On McLeod nine: Ovation acquisition creates big regional CLEC

Competitive local exchange carrier McLeodUSA's acquisition of Minneapolis-based Ovation Communications is creating what the companies are calling a super regional CLEC. The combined company will operate as McLeodUSA.

Ovation operates in Tier 1 Midwestern cities while McLeod targets Tier 2 and 3 cities in the Midwest and West. Despite the difference in target city size, McLeod's approach matches Ovation's, said Tim Devine, president and CEO of Ovation. "They saturate the market," he said. "The geographical fit is excellent. As a combined company, we're able to hugely accelerate our growth in the market in terms of penetration of CLEC access lines."

Currently offering service in Flint and Saginaw, Mich., and the Twin Cities, Ovation is rolling out service in Milwaukee and Chicago with Detroit targeted for April turn-up, Devine said.

"With Ovation, we will expand our market area by 50% without adding 50% more to our company," said a McLeod spokeswoman.

"Ovation gives [McLeod] a facilities-based presence in large markets in that territory," said David Heger, an analyst with A.G. Edwards & Sons. "It accelerated their presence and opens up a bigger addressable market for the company."

The acquisition follows the trend of CLEC consolidation, and McLeod's spokeswoman pointed out that the rule of three often applies. Because only three CLECs will survive in a given market, carriers tend to join forces, expanding service offerings and expanding the customer base.

Down the road, Heger sees the possibility for larger carriers to gobble up CLECs. "You might see a Bell company, as the Bells get serious about competing out of territory, or competitive carriers, like Williams, IXC or Level 3 buy up CLECs to get a local presence."

Devine expects continued consolidation in the CLEC market, but he cautions that bigger isn't always better. "It's very apparent that, to a certain extent, being larger is better," he said. But when a carrier is as large as AT&T or MCI WorldCom, he said, it is harder to focus. "McLeodUSA is very focused. They are considerably larger than Ovation, but they are still focused on a region," he said.

IP telephony alliance GRIC Communications has developed an application that will let Internet telephony service providers sell prepaid calling cards.

GRICprepaid interfaces with Lucent Technologies' PacketStar Internet Telephony System gateway and lets service providers authenticate, rate, terminate and bill customers' voice-over-IP calls. Running on a Unix or Windows NT platform, the application uses Web-based management tools for setting up accounts, managing tariff tables, checking or increasing a customer's balance and changing account status.

"Prepaid is hot because it allows service providers to enter markets they wouldn't get into otherwise because they might lose their shirts," said Bob Powell, senior GRICphone product manager. "Marry that to the reduced costs of voice over IP, and the small guys can get in at a very modest cost." The basic license price for GRICprepaid is $25,000, not including the price of the Lucent gateway.

Lucent modified its standard PacketStar application programming interface to allow it to check billing records on the GRICprepaid server and notify calling card customers when the remaining time or dollar amount drops to a predetermined level.

Interpath Communications, a subsidiary of Carolina Power & Light, is the first service provider to beta test the application. The provider's location in Research Triangle Park, N.C., makes it a good prospect for prepaid voice over IP. "It's a hotbed of technology right now with companies like IBM, Nortel and Cisco," said Chris Gosk, Interpath product manager for voice over IP. "We have many business customers who value being able to make low-cost international calls." Three major universities-Duke, the University of North Carolina and North Carolina State-within 15 miles also means a large population of foreign students who may prefer using a prepaid card for calls home over setting up full phone service.