The data CLEC opportunity

It's hard to believe it's only been a year since Telephony first covered what have since come to be called data CLECs (Telephony, Dec. 8, 1997, page 16). Among the many business models a competitive local exchange carrier can adopt, this has been one of the best opportunities.

Companies using this strategy-including Covad Communications, NorthPoint Communications, Rhythms Net Connections and Dakota Services Ltd.-are cashing in on the demand for more bandwidth by upgrading incumbent carriers' existing copper loops. By being tightly focused, these carriers have developed a unique skill set. Best of all, they don't have to wait for the incumbent to deploy DSL before they can make their own offerings.

Data CLECs have initially targeted Internet service providers who, in some cases, were prohibited from collocating in incumbent COs or who just didn't want to go through the hassle. Looking ahead, another opportunity is beginning to arise-wholesaling DSL to other CLECs.

Sprint, for example, has very aggressive DSL rollout plans. Company representatives have acknowledged they won't collocate in every CO but in some cases will buy from the incumbent or from a data CLEC. As the Bell companies revealed in a letter last week to the FCC (see story on page 7), they're not eager to wholesale DSL-potentially ceding the wholesale DSL market to the data CLECs.

DSL won't be just for data, either, as recent announcements from Jetstream Communications (Telephony, Nov. 30, page 7) and Premisys Communications have revealed. Both companies now offer DSL equipment that simultaneously supports multiple voice connections as well as data-and when the phones are not in use, their bandwidth is available for data transmission.

Incumbents, not wanting to cannibalize existing higher-priced services such as T-1 or multiple phone lines, will not rush to offer that kind of DSL service. But for CLECs, it can open up new markets. For data CLECs, that means even more wholesale customers.

Just as the data CLEC opportunity begins to look even better, NorthPoint CEO Michael Malaga says the window of opportunity may be closing. We may never have more than a handful of data CLECs.

The issue is how many such companies the market can support.

It's not unusual to see two or three carriers offering DSL from the same CO. As long as wholesale customers have several data CLECs from which to choose, the opportunity for the fourth or fifth carrier is significantly reduced.

This is of particular concern because the set of homes and businesses attached to any CO is relatively fixed. It's a market in which being early is a tremendous advantage. Being late may mean not being able to play.

Recognizing these dynamics, one also sees that the much-debated question of whether incumbents should be required to resell and unbundle DSL networks may become less critical as data CLECs continue their deployment. Other CLECs just want a source for DSL. If data CLECs can provide it, what the incumbent is required to do won't matter.

The more important question, in terms of ensuring a competitive marketplace, concerns the raw copper and the collocation space that CLECs require from incumbents to do their own DSL deployments.

If incumbents are required to offer relatively inexpensive collocation options, such as cageless collocation, and reasonable terms for conditioned loops, data CLECs will offer DSL on a wider basis more quickly than if those options are not available.

NorthPoint's aggressive DSL rollout plan-including a larger footprint than all incumbent carriers combined by third quarter 1999-assumes the company will continue to make regulatory progress, says Steven Gorosh, NorthPoint vice president and general counsel.

Let's not be distracted by the issue of whether incumbents should unbundle their DSL offerings. All that means is that, where the incumbent has chosen to deploy DSL, it would have to let competitors connect to its DSLAM. It benefits competitors only where the incumbent has made the deployment choice.

If data CLECs can get loops and collocation at reasonable terms, it's no big deal for them to add their own DSLAMs.

Let's concentrate, instead, on how competitors can get a fair shot at making their own DSL installations.