Measuring CLEC success: The trouble with counting access lines

Read a competitive carrier's quarterly earnings release and in the first two or three sentences you will usually find a boast about the number of access lines the company installed during the quarter. Carriers that are not yet profitable or do not have positive EBITDA prominently display such numbers to demonstrate growth in their customer base.

But the changing nature of telecom traffic and the inconsistent methods competitive local exchange carriers (CLECs) use to count access lines dilutes this number's usefulness as an indicator of CLECs' market share and quality of revenue. And Wall Street and investors are beginning to take notice.

The old definition of an access line - one line reaching from the customer premises to the central office in the public network - has been made somewhat obsolete by the proliferation of data ports and non-switched lines. A typical DSL connection for a small business carries 10 to 25 users, for example.

Some CLECs have applied multipliers that translate a network element such as a trunk into an equivalent number of access lines. But there is no standard among CLECs for counting so-called access line or voice-grade equivalents.

"[Counting access lines] is a complicated issue, and it's going to continue to get more complicated," said Carol Shobrook, an analyst at New Paradigm Resources Group. "The financial community is having trouble making apples-to-apples comparisons."

Problems with counting access lines started in 1998, when several Wall Street analysts discovered that incumbent carriers were excluding high-speed DS-1 and DS-3 connections from their line counts. But while incumbents have an incentive to understate access lines to show increased competition in their local regions, CLECs have the opposite motivation. Because they lack profits, they want to boost their access line counts to indicate future revenue and market share growth.

Trunking multipliers came into use because CLECs had so many ISP accounts, Shobrook said. "Some investment banks began to back out the trunking multipliers and just count ISP traffic," she said. "As CLECs focus more on business customers and less on ISPs, trunking multiplier use will diminish."

US LEC, for example, used a trunking multiplier until the end of 1999. The multiplier was based on "management's experience" that during the busiest hour of the day, the typical business trunk was in use six times longer than the typical business line.

Now, instead of trying to convert trunks into access lines, the company reports the number of business lines, the number of business trunks and the number of ISP trunks as different line items.

"We tried to add up things to make them simple, and we wound up having to provide additional detail anyway," said Jeffrey Blackey, senior vice president of marketing for US LEC. "We've evolved to providing more visibility into customer connections and more granularity."

Other CLECs have kept things simple. At ICG Communications, an access line is a single DS-0 or voice-grade equivalent, and a T-1 is 24 lines. "We don't use any trunking multipliers. Everything is a DS-0," said an ICG spokeswoman.

Although the use of trunking multipliers will diminish as CLECs focus more on business customers and less on ISPs, other technology developments - local voice over IP, voice over DSL and the new DSL line-sharing rules - threaten to muddy the waters further. "Ultimately, it may be impossible to distinguish between voice and data traffic," Shobrook said.

As CLECs finish their network buildouts and begin seeing a return on their investments, Wall Street will look to financial data as the key barometer of a service provider's health.

"The established CLECs are becoming profitable and bringing about new ways of comparing them," Shobrook said. "There's an increased emphasis on average revenue per line and the quality of line revenue."

One revenue metric likely to be useful is the portion of sales a CLEC receives from reciprocal compensation.

Pending legislation in the U.S. House of Representatives would exempt Internet traffic from reciprocal compensation requirements, establishing it as interstate traffic. This would be a negative for those CLECs that rely on ISP traffic to boost the reciprocal compensation they receive.

"Those companies which we believe would be most impacted by the proposed bill would be Electric Lightwave, Focal, ICG Communications and Intermedia, as each of these has a significant exposure or a growing exposure to reciprocal compensation as a percent of its total revenue stream," wrote Mark Kastan, a Credit Suisse First Boston analyst, in a recent report.

Access line - A circuit that connects a subscriber to a switching center. Also, a private line feeding a common control switching arrangement or enhanced communications service switch from a PBX.

Trunking multiplier - A number used to convert trunks in use to equivalent access lines. One way management determines the multiplier is to base it on the usage time of a typical business trunk at the busiest hour vs. the usage time of a typical business access line. Usually ranges from 1.5 to 6.0.

Voice-grade equivalent - A level of digital bandwidth sufficient to support a voice conversation using standard encoding techniques. One voice-grade equivalent circuit is equal to 64 kb/s of bandwidth, or one DS-0.