Analysts: Facilities-Based CLECs on the Upswing

The Competitor Segment is Continuing to Grow

The CLEC sector's second role is in providing competitive, viable, and meaningful alternatives to incumbent telecommunications carriers. Although no single CLEC competes with any particular ILEC in all of its customer segments, against all of its services, across all of its franchise territory, one or more among the universe of CLECs does or could choose to do so. A healthy CLEC sector ensures that customers of all types have options available to them, and provides downward pressure on both pricing and margins.

Third, in their quest to identify and satisfy underserved customers, CLECs extend upgraded service to areas or specific locations that would otherwise have no recourse if the incumbent deemed it an insufficiently profitable opportunity. While this in no way guarantees that customers can obtain any service they want at a price they are willing to pay, the explosion of fiber deployment and the development of new services as a result of the Telecommunications Act of 1996 and earlier deregulation is a testament to the catalyzing effect of CLECs.

Key CLEC Strategies

There is no single CLEC model or flavor. CLECs vary widely, more so than most other sets of telecom carriers, and assessing sector leaders and laggards ultimately depends on one's perspective. The differences among CLECs are reflected in such things as the mix of technologies used in their networks, their strategic foci, and their customer segmentation.

CLECs’ footprints vary considerably in regards to geographic reach. CLECs with similarly sized footprints share other characteristics in common, such as comparable total revenue growth and target customer segmentation. A CLEC's geographic reach drives, to a significant extent, the customer classes it can effectively serve. The figure below illustrates the customer focus by CLECs' geographic scope.

Business Customer Focus by CLEC Category

Source: New Paradigm Resources Group Inc.

The Coast-to-Coast Strategy

CLECs with a nationwide footprint principally provide advanced telecommunications services to enterprise businesses. Such CLECs became nationwide providers specifically to target this high revenue, high margin customer segment. CLECs falling into this category include Level 3, PAETEC, Time Warner Telecom, and XO Communications. These carriers share several characteristics. Specifically, they own expansive fiber networks, focus primarily on major metropolitan markets, and have total annual revenue in excess of $1 billion.

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