CLECs to Trade Traffic, Bypass Bells

Against that backdrop of an uncertain
regulatory environment, Matrix Telecom rolled out in mid-September a new wholesale service called Network Matrix, which is designed to give CLECs the ability to offer customers a seamless nationwide service.

Network Matrix is a kind of CLEC cooperative, explains Rick Nagel, director of wholesale for Network Matrix. “Matrix will serve as a gateway to several independent networks across the country,” he says. ”Aggregated in total, everybody that participates in the program has access to everybody else’s markets.”

Dennis Smith, president of Matrix Telecom, boils the value proposition down to one question: Why give it to the RBOC? “I would much rather see a competing CLEC get the business even if my margins are minimal than to turn it over to the incumbent,” he says.

Nagel concedes there is an ’emotional’ component to proposition now that CLECs are struggling to compete with the Bell companies and have no realistic ability to attract capital to fund buildouts.

“I don’t think we will win any awards for being visionary,” says Nagel, “but what we can do is help bridge gaps and be a gateway at a time when all the CLECs are coming to the realization that working together they are going to get a whole lot more traction than certainly they have been working [against] each other.”

Despite any real or perceived animosity toward the Bells, analysts are skeptical of the allegiance that a cooperative like Network Matrix could expect from what are, at the end of the day, competitive businesses. “It could be useful in some cases, but, ultimately, price usually wins out in the wholesale market,” says J.P.

Gownder, a senior analyst covering wholesale markets for The Yankee Group. “If the RBOCs can cherry-pick customers based on price, the cooperative might break apart. Or, secondarily, carriers will have to use the RBOC for redundancy anyway, so second-line business would still accrue to the RBOCs.”

In addition, Gownder says the Bells’ deep footprints also will win them business by default. “Ultimately, the superior capillarity of RBOC networks still gives them a strong advantage,” he says. “But in major Tier 1 cities where AT&T, MCI and many CLECs have significant metro capacity, the RBOCs might lose out to such cooperatives.”

Industry analyst Dr. Judy Reed Smith, CEO of ATLANTIC-ACM, says the strategy can be particularly effective for emerging markets. “It’s easier to work with others than to go it alone,” she says. “This changes as the industry or opportunity matures, but it can be highly effective in the early running.”

She cautions potential participants to partner wisely. “In this case, wherein recent regulatory events suggest a second CLEC shakeout could unfold, companies involved in this kind of deal need to be prudent when evaluating and choosing partners. You don’t want to lose your customers or service ability because your partner’s business fails,” she says.

Network Matrix will include a core group of initial network providers forming the national footprint. Nagel says two unnamed CLECs already have signed reciprocal agreements. He says up to 10 will be needed to reach the goal of a diverse network serving the nation’s top 50-60 metro areas.

“What we contemplate though is making sure we have options, and that we can touch about every LATA in some way or another without the need to use Bell facilities,” says Nagel.

Although reciprocal agreements are common among long-distance and wireless operators, they have not been forged previously in the CLEC community.

While part of Network Matrix will be facilitating such contractual arrangements, a second piece will be facilitating the backoffice communication.

“Certainly, there’s no standardization across any of the CLECs with respect to their OSSs, their ordering systems, trouble-ticket systems, customer-care information,” says Nagel, explaining that Matrix will handle back-office information handoffs as well so that a CLEC doesn’t have to worry about taking inputs and driving outputs to 50 different partners. “That’s Matrix’s problem. It’s a two-layered value proposition here.”

Network Matrix is staffed with about 10 people, Nagel says, and explains most of the communications will be handled electronically.

Matrix Telecom takes its fee by marking up the services that are provided to the partners.

In addition to reciprocal network partners, Network Matrix will be available for resale by other CLECs that might be too small to be a reciprocal partner.

Other CLECs are considering creating bilateral arrangements to achieve similar goals. One such CLEC is Birch Telecom. Paul Hales, senior vice president of sales for Birch, says creating a hub-and-spoke model may be like trying to ‘boil the ocean,’ and questions whether the gateway can avoid partners having to work directly on back-office issues. He adds CLECs’ available capital is being spent on developing VoIP products instead of on legacy platforms.

Another CLEC, LDMI Inc., also is pursuing reciprocal agreements, though it has none in place. Dave Bailey, vice president of marketing and strategic development for LDMI, says the company already partners with other providers for T1 level access, so it’s a natural evolution to add the local service.

“In Ohio and Michigan, we sell in hundreds of COs but we are only in 82 [as a facilities-based carrier],” he says, explaining that in order to continue to sell to the entire footprint, LDMI has to either build out, maintain its wholesale agreement with the Bell company or partner with another CLEC in those COs.

Bailey says the Bells have missed an opportunity by making foes of the CLECs instead of using them as a distribution channel. “If they are able to sustain themselves, then they become competitors [instead of customers],” he says.


Birch Telecom
Matrix Telecom
The Yankee Group

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