WAN Services /

Caution flags flying as CLEC woes mount

By Michael Martin
Network World, 11/20/00

A worsening shakeout in the competitive local exchange carrier market has network professionals and analysts questioning how big a role CLECs should play in corporate WANs.

The latest news rocking the competitive local exchange carrier market includes:

ICG Communications, which serves more than 10,000 ISP, long-haul-carrier and business customers, last week filed for Chapter 11.
New Edge Networks of Vancouver, Wash., a wholesale DSL provider serving small, midsize and rural markets, revealed last week that it will cut roughly 30% of its 455-person workforce.
Earlier this month, Teligent, a Vienna, Va., wireless and wireline broadband service provider, announced plans to slash more than 20% of its workforce and said it has enough cash "to fund operations into the second quarter of 2001."
DSL carrier Covad Communications' CEO resigned, and the company's stock price plummeted in the wake of disappointing financial results.

Such problems should "raise a yellow or red flag" for customers, says Brent Bracelin, an analyst with Pacific Crest Securities. "[Some of] these folks might not be around much longer."

So what's causing the shakeout?

"The biggest problem is that there are just too many players in the telecom field right now," says Jeff Moore, a senior analyst with Current Analysis. There are only so many total telecom dollars to go around, and too many providers trying to grab them, he explains.

According to research from New Paradigm Resources Group, a telecommunications market analysis firm, there are currently 217 CLECs with some of their own facilities in place or plans to build facilities.

Roger Philipps, IT/telecommunications manager with Southwestern Battery Supply in Garland, Texas, says CLECs are akin to other New Economy companies that relied on bundles of stock market money to fuel their growth.

"These guys were expecting the world to beat a path to their doors, but everyone is taking a harder look at the viability of these Internet businesses, and frankly, that is what these CLECs are," he says.

Philipps says he is leery about using CLECs, believing that service reliability is more important than saving a few dollars. "I don't want to have to worry if my provider will be around in six months," he says.

Another network manager, who asked not to be named, says the CLEC woes would definitely make him think twice about going with a lesser-known service provider.

"Customer support - being able to talk to a live person 24-7 when we have problems - is critical in picking a carrier, and I'd expect that's where they'd cut jobs when in the red," he says.

Industry watchers are quick to note that not all CLECs are alike. For example, they see promise in a new breed of carrier such as Yipes Communications and Cogent Communications that offer flexible per- megabit pricing which beats rigid T-1 and T-3 line equivalents. Still, even some CLECs that analysts cite as those that are doing well - such as Allegiance Telecom, McLeod USA and WinStar - are losing money.

It's not getting any easier for CLECs to get new money to expand their networks, says Rosemary Cochran, an analyst with Vertical Systems Group.

"They need a lot of capital to build out," she explains. "Unless you build, out you can't get customers."

Pacific Crest's Bracelin echoes Cochran's thoughts. Wall Street is looking less favorably on CLECs because they are not making enough money soon enough to make good on the huge sums that have been invested in them, he says.

"Access to capital for that whole group has been significantly reduced over the past nine months," Bracelin says. "The attitude on Wall Street is you have to earn the right to raise another $1 billion."

One major factor that can determine if a CLEC will succeed is whether it owns its infrastructure, Current Analysis' Moore says.

"It's hard to be profitable when you're running on another firm's network," he says.

Although there are carriers that started out as CLECs and had their own fiber into buildings, they eventually built long-distance networks or were bought by and incorporated into WorldCom, AT&T or others.

Other characteristics Moore says corporations should look for when considering a CLEC are a wide range of services and a broad geographic reach.

Companies should look at the CLEC's balance sheet and customer base, and should press carriers on what new services are in the offing and how soon they will roll out, Vertical Systems' Cochran says.

"The selection process has become more problematic," she says. "The [customers'] financial people may have to become involved in some of these decisions."

Customers that haven't gone the CLEC route say they aren't surprised some CLECs are failing.

"The CLECs seem like they came up over night, and if they come up that fast it seems they go away that fast," says Bill Lasseigne, program manager for Collin County (Texas) Community College. "How do they compete with the big boys when they are on the same lines? It seems that to be competitive they have to have their own lines."

Lasseigne's network encompasses four campuses, which are served by incumbent local exchange carriers.

"From what we understand, if we use the CLEC, we'll be using the same lines as we do with [the Bells]," he says. "There is not much to gain - actually we see a loss, especially when we need [customer] service, since we'd have to report [any problems] to the CLEC first."

Dave Wither, corporate telecommunications manager for Marconi Medical Systems in Cleveland, manages an approximately 70-site nationwide network that serves 5,000 employees. He has looked at CLEC proposals and considered using CLECs for alternate access at some remote sites.

"The problem is they don't understand alternate access," he says. "They're basically buying wholesale and trying to sell retail."

Wither says CLECs don't offer enough of a cost savings to offset the risk a company runs by going with a largely unproven provider.