After Turbulent 2009, CLECs Feeling Upbeat
One reason for the optimism is that the appeal of newer Internet Protocol (IP)-based services, including converged voice and data, is growing in tough economic times, which meant telecom wasn't buffeted as badly in 2009 as some industries were.
Another reason, CLEC execs say, is the expectation of new revenues for wireless backhaul services in 2010 and beyond.
"2009 was an interesting year," says Keith Wilson, executive vice president and CFO of Paetec Communications Inc. (Nasdaq: PAET), which has become one of the larger CLECs with operations in 47 of the top 50 markets, following its acquisition of US LEC Corp. (Nasdaq: CLEC) and McLeodUSA Inc. (Nasdaq: MCLD), two other CLECs. "Usage-based services tended to be soft as companies cut back, but we also saw many companies accelerate their move to an all-IP network."
Firms that hesitated to make the leap to Internet Protocol finally found the economic advantages too tempting to resist, Wilson says. Paetec helped that decision-making by structuring deals that bundled the cost of new equipment into the monthly service charges, eliminating a major capex hit up front, and by still providing services that offered more bandwidth at a lower cost than legacy offerings, he contends.
Verizon Enterprise Solutions Global Wholesale is also positioning to capitalize on small to mid-sized business interest in cost-effective IP services, offering three new VoIP and Internet packages to its CLEC customers along with marketing support. All three packages combine services and hardware required to make it easier for SMBs to deploy either a VoIP-and-Internet service, dedicated Internet, or an Ethernet-based Internet offering -- and all three target companies are looking to converge voice, data, and video onto IP.
"We let them plug and play these services into their own models," says Quintin Lew, senior vice president of marketing for Verizon Global Wholesale. "Our customers have their own value proposition, and these services are designed to fit into that."
Verizon Global Wholesale also lets CLECs bundle in a wireless offering as part of their service, not to compete with Verizon Wireless, but to augment a business package with services like find-me and follow-me.
"We are seeing a lot of demand from international carriers for this service," Lew says.
All of that plays into a general uptick in business, according to Lew: "We are seeing an uplift in volumes and also more services being purchased, and our disconnects are not as significant as last year. We are also seeing new adds, from the SMB market up through the enterprise."
For CenturyLink Inc. (NYSE: CTL), the wholesale world in 2009 was a tale of two different businesses. Its LightCore fiber network business "had a pretty decent year," says William Cheek, president of wholesale operations. "There was still a need for capacity and bandwidth growth."
On the special access side, where CenturyLink combined the wholesale operations of CenturyTel and Embarq, there was an economic hit, says Cheek, who come from Embarq to take over wholesale at the merged company.
"Some of what hit us was the mergers -- Verizon/Alltel Corp. (NYSE: AT) and AT&T Inc. (NYSE: T)/Cingular -- because they got around to merging their operations in the Tier 2 and Tier 3 markets we serve," Cheek says. "But in general, wireless has been a real bright spot. It is fueling a lot of growth."
The buildout of 4G networks and even the competition to claim the best 3G coverage have created a new competitive market in backhaul, and CLECs are definitely joining that battle.
"We are finding a lot of new competitors coming into this market," says Roland Thornton, Qwest Communications International Inc. (NYSE: Q) executive vice president for wholesale markets. "We have seen wireless service providers as partners for some time. We expect to build on those relationships. There is a lot more to providing service to a cell tower than just laying down a fiber."
Covad Communications Inc. , which unveiled the third leg of its network upgrade strategy and an end-to-end Ethernet offering, expects to see market differentiation for the near future that is based more on service-level agreements and customer service than on the price competition that has sometimes dominated -- and at one point crippled -- the wholesale market in the past.
"This [Ethernet] is not a commodity yet," says Aamir Hussain, chief technical officer for Covad.
Interestingly, CLECs generally downplayed the impact of the cable industry's push into business services.
Paetec's Wilson says it's nothing new -- his company has been competing with the likes of Optimum Lightpath (owned by Cablevision Systems Corp. (NYSE: CVC)), Cox Communications Inc. , and Time Warner Telecom -- now independent of Time Warner and known as tw telecom inc. (Nasdaq: TWTC) -- for a long time.
"Those are good companies and strong competitors," he says.
If cable is making headway, it's more at the very low end, claims Howard Janzen, CEO of One Communications Corp. , a Northeastern US CLEC.
"They look more like SoHo players or slightly larger, say, 10 to 20 lines, and we tend to play above that," Janzen says.
— Carol Wilson, Chief Editor, Events, Light Reading