Home on the range
In this age of rapidly breeding CLECs, why have so many steered away from wide-open spaces? Perhaps the perception is that the big cities-with their businesses, their big office buildings, their suburban sprawl-are where the money is. Could it be that only in big cities, so-called Tier 1 and Tier 2 markets, do people need high-speed access, local and long-distance bundles, and wireless service? A few new CLECs don't think so. They're willing to bet the farm that customers in smaller markets want the same services people are asking for in Chicago and New York City. Milwaukee and Kansas City.
Because we're not just talking Tier 1 and Tier 2 here-cities of a million or a few hundred thousand people. We're talking Tier 3. Tier 4. Tier 5 even. Places where the county population is less than a good crowd at a Big Ten football game.
Starting small Here's an example: New Bern, N.C. Population: 18,000. County population: 88,000. Tier 4 market and home to Crescent Telephone, a new CLEC founded by CEO Jake Roquet.
He fell into the telecom business-started out with a master's degree in print-making from the Art Institute of Chicago, taught at Duke University for a few years, then gradually moved into advertising and, from there, computers. Started an ISP, CoastalNet, in New Bern because there wasn't any other way to get Internet access there. Grew from 100 subscribers in 1994 to 17,000 in 1998. Then decided county folk were also being underserved in other ways. Under the parent company of the Global Information Exchange Corp., Roquet decided to create a facilities-based CLEC, Crescent Telephone, and market bundled telecom services to its ISP customer base.
"There are a few other CLECs in North Carolina," Roquet says. "But they're going for the top of the pyramid. We're going for the bottom."
Crescent will serve residential and small business customers in New Bern, Greenville, Rocky Mount, Fayetteville and Jacksonville, N.C.-and will move on from there. Crescent will start with small markets and then move to bigger ones-another difference from other CLECs. "We'll be expanding out the back door instead of the front," Roquet says.
He believes the CLEC will be as successful as his ISP because its target markets are ready for new choices. "They're ripe for competition," he says, explaining that the incumbent in the area is Sprint's local arm, which is taking its time in offering new services.
"Sprint won't be rolling out things like [digital subscriber line] for a long time," he says. "We hope to do it by the end of this year."
The Wild West Greg Green took a similarly roundabout route into the lower-tier markets. In the early '90s, Green helped found the first CLEC in Spokane, Wash. It was doing well and therefore was promptly bought by Craig McCaw's Nextlink in its effort to establish a presence in the Northwest.
For three years, Green served as president of the company. "It was an excellent ride. I enjoyed every bit of it," he says. But when his contract was up, it was definitely time for a sabbatical. "I spent a whole summer on a boat," he says. "It took me three months to realize, when I woke up in the morning, that I didn't have to go into work."
When his entrepreneurial spirit returned, Green started looking at the CLEC market again. "I noticed all the players were going to Tier 1. Very few were going for smaller markets," he says. "The reason was the money was just not there. Technology needed to advance enough to make it cost-effective."
For his part, Green found it would be too expensive to start up a CLEC in a bigger market. Deciding to focus on less densely populated areas, he designed a business plan, recruited employees and started up One-Eighty Communications ("because we wanted to take telecom in a new direction") six months ago. The CLEC's first target cities were Billings, Mont., and Lewiston, Idaho-both down at the Tier 5 level.
Washington Water and Power recently acquired One-Eighty and merged it into its Avista Communications subsidiary. Green wasn't looking for an equity partner but says he "needed something to grow the business."
The agreement, though, has offered the advantage of developed relationships with community economic development councils, he says.
Other ways the company has saved money: An $8 million agreement with Harris Corp. for cheaper, software-defined switches. Forming true interconnection agreements (not just resale) with U S West. Working those small-town business sectors to invest in their own technological advancement. "They've really bent over backwards for us," Green says. "Lewiston has committed to 1500 lines, worth $1 million in revenue."
He also says the only way to serve these markets is to be facilities-based. Some CLECs-most notably, McLeod USA-are known for providing service to Tier 3 cities but have been reselling service.
A discouraging word Marty Feilen, VP of Climax Telephone-which serves as an incumbent in Climax, Mich., (just south of Foreplay) and as a CLEC in towns like Battle Creek and Kalamazoo-says providing all the services customers are looking for can be quite expensive.
"The costs of the services don't go down just because you have less people," he says. "And [concerning] customer wants and needs-they want ISDN lines just like people in urban areas."
The "numbers game" is the chief reason why so few CLECs have targeted small markets, said Matthew O'Donnell, an analyst with New Paradigm Resources Group, a Chicago-based telecom consulting firm that focuses on CLECs. "All the money is in the business market, and rural markets tend to have more residential users." He adds that technological limitations-such as the distance limit on DSL provisioning-also make wide-open markets more difficult to serve.
For some new companies in these areas, the threat of an equally small incumbent is also very real. In January, Western Wireless Corp. announced it would offer fixed residential service through a Cellular One office in Regent, N.D. Four days after the announcement, the local incumbent, Consolidated Telephone Cooperative, cut off the service without warning.
Though the move directly affected only four customers, it also showed that in some small towns, there's only room enough for one provider.
Small-town hospitality Marketing yourself as a CLEC in regions like this can also be expensive, O'Donnell says. But both Green and Roquet seem to have found low-cost ways to spread the word.
While working through his ISP, Roquet noticed that people in these markets wanted the company to be viewed as a local business with which customers could easily communicate. For this purpose, he opened a walk-in customer service office in New Bern, where people can pay bills and try out new services.
"We're using new millennium technology, but we're bringing back the 1950s customer care," he says.
Like Green, Roquet says it's very important to become a community presence-showing up at town meetings, talking at the Rotary Club, and so on. "Truly acting locally and becoming part of the community is key," he says, adding that the company plans to offer this kind of service even when they move on to bigger markets.
David Jones, a principal with Cathey, Hutton & Associates, a Dallas-based financial consulting firm, says this local presence will be a key differentiator for Crescent. "It's not just about leveraging technology, it's about leveraging that closeness with the customer," he says. He explained that Crescent will also have the advantage of the 17,000 customers receiving service from its sister ISP.
Green says marketing his CLEC has consisted of "feet-on-the-street" advertising. But after talking with the people in these communities, he's learned that "people in general are interested in change and progress," he says.
"A lot of these communities want to build industry and bring jobs to the area, and many of those industries need a communications infrastructure," he explains, adding that he believes his company has been responsible in some cases for bringing other industries to communities.
Don't fence me in Despite the fact that few CLECs have decided to serve these markets, Jones feels that the adoption rate for new services will be faster than in big cities where there are an abundance of competitors.
Feilen believes that this arena presents an opportunity for more CLECs. "Sure, there's a need to serve these markets," he says. "There's definitely not enough competition in this business."
Roquet feels CLECs like this are on the "beginning edge" of what the market could be. "We're seeing people build out huge networks-they don't understand that that market will peak out."
In a few years, the smaller markets will be a lot more competitive, he says.
The fact so many companies are competing in urban markets may mean that more CLECs will try the smaller tiers, says Debra McMahon, a vice president with Mercer Management Consulting. But the real opportunity is in Tier 3, she says, where there is "some density" but the towns are still small enough to be "natural monopolies." The only problem will be when more than one CLEC tries to hit the same small town.
So far, though, most of these guys are sticking to their own unique territories. Green plans to bring his CLEC's services to three other Northwest markets soon-all Tier 4 or 5 markets-with bigger market plans down the road. He believes more CLECs will move to areas like this once a good business model is out there. "Because the industry is so new, right now they'd rather go to existing markets," he says. "Once there's the right model for 4th or 5th tier, they will come."
And on their porches and in their storefronts, customers will be waiting. Sarah Schmelling laments the lack of Starbucks coffee in many Tier 5 markets. She is Senior Editor-Supplements with Telephony.
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