Competitors Bracing for Bigger Bells

The competitive operators who gathered at the CompTel/Ascent trade show last week in New Orleans could have abandoned their booths early and bee-lined for the bars of Bourbon Street, looking to ease the impending pain from proposed mega-mergers and FCC rule changes that are likely to make it much tougher for them to do battle with the largest U.S. carriers.

Instead, the show's estimated 3,000 attendees continued to exhibit a sense of tempered optimism in the halls and on the floor of the Morial Convention Center, where more than 150 companies exhibited their latest VOIP, Ethernet, and other service offerings.

The generally upbeat attitude partially has to do with the feeling – articulated by outgoing CompTel/Ascent CEO H. Russell Frisby Jr. – that "the industry is back" after a long period of loan defaults, bankruptcies, debt restructurings, and massive job cuts.

Beyond this, however, the generally good vibrations are a sign that competitors are starting to recognize that their long-term survival may hinge on their ability to build some sort of cooperative framework with one another, rather than stand alone against the bigger Bells. In effect, we may be witnessing a shift from a Hobbesian model in which the life of a competitive carrier is "solitary, poor, nasty, brutish, and short" toward a more sustainable competitive environment, in which a desire for survival and a degree of rationality will lead operators to focus ever more intently on basing their businesses on sound fundamentals and strategic partnerships.

For this new telecom community to take hold, operators must stop overestimating their own abilities and underestimating the abilities of their competitors, or the challenges of navigating an uncertain regulatory environment.

Here's where the SBC Communications Inc. (NYSE: SBC)/AT&T Corp. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ)/MCI Inc. (Nasdaq: MCIP) mega-mergers and the recent FCC order easing ILEC unbundling obligations regarding local circuit switching, high-capacity loops, and interoffice transport – despite all the hand-wringing they have produced – may actually benefit the industry at this critical moment. Beyond the likelihood of ushering in more rational pricing, these developments may pump a fear-born jolt of adrenaline into the bloodstream of competitive carriers, galvanizing them to take cooperative action that they otherwise might have avoided.

CompTel was the first public gathering that offered the chance to gauge the disposition of leading competitive carriers in the wake of these developments. It was clearly a show in which CLECs decided to stand their ground, instead of running for the hills.

As WilTel Communications Group Inc. president and CEO Jeff Storey noted in his keynote address, now that "the giants are getting bigger," it is vital for competitive carriers to work together to eliminate inefficiencies in business operations and service delivery. His advice centered on addressing multiple needs:

  1. the need to focus on applications, as opposed to simply technologies;
  2. the need to consolidate;
  3. the need to outsource; and
  4. the need for "a rapid and substantive shift" in regulatory policy.

But most of all, he said, operators must prioritize free cash flow over revenue growth, if they want the industry to prosper.

Storey's prescription for returning the industry to health was largely echoed by other executives participating in the show's CEO Forum. Alpheus Communications CEO Paul Hobby forcefully reiterated Storey's call for cooperation, saying he believes the primary motivations of fear and greed are now properly aligned for competitive carriers to present a united front.

"I think we just went from a trilateral world to a bilateral world," Hobby said. "We need a CLEC NATO." He is apparently looking for cooperation in both sharing network infrastructures and in defending competitive carriers' interests in Washington, now that AT&T and MCI will no longer be providing air cover against the Bells.

XO Communications Inc. (OTC: XOXO) CEO Carl Grivner suggested industry players should brace themselves for much more change, including consolidation on a global scale and a shift in how the world works. He predicted that operators that were once friends could become enemies, and those that were once enemies could become friends. And competitive carriers can expect to see new threats from emerging service providers such as Vonage Holdings Corp. that currently that do not operate their own networks.

Against this backdrop, Grivner still expects opportunities for facilities-based carriers to do more selling among themselves and to develop beneficial partnerships that will help them address customer needs and overcome network access obstacles.

Grande Communications president Joe Ross perhaps best summed up the attitude of competitive carrier executives at CompTel, when he said that recent events "will impact competition in a negative way," but that operators can view the next one to two years as an "opportunity to find your niche." The key is to be agile and focused on what you're good at.

— Stan Hubbard, Senior Analyst, Heavy Reading

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