The New CLEC's Evolution

By Tara Seals Comments

Anyone watching the telecom space lately is likely to be struck by one very large trend: consolidation. CLECs and RLECs alike seem to be circling each other, looking for potential mates to shore up their territories and their sweet-spot proposition in both wholesale broadband and business accounts. Some merged companies are angling to become full alternatives to the likes of AT&T Inc. and Verizon Communications Inc., while some are maintaining their status as highly targeted competitors. As the business model shifts, this new breed of “super-LEC" is in turn driving a new wave of back-office investment and challenges.

Traditional CLECs can be considered somewhat antiquated as a concept, born out of the 1984 breakup of Ma Bell and the local dial tone market. The model has over time moved from that of companies operating as switchless voice minutes rebillers, to the days of UNE-P regulation where they were guaranteed a viable wholesale margin on local data services. UNE-P went away, the world went IP and switchless local exchange carriers turned to facilities and fiber to make their value proposition tick. The residential business went into decline, but the business services sector offered growth. And the idea of geographically tied services has become a dying breed in a world of virtualized work forces, cloud-delivered services and network-layer abstraction. The new CLEC takes the “Local" out of the acronym.

Creating New National Competitors

Non-AT&T and Verizon LECs, be they small independent telcos, CLECs or rural LECs, are all faced with the same issue: expand or die.

“There is very little room for the traditional regional LEC anymore," said Craig Clausen, founder of research firm NPRG Group. “The old model, of going after only top 66 metro markets, mimicking what the incumbents were doing, competing mainly on price and sales service, all of that — it just can’t work anymore."

He added, “They recognize that their markets are no longer insulated — satellite companies, other Tier 2s, the Skypes of the world, they’re all looking over the hedgerow into their area. They need to expand out of region to survive."

"Over the next three to five years, there will be another wave of consolidation," said Zayo Group CEO Dan Caruso, who is leading his company to its 15th acquisition. “The big guys will get together and the number will drop to less than 10." 

“We’ve spent the last couple of years expanding to become a national alternative," said PAETEC CEO Arunas Chesonis. “You need all the major markets, not just a region, to get the larger deals. It’s not possible or realistic to expect Fortune 500 companies to do business with you if you’re not in all the markets."

PAETEC’s merger binge isn’t over yet. “The next wave of consolidation is going to happen – it’s a real opportunity to create value. And we want ‘PAETEC’ to be a name people think about in that next wave of consolidation," said Chesonis.

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