CLEC Market Overview
The following is a loose transcript of the 20 minute presentation, CLEC Market Overview, given by David Piscitello at the 3Com Presentation Theater at SuperComm '98 in Atlanta, June 9-11,1998. These notes will make most sense when you read them in conjunction with the PowerPoint presentation.
CLECs: Changing the face of the telecom industry (Title slide)
I’ve been invited by 3Com to provide a brief accounting of how I believe the Competitive Local exchange Carriers will change the face of the telecom industry.
I am currently on the technical advisory board of a California and soon-to-be national CLEC, and on the board of directors of a regional ISP in PA. From my years as a MTS at Bellcore, from my participation on these boards, and by observing the industry at large, I’ve come to appreciate that CLECs can dramatically alter and rejuvenate the telecom landscape, and I thank 3Com for the opportunity to present my thoughts to you.
CLECs: Changing the face of the telecom industry (Agenda)
Today, I'd like to quickly review the following with you:
- The Regulatory Terrain as it stands today,
- The current State of Competition, as described to me by friends at the FCC,
- Issues facing CLECs as they enter the marketplace,
- Challenges to building a company prepared for competition in the local loop,
- Service Opportunities afforded CLECs, in particular, we'll look at traditional and not-so-traditional services as well as complementing services for residential and business customers,
- In the process, we'll look at Delivery Options CLECs can consider.
The Telecom Act of 1996 was Enacted by Congress in February, 1996 "to provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced tele-communications and information technologies and services to all Americans by opening all telecommunications markets to competition".
What is noteworthy about the Telecom Act of 1996 is that it opens the telecommunications access market to anyone brave (or foolish) enough to believe they can compete and distinguish themselves in local loop services. It defines a framework in which competition will operate. It does not, however, describe in detail how competition will be implemented. This is a matter for both the FCC and state regulatory agencies to determine. Interpretations of the ACT and rule-making by state agencies can lead to different implementations from state to state.
The rule-making by states and the FCC is guided by what have come to be known as the "Competition Trilogy", which consists of:
- The Local Competition Proceeding (CC Docket No. 96-98)
- The Universal Service Proceeding (CC Docket No. 96-45)
- The Access Charge Proceeding (CC Docket No. 96-262)
Of these, the Local Competition Proceeding impacts CLECs most.
The local competition proceeding considers all of the following aspects:
- Access to unbundled elements.
This includes access to Local loops, Local and tandem switches (including vertical features), Interoffice transmission facilities, Network interface devices, Signaling and call-related database facilities, Operations support systems (OSS) functions, Operator and Directory Assistance.
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Interconnection.
This includes connection to the Line side and Trunk side of the local switch, Trunk interconnection points of a tandem switch, Central office cross-connect points, and Out-of-band signaling points.
The local competition proceeding also addresses collocation of CLEC equipment in incumbent LEC central offices, resale of facilities, pricing of interconnection and unbundled elements, and access to rights-of-way.
The Telecom Act has had the desired effect of attracting competitors to the local loop marketplace. In addition to the observations made on the slide, it's important to note that the actual number of CLECs is hard to estimate, and changes frequently as new carriers are issued certificates. Indeed, my colleagues at the FCC tell me several CLECs have already gone out of business!
The actual number of applications for operating certificates is also difficult to collect, as this is regulated at the state level and changes constantly.
The AOL and GTE DSL initiative notwithstanding, most CLECs hope to penetrate the enterprise and growing teleworker market. Access to the public Internet and Online services is a secondary business because of the real vs. perceived cost of DSL. I am skeptical about the ability for any company to profitably offer bandwidth and online or Internet service at $39.95 to $49.95 per month. Given the cost of coppertone, switching, field craft, support systems and OAM associated with deploying DSL, and given that many ISPs lose money per subscriber at rates between $10-$20, how much can be left for GTE and AOL to share? Price points in the $80-200 range for ADSL only at various rates seem more realistic, and this matches the business budget more so than the residential consumer budget.
On-ramps to the Internet Highway are congested. ISDN and 56K V.90 modems will improve this only marginally, but they don’t exhibit LAN-like characteristics necessary for extending certain applications (SMB/Microsoft File Sharing, highly visual applications). DSL and Transparent LAN services are the answer, and CLECs want to penetrate this business.
CLECs will also want to compete in dialtone, wireline and wireless, and of course, Internet voice. Consider the market size, why wouldn’t someone want to go after the local loop for voice? T-carrier will continue to be a lucrative business (not constrained by distances like DSL), and T1 competition will undoubtedly grow.
There are also intriguing voice arbitrage opportunities for CLECs who incorporate Internet Telephony into their business (more later on this). How many PC's will there be by Y2K, and how many will be able to answer the phone?
It’s tempting to ask, "So, you want to become a CLEC? Have you considered..." The regulatory terrain is uncertain. I don’t mention this to dissuade, but you'd best be prepared and have good council. Legal matters as important as business & technology. It's also good to acknowledge early on that equipment and technology are first generation: Don’t expect that any vendor will satisfy all your needs, and accept that vendor interoperability isn't universal. You may also need to roll your own OSS systems
Finally, there is the little matter of the incumbent carriers you must deal with. ILECs own the plant and CO’s. This may be the only business in history where your landlord is your competitor!
The challenges most frequently mentioned to me as I discuss CLECs as a business opportunity among those who are entering or engaged in this business include staffing and facilities development or maintenance. Finding staff who are competent in data and voice technology, telecom transmission systems, and network administration is hard: such folks are a scarce commodity. For those CLECs that are building facilities, duplicating the last mile is expensive, whereas for those leasing copper, maintaining the local loop means learning how to practice an old craft.
Learning how to and with whom to deal with ILECs is critical. You may not be able to find a champion inside an ILEC, but you can still find staff and craft who have a "do the best job possible for the customer" mentality from pre-divestiture days. These are the best folks to work with, and are your best allies, whether you're delivering ISDN, ISDL, POTS, or DSL.
Pricing has multiple dimensions and issues. Your costs for cage space and copper, staff and craft should be the basis for pricing, but pricing competitors promote in direct competition with your service will affect your ability to do business profitably. The things I worry most about with pricing are the promotional and lowball pricing incumbents may use when they announce intent to deploy. If you're deploying service now at $90/month, and the incumbent announces an intent to offer the same service 3Q98 at half that rate, how many buyers could this affect? Come 3Q98, what's the guarantee the incumbent will deploy, and how long will the rate be available? Meanwhile, your market share has suffered!
Slides 10 illustrates local loop deployment and backbone (aggregation) alternatives for CLECs who enter the level 2 business.
- DSLAMs in multi-tenant business, coppertone from landlord
- DSLAMS in collocation arrangements at ILEC CO’s
- Depending on bandwidth needs for regional data distribution, CLECs will buy FR, broadband ATM, even SONET, and will deploy their own switching and routing solutions.
In slide 11, the local loop deployment and backhaul/aggregation issues here are the same. The big difference here is that the CLEC rolls out IP service and differentiated services.
I believe there is a tremendous opportunity for a CLEC to either partner with ISPs or offer services itself that complement broadbandwidth with differentiated services. More than ever, just offering available bandwidth is no longer an option. Managing bandwidth and latency and providing application-specific bandwidth are critical success factors for successful ISPs. Adding security for information transport using virtual private networking techniques is another means of service differentiation. Voice is a incumbent's cash cow, and there is no doubt a lucrative but challenging opportunity to provide Internet telephony using V.90 technology, or voice over frame, or lifeline voice using ADSL with POTS splitters, or soon, Universal ADSL . Once you're offering voice, it's not that big a stretch to imagine, investigate and experiment with virtual voice networks and features that allow the company PBX to extend to the teleworker's desktop.
Virtual Private Networking solutions provide promising and potentially lucrative service opportunities for CLECs and ISPs. But don't limit your consideration to security over the wire. Security in other forms is also critical, and will prove an especially significant hurdle to cross for the enterprise customer. And it’s not just security over the wire. CLECs must be convinced that broadbandwidth to teleworkers doesn't introduce new security risks, but rather, that always-connected access makes it more important than ever to examine security policies and address security for remote access in more comprehensive ways. Your staff must be able to explain the kinds of technologies and practices that enterprise administrators can deploy to increase confidence in the evolving "security perimeter". Biometric and other forms of strong authentication, physical lockdown of facilities, personal firewalls are coming, CLECs who know how to explain these to their customers can also consider security consulting as yet another service to offer.
Before I conclude my talk, I want to emphasize again that, despite all the excitement over residential broadband data, opportunities abound to offer voice. I'm a data guy, but even data folks appreciate how enormous the voice market is. Besides, we're just dying to demonstrate that voice can be offered as efficiently when packetized as when circuit switched. The voice fidelity you can now achieve with bandwidth management and V.90 modems, for example, is just the appetizer.
I want to thank you for the opportunity to share my thoughts about the CLEC market with you. I believe we are entering one of the most exciting times in the history of telecommunications. And we haven't even begun yet.