Consolidation Key for Telecom’s Future

Posted: 4/2003

Consolidation Key for Telecom’s

By Dick Jalkut

1996 Telecommunications Act
opened the floodgates for many things —
competition and choice for customers, better pricing and service, and
entrepreneurs trying to make a quick buck. Now, seven years after that landmark
event, we know that indeed many bucks were made by a few, and we know customers
have benefited from competitive pricing and improved service, but we also know
of fallen service companies that borrowed on the dream of 1996 but have not been
able to repay their debt.

For every one CLEC that has
succeeded thus far, there are 10 more that ran out of time, money or both. The
question now is whether the remaining service providers will be able to stay in
the game or be forced into a slow crawl to the exit. Either way, the stakes are
very high, and the communications lifeline for business and residential users
across the country is the chip that’s in play. I believe today the only way
we’re going to see the fruits of the Telecom Act is for many of the remaining
players to consolidate.

To understand why consolidation is
inevitable, let’s remind ourselves of how we got into this predicament. In a
rush to take advantage of the new playing field, new service providers erupted
onto the scene. These pioneers took advantage of booming economic conditions and
an investment banking community that was ready to gamble on anyone with a switch
and a plan. However, the heyday dissipated and "old-fashioned"
business ideas such as customers, profitability and return on investment started
to become important again.

Since early 2000 a
telecommunications drama has been playing itself out. We know many investors
lost a lot of money; the investment banking community’s motivation moved from
greed to fear almost overnight and capital markets slammed shut. More than
500,000 telecom industry employees lost their jobs. But what was the impact on
customers, agents and the vendor community? Are there logical next steps in the
best interest of these three major stakeholders?

Customers. They are the
reason the Telecom Act was established in the first place. Unfortunately, in
this rollercoaster CLEC world, some have become victims. While customers have no
doubt benefited from competitive pricing and service levels, others have been
bounced from one carrier to another as their providers have hit the wall. Many
of them left the former monopoly provider in hope of getting newfound quality
service, only to be sent back to the incumbent once the CLEC went bankrupt. The
choice some were so grateful to have has become a bit of a burden, requiring a
difficult balance among price, service and stability. Increasingly, new CLEC
customers are asking hard questions about financial stability.

In order for the competitive
landscape to truly flourish, customers need to know that the service provider
options out there are viable, and have confidence that their new carrier will
live to see another contract renewal. Consolidation among competitive providers
will ensure that strength and ultimately provide better choices for customers.

Agents. Just as for the end
user, agents benefited from the multitude of options under the "more the
merrier" scenario; but in time, agents realized which carriers were going
to succeed and meet their critical needs for timely commissions, ease of doing
business and responsive customer support.

In both their minds and practice,
agents already have reduced the playing field to a few key players — providers
with the necessary back-office infrastructure, customer care support, strong
management team and financial stability to be able to take care of their most
important commodity — their customers. Sensible consolidation will shore up
competitive providers and make the agent community sleep easier at night.

Vendors. Just as some end
users have gone through a yo-yo experience with service providers, so have the
vendors who support the end-user customers. From the PBX vendor to the
one-person wiring installer, the vendor group has been hard hit by multiyear
contracts that turned to dust with the bankruptcies of their customer’s service

What would consolidation mean to
this group? A smaller but more viable CLEC that buys more has a greater need and
has the financial stability to remain in business. A field of consolidated
players will need to achieve and maintain continuity in their systems across
their network, and that is music to the ears of vendors.

touched on three groups that will benefit from industry consolidation, but the
reality is, there are others. Many of the carriers that came onto the scene in
1996 or later have not been able to sustain themselves. Smart, well-executed
consolidation will be well served for all of the critical constituents of the
telecom industry. Providers with similar geographic reach, back-office systems,
similarly deployed networks and commonalties in customer base are natural
partners for alignment. A rolled-up collection of providers will wind up
offering better support to the end user, as well as a more viable revenue source
for the agent and vendor communities.

There already is evidence to support
this. One example of a successful rollup is my company’s acquisition of assets
from a northern California CLEC. We were able to acquire two Lucent Technologies
Inc. 5ESS switching facilities and 1,100 customer accounts in a territory that
was a natural extension to our existing service area. As a Los Angeles-based
provider with service in all of California’s major metropolitan markets as well
as Las Vegas, the opportunity to extend our reach further in the Northern
California market was attractive.

Most importantly, the customers were
able to receive the service, support and price advantage values that initially
directed them away from the monopoly providers without missing a beat or
experiencing any transition pain. The result is a more robust option for end
users, where a California firm with offices in San Diego, San Francisco and Napa
can use one provider for all three locations. Similarly, the agents that cover
that territory now have a carrier with a stable presence and a strong emphasis
on the overall customer experience. We will pursue additional consolidation
opportunities in 2003 to further strengthen our West Coast presence, network
capabilities and customer base.

Isn’t that what the
Telecommunications Act was all about in the first place, to provide real
options for customers? We have seen the number of providers shrink involuntarily
over the past few years. The time is right for existing companies to proactively
address the situation, talk to each other, create efficiency by reducing
overlapping networks, back offices and overhead. Clearly, a consolidated field
winds up providing better options for customers, agents and everyone involved.
The telecom industry is proving to be an example that quantity is not always as
important as quality.

Dick Jalkut is president and CEO
for TelePacific Communications, a full service, broadband, telecommunications
provider serving small and medium-sized businesses in California and Nevada.


TelePacific Communications

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