independent telcos interested in participating in next year’s study should visit Telergee.com.