Too much of a good thing

One of the most exciting things about a new market segment is the flurry of activity that surrounds it. A service provider branches out or a new one starts from the ground up to address a new customer base. Other service providers follow, and vendors jump on the bandwagon, too. New suppliers emerge and existing suppliers adjust products specifically tailored for the new market segment.

But too much of a good thing can be, well, too much.

Some fear this is happening in the BLEC space. An early entrant in this segment is Allied Riser Communications, the subject of this week's cover story on page 50. ARC isn't alone: Several others noted the MTU/MDU opportunity, and soon new providers cropped up, among them BroadBand Office, Everest Broadband Networks, OnSite Access and Wired Business. Each takes a slightly different tack, but the overall goal is the same: wire a building for broadband access and other services and then market those services to tenants within the building. Expand as needed.

Where there are service providers, there are vendors. Some 15 are listed in the chart on page 74, and more will undoubtedly emerge.

As a whole, these providers and suppliers validate the MTU/MDU space. Most companies agree that more competition indicates a healthy market opportunity. Each aims to be the market leader and claims its business plan is superior to the others.

But look at the statistics. According to Jim Andrew, vice president of analyst firm Adventis, ARC is the largest MDU/MTU provider serving more than 50 cities. BroadBand Office is in 25 cities; Cypress Communications and Eureka each offer service in about 20 cities; OnSite Access is in around 15 cities; and Urban Media, a private company in San Francisco, expects to be in 40 cities by the end of this year.

But it's possible these providers have sub-segmented the market too much for long-term survival. No matter how successful any one of these providers is, they are targeting a finite number of customers within each city. They are essentially battling for the same group of customers - the tenants of office buildings. And they are battling for business against the formidable incumbent carriers and any number of competitive or alternative providers.

Of course, any Tier 1 city is rife with office buildings, each representing an opportunity for the BLECs. But the argument that there are plenty of targets is sustainable only to the degree that providers want to build them out. Not all office buildings are candidates for BLEC expansion. Rights-of-way, building penetration and distance to a CO or co-location site all affect the decision on whether to build. Those factors concern all BLECs, though their parameters differ.

Even presuming that the BLECs actually offer better support and more hands-on customer service, they still derive revenue from a small group of customers. Like all service providers, they have to offset their build costs. And in the case of the BLECs, they have met serious and unexpected build costs - like the cost of doing business with real estate owners.

Despite rules that force property owners to play nice with all interested BLECs, ARC's executives concede they probably aren't going to expend the time and capital to wire a building whose risers already are occupied by another BLEC. The same likely is true for other BLECs. It doesn't make economic sense.

This of course, leads to the inevitable shakeout - the downside of creating a new market segment. Some will fold, others will merge and, in my opinion, more than a few will be acquired. Not one of the BLECs I've spoken to has admitted it wants to be purchased, but as a group, BLECs are nice acquisition targets.

As Andrew said: "They have the most valuable piece of real estate of all, and that is the connection to the end user and the end user's desktop."

If they leverage their assets properly, we'll have just enough of a good thing.