Put Away Egos, Get Down To Business

By Dick Jalkut

The news of the past quarter featuring the SBC Communications Inc. and AT&T Corp. merger and the debates between MCI and Verizon Communications Inc. and Qwest Communications International Inc. ought to be instructive to all of us involved with CLECs. Size matters. Synergy is important. Eliminating a competitor is strategic. Filling networks is imperative.

Let us take a quick tour through history. Divestiture was announced in 1982 and actually took place in 1984. Divestiture essentially transferred ownership of the 22 local phone companies from AT&T to seven regional Bell operating companies. Striking the seminal chord in telecom, the genie would not go back in the bottle, seemingly so.

The facilitating structure to enable competition was the Telecommunications Act of 1996, a watershed event full of promise. The purpose of the new act was to open the local market to deeper competition, and further open the long-distance market to competition from local telephone companies.

Since 1996, two cold showers have doused the fire. The first was the telecom meltdown in 2000, resulting in closed markets, death to companies with partially funded business plans, numerous bankruptcies and a return to the fundamentals of EBITDA (earnings before interest, taxes, depreciation and amortization) and cash flow as metrics of success. A sketch of a business plan on the back of an envelope with visions of “land grab” in sight was no longer the working model. The second took place in February when the FCC essentially abandoned the CLEC model as the engine of telecom competition and, without saying it officially, cast its lot with the cable industry. By abandoning UNE-P as the only relevant form of consumer competition, enabling the RBOCs to engage in market pricing (read that to be about an extra $10 per line), and giving them the leverage to demand “interim” rates higher than the prescribed $1, has forced the CLEC genie back in the bottle.

Whether or not you are a UNE-P advocate is not the point. By turning its back on more than 10 million consumer UNE-P customers, the FCC is sending a clear signal that the regulatory momentum has swung back to the RBOCs for rules and pricing.

So what does that leave for the rest of us to do? Let’s start with what is working in our model. CLEC pricing is better than RBOC pricing driven by a non-union, more productive labor force. Our technology is modern with realistic depreciation lines. Our product is quality service and relationship building - two hallmarks RBOCs strive to achieve but cannot simply because they have too many customers to accomplish their goals.

So what are our problems? No. 1 is liquidity, a too thin veneer of cash and for some far toomuch debt. We have too many unused facilities, a too high customer churn rate preventing real net growth, a tendency to sell on price rather than value, poaching on each other’s customers rather than the vulnerable RBOCs and, for some, a questionable national model with supply lines far too long.

So what’s the answer? It’s simple. If it is good enough for SBC and AT&T and MCI and Verizon, it has to be even better for us. If Fortune 100 companies need to consolidate to improve earnings, then shouldn’t we? Yesterday, there were too many of us. Today, there are fewer, but still too many of us. Tomorrow, a model will emerge centered around scale on a regional basis.

Since the year 2000, there has been a scarcity of telecom IPOs. Five years is a long but telling period. If you had to define scale to execute an IPO, the EBITDA and cash flow from a company with 500,000 access lines in service would be a good place to begin. If you had to define sustainable competitive advantage for an IPO, consider a million access lines as a buffer to the Bells.

SBC, Verizon and Qwest are in the hunt for scale, synergy and brand. So are we! We need less overhead and SG&A, a stronger back office, more highly utilized networks, cash to invest in new platforms and less cost.

It’s time to put away egos and get down to business.

You can’t pick up a single RBOC 10Q that brags about gaining access lines. In the mid-90s, BellSouth routinely grew 5 percent net a year. In particular, the small and medium business customers are voting for the competitors with their feet. They like CLEC companies who pay attention to them. They like the better pricing. They appreciate the relationship building.

The Bells will fight to the death over enterprise customers. For most of us, it’s not our sweet spot. Let’s not go there.

Likewise, the economics of consumer service post UNE-P don’t work for us. The irony is the Bells really don’t want most of the consumer customers they say they are trying to win back. They want high wholesale prices, not this customer base. Let them have this retail market.

We have lots of market share to go after, lots of geography still open. Let’s stop poaching on each other’s customers and take more market share from the RBOCs. Let’s learn from the “big guys” that synergies, scale, eliminating a competitor, efficient networks and volume purchasing power are huge economic levers. If there are two of us large enough in every major market, we can show the power of the CLEC model.

Dick Jalkut is the president and CEO of TelePacific Communications, a CLEC serving business customers in California and Nevada with local and long-distance voice, dedicated Internet access, private networking and data transport services as well as bundled voice and Internet solutions.


AT&T Corp.
Qwest Communications International Inc.
SBC Communications Inc.
TelePacific Communications
Verizon Communications Inc.

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