CLECs' Real Role: Providing Advanced Services

FRAMINGHAM (04/18/2000) - Regulatory trends seem to be going against the competitive local exchange carriers (CLEC) these days. Many say the CLECs depend on access to incumbent LEC (ILEC) infrastructure for their survival. If this is true, can CLECs continue to play a role in telecommunications, or will the future be a battle among the facility owners such as the regional Bell operating companies and cable companies? Is local exchange competition going to be competition among the few?

The answer is yes, unless the CLECs get smart.

The Federal Communications Commission, in a November 1999 rule-making and in its actions regarding the SBC Communications/ Ameritech merger, has given ILECs approval to deploy modern packet-mode digital infrastructure to provide universal high-speed service capabilities to businesses and consumers.

In return, the FCC has promised the ILECs that most of the new infrastructure will be shielded from unbundling. This limits the CLECs' ability to exploit the incumbent network and, in some cases, may enslave the CLECs' service plans to the specific product strategies of certain ILEC vendors, such as SBC's fiber remote favorite, Alcatel.

But the real debate isn't so much whether a CLEC should be able to install a card in an ILEC's fiber-remote equipment shelf as it is whether CLEC competition is the way to provide universal advanced services. The telecom act assigns the FCC the responsibility to promote this noble service goal, and the FCC seems to have adopted the view that facility owners such as the ILECs are really the only way to bring about universal digital services.

To understand the CLECs' problems and future, you have to consider a misunderstanding about the telecommunications act. It wasn't really about creating competition; it was about creating a modern digital-access infrastructure. Competition was one of the ways to achieve that goal.

The act let the ILECs into the national advanced services market, where virtually all future data opportunity is found, as an incentive to modernize their networks to better support advanced services. If the ILECs let modernization languish, the CLECs would step in and fill the gap.

Given this approach, it's not surprising the current FCC policy links the shielding of ILEC network elements to the deployment of advanced-services-capable broadband networks. But what now for the CLECs?

Well, CLECs can still exploit home-run copper or fiber as before because customer loops must be made available as unbundled elements no matter what kind of ILEC infrastructure is in use. In the near term, this gives CLECs access to perhaps one-third of the target customers - those with high-service revenue potential. In time, ILEC's provisioning practices may erode the current base of home-run fiber and copper in favor of fiber remotes and short loops, but CLECs have a few good years left in their traditional space.

If they want it, that is. Industry statistics suggest the profit margins on access services alone are less than 15%, far too thin to support an aggressive sales/ marketing program for a CLEC, and too small to provide an attractive return for a CLEC's investors. On the other hand, the new ILEC infrastructure would let the CLEC wholesale digital access from the ILEC, freeing up its capital to create new competitive services with higher profit margins.

Putting this another way, how could any CLEC strategy to serve customers with digital-access connections - being necessarily limited in terms of scale - hope to be competitive with the architecture of a large incumbent that already touches tens of millions of customers?

The CLECs need to stop hitting the ILECs where they're strong and instead target their weak spots. Let the ILEC provision the customer and compete instead with the ILEC's advanced-services subsidiary in providing the services across that infrastructure.

All this techno-debating as to whether CLECs or ILECs get to own digital subscriber line (DSL) cards ignores the fact that the real future of networking isn't created by pushing bits, but by pushing services. Sure, the ILECs can and will shield more of their networks from unbundling at the cost of being able to offer lucrative data services directly to the users. Their future now depends on how successful their advanced-services subsidiaries will be in providing customers the services they want.

If the CLECs are willing to stop trying to salvage a DSL strategy that could never have hoped to be competitive to begin with, they can still build a service business that will threaten these subsidiaries' ability to compete and grow.

Nolle is president of CIMI, a technology assessment firm in Voorhees, New Jersey. He can be reached at (856)753-0004 or tnolle@cimicorp.com.

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