As CLECs get a second chance, users get deals

Anderson Columbia Co., a road construction contractor in Lake City, Fla., chose to switch to telecom provider ITC DeltaCom just five months before the competitive local exchange carrier filed for bankruptcy.

But Mark Resler, communications manager for Anderson Columbia, says he wasn’t concerned about the bankruptcy, filed in June 2002. “It’s done all the time in the corporate world,” he says.

When Anderson Columbia switched, it saved 10 percent to 15 percent on telecom services, amounting to more than $3,000 per month, he says. The company, with about 1,000 employees, uses ITC DeltaCom Inc. for local and long-distance service, T-1 lines and frame relay connections for its 10 locations in northern Florida.

While investors in CLECs have lost billions of dollars, the competitive carriers that survive are fighting hard for the business of companies such as Anderson Columbia. In addition to saving the construction contractor money, ITC DeltaCom offers personalized customer service that Resler says he doubts would be available from most larger carriers. “My requests get handled real well,” he says. “They call back relatively quickly.”

Taking different paths

Telecom observers have seen dozens of small and midsize CLECs emerge from bankruptcy in the past year, and even more came back in the previous year. Some survivors are gobbling up smaller competitors, some are cutting back on services or markets, some are offering new services and still others are just trying to turn a profit. The good news for telecom buyers is that these formerly bankrupt CLECs are focused on competing with their larger cousins and with incumbent carriers, sometimes by lowering prices and sometimes by trying to offer bundled services or better customer service.

“It’s good for customers right now,” says Nancy Kaplan, vice president of telecom strategy consultant Adventis Corp. “CLECs are going after customers with lower prices.”

Price competition, however, might not be a winning game for many smaller CLECs, when large CLECs and the RBOCs have economies of scale on their side, Kaplan says. “If all you’re going to do is play on price, that’s a difficult sell,” she says. “Some of these companies will emerge very strongly, some of them will be bought by other carriers, and some of them aren’t going to make it.”

While customers should pay attention to CLECs’ financial reports, service won’t get turned off overnight if a carrier doesn’t succeed in the long term, Kaplan says. Worst case, a customer would have to eventually negotiate another telecom contract if a CLEC doesn’t survive, she adds.

Often CLECs emerging from bankruptcy don’t offer business plans that are radically different than they offered before. In the case of AboveNet Inc., a fiber-based telecom carrier, bankruptcy meant cutting loose three data centers and getting rid of “fiber bank contracts,” where customers bought contracts based on estimated future needs.

While those contracts were “spectacular from a revenue point of view, they were a disaster from a planning point of view,” says AboveNet President and CEO William LaPerch, who joined the company in January, three months after it emerged from bankruptcy.

AboveNet, formerly called Metromedia Fiber Network, now is focused on what LaPerch says is its strength: Delivering services based on its 2.1 million miles of fiber lines in 13 major U.S. markets. In March, the company announced a dedicated Ethernet service and in April said that E! Networks had become a customer of its Metro Gig-ETM high-speed optical IP connection.

The “growth-at-all-costs” mentality of 2000-01 among CLECs is gone, LaPerch says. “The old mentality of building a field of dreams . . . was given up for a more conservative model,” he adds.

The company is focused on providing high-end IP services instead of competing with other carriers strictly on price. “When I’m competing on price, there’s a sense of desperation in the folks I’m competing with, and I get out of that space,” he says.

Getting bigger is the game plan

While AboveNet has fine-tuned its business plan to “the right focus,” as LaPerch calls it, other carriers such as ITC DeltaCom and XO Communications Inc. have pegged their future on growth through acquisitions.

ITC DeltaCom, which came out of bankruptcy in October 2002, merged with BTI Telecom a year later, and the West Point, Ga., company might complete a second, or even a third, merger by late this year, says Larry Williams, ITC DeltaCom’s chairman and CEO.

ITC DeltaCom, which packages services such as T-1 Internet and voice offerings, also has focused on price competition since emerging from bankruptcy, Williams says. BellSouth drives prices in the retail market, where ITC DeltaCom focuses its energies, Williams says. The CLEC continues to sell some of its bandwidth in the wholesale market as well.

“We’ve finally corrected our pricing to make sure we’re in line with our competition,” Williams says.

In March, the carrier introduced its Simplici-T Plus bundle of voice, Internet access and site-to-site transfer on one T-1 line. But a major part of the company’s business plan is to save money by merging with other CLECs in the southeastern U.S. and consolidating operations. The company this year expects to cut costs by more than US$23 million through its merger with BTI.

ITC DeltaCom, with 50,000 business customers and 20,000 residential customers, sees strength in adding more customers, Williams says. “Now that a lot of companies have cleaned up their balance sheets . . . we see as one of our strengths going forward being able to consolidate some of these people,” he says.

XO, which emerged from bankruptcy in January 2003, completed an acquisition of fellow CLEC Allegiance Telecom in April. XO posted a loss from operations of $43.3 million in the first quarter, but CEO Carl Grivner says the acquisition will help the company move toward profitability faster. The company, with 180,000 customers ranging from small to large, plans to be profitable next year, he says.

XO provides a range of telecom services, including local and long-distance voice, Internet access, VPNs and Web hosting. Since filing for bankruptcy, the company has consolidated some of its services, cutting the number of packages it offers from about 60 to about 12, and nixing some of its DSL offerings to small businesses, Grivner says.

The company also is focusing on customer service as a way to set itself apart from bigger competitors. “(Customers) are less enamored with technology for technology’s sake, and more focused on customer service,” he says.

Broadband provider Covad Communications Co. is looking at providing VoIP service in addition to Web hosting, e-mail hosting and other traditional IP services.

Covad, sometimes called a data LEC, emerged from bankruptcy in December 2001 and announced plans in March to acquire VoIP provider GoBeam. Covad owns most of the network facilities it uses and sees that as an advantage in the growing VoIP market, says Charles Hoffman, Covad president and CEO.

“Unlike most others getting into this (VoIP) game, we can control the quality of service from end to end,” he says.

Expect more mergers and acquisitions as the CLEC industry continues to look for ways to become more efficient, says Carlyn Taylor, senior managing director in corporate finance/restructuring practice of FTI Consulting.

Taylor, whose group has advised dozens of CLECs during bankruptcy, says she still sees vastly different cost structures among CLECs, with some inefficient companies spending three times what others do to attract each customer. Because of those differences in costs, some CLECs remain good targets for acquisitions, she says.

CLECs covering wide geographical regions tend to have problems, while those offering a deep bundle of services in smaller regions should be able to compete, she says.

“There are maybe a dozen CLECs that have used the last couple of years to significantly cut their costs to become more efficient,” Taylor says. “In my opinion, there’s nothing wrong with the core business model. As these companies bulk up, you’ll see more companies . . . that are cash-flow positive.”