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Regulation

The Switch Is On for CLECs

On March 11, life will get a little harder for competitive local exchange carriers (CLECs). That’s the day the Federal Communications Commission (FCC) has mandated that they cannot add any new subscribers with their UNE-P (Unbundled Network Elements-Platform) agreements with ILECs and have one year to shift their existing customers over to their own facilities.

That’s bad news for CLECs, who currently get full access to local loops from ILECs at steeply reduced rates determined by state Public Utilities Commissions (PUCs). With regulators dead-set on weaning CLECs off the incumbent networks, these carriers will have to make some tough choices in the days ahead. They can either:

  • Sign commercial deals with ILECs to use UNE-P lines (without a wholesale discount);
  • Use wholesale lines from another provider like Covad Communications Inc. (OTC: COVD);
  • Offer VOIP services over broadband; or
  • Become a facilities-based provider handling their own switching, port, and transport functionality over UNE-L copper loops. This could allow them to eventually offer a full range of services including voice, data, and video. ”This is another hurdle for the CLEC community,” says Dana Frix, a partner at law firm Chadbourne & Parke LLC. “The notion that the FCC would require carriers to duplicate facilities is odd and inefficient.”

    Frix says that the ILECs knew what they were getting when they agreed to unbundle and get into the long distance market with the signing of the Telecommunications Act of 1996. “They agreed to a deal and after they got into it they claimed that it costs them money,” he says. “Those who have put a lot of time into ensuring competition in the market have been double crossed by this ruling.”

    Not everyone agrees this UNE-P development is the death knell for CLECS, who have increased their share of access lines in the past year (see CLECs Think Small). Some see it as an opportunity for them to expand by offering bundled services that consumers want. ”This amounts to a huge sea change in policy,” says Doug Cooper, Ciena Corp.’s (Nasdaq: CIEN) VP of regulatory and market development. “CLECs will have to move from a model where they were providing voice services only over someone else’s equipment to them adding their own switches and being able to offer additional services like data and video.”

    The change is a big opportunity for CLECS like Covad, who do have their own switching facilities. “With UNE-L, ILECS provide a copper loop without switching or dial tone that has to be terminated at a co-location facility,” says Jeff Ahlquist, Covad’s VP of product management. “For CLECs without a facility, this ruling is a tough pill to swallow.”

    The ruling also sets the stage for explosive growth for companies like MetaSwitch and CopperCom who provide cost-effective voice platforms that can handle traditional voice traffic and VOIP all in one system.

    Whether viewed as an opportunity or burden, the change ensures a rough road ahead for CLECs as they transition their business models. The capital investment in equipment purchases to build their own facilities could cause consolidation in the industry and will even push come CLECs out of the market. “Some will use this as an exit strategy,” says Ciena’s Cooper. “But those who have a facility or can ramp up quickly are the ones who are going to advance and prosper.”

    But Frix disagrees: “The diminution of market participants is not a good thing and not in the public interest. Consumer demand for services from carriers who are not RBOCs is high, and this ruling eliminates that competition.”

    By arguing to the FCC that the CLECs shouldn't have a free ride on their networks, the ILECs essentially are forcing smaller companies into a facilities-based competitive environment. And since many CLECs act as little more than marketing companies reselling LEC services, this transition is no simple task. "It's difficult to build a facility with voice switching capabilities," says Covad’s Ahlquist. “This definitely has a lot of people scrambling.” — Chris Somerville, Senior Editor, Next-Generation Services

  • materialgirl 12/5/2012 | 3:24:23 AM
    re: The Switch Is On for CLECs No wonder ATT sold out.
    dljvjbsl 12/5/2012 | 3:24:20 AM
    re: The Switch Is On for CLECs I have never understood this mechanism. Some companies are allowed by government mandate to purchase services from the ILECs at very discounted ad government mandated rates. They then resell these services. Why is this considered a competitive market? It just seems to me to be just anothr form of regulation in which the ILECs are forced to offer services at mandated rates.

    Are these CLECs able to force the ILECs to offer any new services or are they just simple resellers of ILEC services. If the ILEC refuses to install equipment that can provide certian features, can a CLEC force tehm to do it?

    Just waht are teh dvantages of these policies to subscribers. I can see that the subscriber base and ILEC shareholders are being forced to pay money to support some marketing and sales organizations. I just do not see why there is any difference between this and government mandated lower rates.
    rjmcmahon 12/5/2012 | 3:24:20 AM
    re: The Switch Is On for CLECs I have never understood this mechanism.

    I think the idea was to provide a platform where competive markets could be built.

    Try thinking about it a different way. Imagine you were the one charged with motivating the massive facilities upgrades, facilities currently controlled by a monopolist mentality and organizations with subpar productivity and innovation levels, such that a modern communications infrastructure could emerge. How would you go about deregulating the industry, encourage market based investments, and create a platform for a myriad of yet to be defined digital applications and services?

    Taking this perspective may help one understand what should motivate regulatory policy. (Note: protecting the status quo shouldn't be the driving factor. Unfortunately, the US Congress will be driven by that.)

    Some companies are allowed by government mandate to purchase services from the ILECs at very discounted ad government mandated rates.

    "Very discounted" is the rhetoric of the regulated monopolist. What is a fair and competive price for something when a market for that something does not exist?

    They then resell these services. Why is this considered a competitive market?

    It's not a competitive market. It's a transitory state towards one. It's part of the deregulatory process. It's impossible to get there directly. The status quo will scream that anything the enables change is unfair. Their complaining is a postitive sign that things are headed in the right direction.

    I think the better question to ask is, "What motivated thousands of independent ISPs to build the internet infrastructure and the new services which is as much or more valuable than the 100 year old DS0 infrastructure?" Could the ILECs and government mandates have ever achieved that? It seems doubtful to me.

    Then ask, "Are we going backwards or forwards by handing off these competitive platforms to monopolist organizations?"

    We'll need to change our thinking, embrace modern technology and modern regulatory policy, if we are ever going to catch up to the rest of the world.
    rjmcmahon 12/5/2012 | 3:24:19 AM
    re: The Switch Is On for CLECs No wonder ATT sold out.

    Yeah, not much choice for them but to run back to the safety net of a government sponsored access monopoly. The sadder part to me is that the privately funded and truly competitive entities are only being disadvantaged by our government. Our governments are not creating the environments in which competitive markets can function. Instead we create welfare policy to protect decaying organizations.

    We need a change of direction.
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