Deciphering unbundling data

Telephony's survey of how many unbundled loops and resale lines regional Bell operating companies have sold to competitors confirms much of what we've heard about the state of local competition, but also reveals a few surprises (see story on page 16).

RBOCs say they have converted just under 3 million switched access lines-about 2% of their total-to competitive local exchange carriers. About 90% of the lines converted to CLECs have been through a resale arrangement, while 10% involved unbundled network elements.

Although Telephony's report looked only at RBOCs and not other incumbents, the 3 million-line total probably would not increase substantially if we included Independent telcos. The largest Independent, GTE, is similar in size to an RBOC, but according to recent FCC data, it had converted only about 100,000 lines to competitors.

Of course, some losses to CLECs don't show up on these balance sheets. For example, if a CLEC installs a link all the way to a customer, taking that customer "on-net," it doesn't need to buy that link from the incumbent.

Dataquest senior analyst Steve Koppman estimates that CLECs have more than 1 million lines on-net and that they serve just under 1 million lines through T-1 or other lines leased from incumbents or other carriers. Koppman estimates that, in total, CLECs have as many as 5 million switched access lines-or about 2% to 3% of a 170 million U.S. line total. That leaves about 3 million CLEC lines served through resale or unbundled elements, which matches what Telephony found.

Readers may be surprised, however, by the high number of lines converted to competitors in certain states.

U S West reports conversion rates of 5% or more in North Dakota, South Dakota and Iowa, primarily through resale. A large chunk of that business undoubtedly has gone to a single competitor-McLeod USA.

This underscores what CLECs emphasizing a resale strategy have argued-that resale is a good way to build market share fast. With the tightening of financial markets, however, resale has come under attack because of its low profit margins. USN Communications, which relies nearly 100% on resale, recently eliminated a large number of jobs. And several CLECs that have used a mixture of resale and their own facilities have vowed to minimize their dependence on resale moving forward.

Yet no one seems to be questioning McLeod's performance. Robert Waldman, managing director for Salomon Smith Barney, points out that McLeod isn't doing run-of-the-mill resale but instead is concentrating on Centrex resale, which yields better margins and allows the CLEC to have more control over moves, adds and changes and new features that customers might want.

Ultimately, Waldman says, companies that rely too heavily on conventional resale may go out of business-and may not even find buyers for their accounts. Facilities-based CLECs will have little interest in accounts they cannot easily connect to their own networks. Depending how far-flung a reseller's customers are, those customers eventually may revert to the incumbents, says Waldman.

Another surprise is that between 1997 and 1998, Ameritech's unbundled loop numbers increased at a much lower rate than the other RBOCs. A year ago that company far outpaced other RBOCs in unbundled loops converted to CLECs.

Considering that Ameritech has had the most attractive local loop prices and has made more progress than some other RBOCs in opening its operations support systems (Telephony, Nov. 2, 1998, page 26), it's not surprising that CLECs in that region were drawn to an unbundled loop strategy more quickly.

One wonders if the slowing of unbundled loop growth indicates a second phase of CLEC strategy. Perhaps CLECs in Ameritech's region have reached critical mass and are relying more heavily on their own facilities. Also, as more competitors enter an area, they begin to be sources of unbundled elements for one another, minimizing the requirement to buy from the incumbent.

If we do this report again next year, will we see this trend spread toward other RBOCs? Maybe. But if New York becomes the prototype for 271 approval, CLECs may see more favorable terms for unbundled elements and we might see a sharp increase instead.