It's possible to find a solid CLEC

The list of competitive local exchange carriers that have failed is growing with each passing week. Yet amid the carnage, a select few CLECs are managing to survive and attract new customers.

How can a company considering handing some or all of its business to a CLEC determine if a particular provider will be around for the long term . . . or if it will be the next to fail? The judgment is still something of a crapshoot, but industry observers say there are characteristics that should help distinguish the long-term survivors from flashes in the pan.

A study completed last month by Robert Crandall, a senior fellow at the Brookings Institution, an organization which studies government policy and economics, found that a CLEC's choice of business strategy was the key factor in determining whether it would succeed.

Crandall identified three CLECs that appear to be doing well - McLeodUSA, Time Warner Telecom and Allegiance Telecom - and found common attributes that could explain their success.

Perhaps most important, all three CLECs are at least partially facilities-based. CLECs that rely exclusively on reselling services from incumbent providers don't fare nearly as well, Crandall found, although incumbent local exchange carriers (ILEC) resale can be part of a successful CLEC's overall strategy.

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While having some owned facilities is a key to success, building out facilities too quickly is a fast path to failure. Crandall says the reason many CLECs, including ICG and NorthPoint Networks, failed, is they built out expensive networks in areas where they had yet to establish significant customer bases. The buildouts quickly drained their cash, and there was little income flowing in to replenish the CLECs' capital.

Special services

Another important component in a successful CLEC strategy is offering a service that's different from anything an ILEC is providing. One example of a CLEC that's succeeding by differentiating itself is Focal Communications, says Jeff Moore, an analyst with Current Analysis.

Focal is winning over Fortune 1000 companies by offering them one integrated bill for all their offices across the U.S. This is something the regional Bell operating companies have been unable to do because they don't operate nationally. For example, a company with offices in New York and Los Angeles would get separate bills for its operations in each city if it used an RBOC.

Concentration on a particular market or market segment is also a sign of a successful CLEC, Moore says. For example, McLeodUSA concentrates on serving some states more than others. In Iowa and Wyoming, the company accounts for more than 40% of the business lines in the market, he notes. Similarly, Allegiance concentrates on the small-business market segment requiring a T-1 pipe or less. This has allowed the company to get decent penetration, Moore says.

Barriers to overcome

Still, even if a CLEC manages to do all the right things to succeed, there's no guarantee it will.

CLECs depend on access to RBOC local loops and central offices to get services out to end users. This access is regulated and enforced by the Federal Communications Commission. The new commission, headed by Michael Powell, has made it clear that it wants to regulate as little as possible.

Which isn't a good sign for CLECs, says Abby Christopher, an analyst with Ovum.

"The new administration is making it more difficult for CLECs to survive in the market," she says.

While Time Warner, McLeodUSA and Allegiance are often cited as CLEC successes, their stock prices don't necessarily bear that out. All three are trading just above their 52-week lows and well off their 52-week highs.

The bottom line is that any company looking at moving business to a CLEC should do a lot of investigation.

"Any CLEC right now is vulnerable," Christopher says. "To assess the risk of moving to one of them, any potential customer is going to have to do a lot of due diligence."

Contact Senior Writer Michael Martin

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CLEC questions

Download a report on the status of competitive local exchange carriers five years after the passage of the Telecommunications Act.