CLECs search for new business models

WASHINGTON - Recent months have been tough for competitive local exchange carriers (CLECs), as their allies get gobbled up by competitors and the government dismantles network-sharing regulations. But CLECs say they will survive by adopting new business models and focusing on customer relations.

CLECs, competitors to the four large incumbent local carriers in the U.S., have seen a commonly used business model whittled away by the U.S. Federal Communications Commission (FCC) as the agency strikes down regulations that required incumbents to share their networks with CLECs at a discount. Since late January AT&T and MCI, two of the largest national carriers that sided with CLECs on policy issues, have announced plans to merge with two of the incumbent carriers, collectively called the regional Bells.

These two developments have raised questions about the viability of CLEC business models.

"The CLEC model that relied heavily on use of the (incumbents') facilities is certainly challenged if not inviable anymore," said Al Kurtze, director of executive business development for Cap Gemini Ernst & Young's Telecom, Media and Entertainment division.

Kurtze and other analysts see little future in that old CLEC model, which depended on the discounted network prices set up in the Telecommunications Act of 1996. Without the discounts, CLECs depending on the incumbent Bells' networks to carry their traffic have little chance of beating the Bells on price, Kurtze said.

The '96 Act's network-sharing rules were designed to foster competition with the regional Bells, which inherited large chunks of their networks after the government breakup of the old AT&T monopoly in 1984.

The FCC, under outgoing Chairman Michael Powell, has moved away from these network-sharing rules, often called UNE-P, or unbundled network element pricing. The Bells have continued to press the FCC to abandon more UNE-P rules, arguing that they discourage them from upgrading their networks and investing in new technologies.

As the FCC has moved away from UNE-P, major Bell competitors AT&T and MCI have announced merger deals with two of the Bells. AT&T, in particular, actively supported CLEC positions before federal regulators, but it announced Jan. 31 its plan to be acquired by SBC Communications.

"I am concerned ... there is no one left to fight," said Jeff Storey, president and chief executive officer of WilTel Communications, a long-haul carrier based in Tulsa, Oklahoma. "The largest voices have been silenced."

Even with the uncertainty caused by recent events, however, Storey and other Bell competitors say they can compete. CLECs are betting on a variety of approaches to survive: owning their own networks, excelling at customer service or focusing on niche markets, such as small and medium-size businesses. Some say they found an edge in lower cost software-based infrastructure, instead of hardware-based networks.

In WilTel's case, the company provides a menu of services, including voice, videoconferencing, Internet access and managed services.

Even with the consolidation among major carriers, Storey still sees a role for CLECs. Customers want a choice of carriers, he said, and the mergers could provide a major distraction for SBC and for MCI's two suitors, Verizon Communications and Qwest Communications International. "They will be even bigger and more distracted than before," he said.