The CLEC Marketplace Today By Mathew Schwartz Business and Technology Reporter, Paris

Rising From the Ashes
"It's been interesting to watch…they hung on, they adjusted, they were survivors, and now: Can they survive in the new landscape?" says Craig M. Clausen, Senior Vice President and CFO for analyst firm New Paradigm Resources Group, Inc., based in Chicago.

According to NPRG, CLECs controlled 18% of all competitive access lines in the United States in 2004. Surprisingly, many of the well-known CLECs today, such as McLeodUSA and XO Communications, are first-generation survivors who made it in spite of revenue problems. "You can lose money but pay your bills, plus they had people with deep pockets," notes Clausen. "A lot of them went through bankruptcy; reorganizing to meet tomorrow's challenges."

In fact, bankruptcy is a typical CLEC calling card since it, "makes a stronger business partner," notes Paul Weichselbaum, Senior Vice President of Marketing and Operations at CTC Communications, based in Waltham, M.A. Since CTC went into and emerged from bankruptcy in 2003, it now has no debt on its balance sheet, and tens of millions of dollars in cash. By contrast, "folks who haven't gone through bankruptcy are squeezed for capital and have a debt burden," says Weichselbaum.

Survivors learned other business smarts too, such as keeping circuit inventories up-to- date to ensure providers weren't overcharging. "That's been a lifesaver, saving millions and millions of dollars on a monthly basis," says Myles Falvella, Vice President of Marketing at KMC Telecom, based in Bedminster, N.J. Many CLECs also centralized their business. "CLECs tended to be decentralized," adds Falvella, "so offices could be close to customers." While that's a selling point for potential clients from a management perspective, it was often a liability since salespeople were rewarded by the numbers of new customers they signed. By contrast, today's motto seems to be "growing the customer list, but growing it intelligently."

Successful CLECs have also determined which market segments they best serve, than courting them accordingly. This market segmentation is essential to CLECs' future, providing they have the capital to support it. "A lot of what they've done is target a regional, more local marketplace…anytime you can specifically segment the market and really cater to the particular needs of a target sector you're going after, you can dominate that market…" said Patrick Kelly, a partner at analyst firm OSS Observer, based in Sugar Grove, IL. As an example, last year Nextel had 13 million subscribers versus Sprint PCS's 22 million. Yet Nextel's operating costs per subscriber were 40% less. Kelly attributes that to Nextel picking a particular market (business users) then selling to whole organizations, thus reaping operational efficiencies from software investments.

Another facet of CLECs' regeneration is their mixed experiences with OSS vendors, many of whom over-promised and under-delivered during the Internet gold rush. "We did make some mistakes with some of the vendors we bet on, back in 1998 or 1999," says Bob Moore, the Senior Vice President for IT at PaeTec Communications Inc., based in Fairport, NY. "But we didn't throw lots of good money after bad; trying to make things work when we knew it was the wrong decision. We'd switch gears."

CLECs will have to continue switching gears by embracing new technologies such as, better VoIP networks, better call-reporting software, improved self-service features for administrators and users, and IP-based applications targeted at verticals, as well as refining their business practices, and further differentiating themselves from ILECs in order to retain and recapture a percentage of the market.

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