You can attribute some fluctuation to the natural evolution of the telecommunications market. In more recent months, however, the CLEC market has taken a battering, and industry pundits say its troubles aren't over yet. Despite the turmoil, some customers continue to stick it out, while cautiously hedging their bets and their risks.
Long before the term "CLEC" came into fashion, Merriam-Graves, a Charlestown, N.H., distributor of specialty gases, welding machines, gas apparatus, and filler metals, bought its telecom services through an independent sales agent of the local telephone company. Today that agent, CTC Communications, a CLEC since 1998, continues to provide Merriam-Graves with voice, long distance, and data services.
"The top reason we turned to CTC is reliability," says Eric J. Webb, vice president of info services at Merriam-Graves, who notes that the company's business priority is to move inventory quickly. The $50 million distributor has 34 locations across the northeast.
The CLECs initial value proposition was better customer service than that dished out by Incumbent Local Exchange Carriers (ILECs) such as Verizon. "Many of these players went after small and medium-size companies who were mostly ignored by the regional phone companies," says Courtney Quinn, senior analyst at the Yankee Group. Additionally, the CLECs were unencumbered by the regulatory restraints placed on the regional Bells, which gave them the chance to develop and deliver new services more quickly.
When Merriam-Graves first turned to CTC, it began with data services. In the early 1990s, CTC helped Merriam-Graves design its first Frame Relay network. Over the years, the company has grown that network while adding voice and long distance services. "Compared to the ILEC, CTC is more nimble," Webb says.
CTC president Steve Milton seconds that opinion. "Our customers understand that they're better served by us than what they experience with the phone company," he says, saying CLECs can provide help more efficiently because they tend to stay closer to customers. Webb says he's had the same account representative since the beginning of his relationship with CTC: "He knows us, our locations, and our business."
In 1997 CTC began to build its own network with equipment from Cisco Systems, and today it operates a 100-percent packet-switched network across New England, New York, and southern Washington, D.C.
New Breed Of Customer
Fifty-one-year-old Centex Corp., a Dallas home builder with 15,000 employees in 500 U.S. offices and operations in Latin America and the U.K., is a good example of a company that waited to jump on the CLEC bandwagon. Alan Murrell, manager of field project services, who's responsible for voice services at the branch level, was looking to reduce costs and has been working with several CLECs for a little over a year.
Ultimately Centex decided to partner with three of the larger CLECs -- Focal Communications, Allegiance Telecom, and XO Communications -- for dial tone, T1, and other high-speed digital services. "We partner with a few companies to mitigate risk," Murrell says.
Compared to ILEC costs, Murrell says, "We can save twenty to twenty-five percent on billing, per line." A secondary benefit is dedicated account support: "We can get a hold of a service rep quickly without going through the maze of a voice response system. We also look at the integrity of the telecommunications network as well as internal procedures for turning up circuits and maintenance."
While doing homework on CLEC providers is critical, there are no guarantees as to who'll be left standing when the market shake-out ends. XO's recent financial trouble has been well publicized, which means that customers like Murrell are smart to take a more measured approach and spread the risk.
"Since XO has fallen on hard times we haven't turned up any more new circuits with them," Murrell says.
According to Yankee's Quinn, CLECs are crumbling for several reasons. In some cases, she says, the CLEC put too much faith in regulators and then saw the regional Bells spend a lot of money to keep decisions that benefited the CLECs tied up in the courts. "There were also many CLECs that got funding they didn't deserve and failed as a result," she adds. Finally, a handful of CLECs with good, well-executed business models are feeling the fallout of a market turned sour.
Tony Leggio, president of the telecom division at Focal, says that while other CLECs built their networks first, then went looking for customers, Focal took the slow and easy approach. "Our growth plan is to open one market at a time," he says. The vendor offers service in 21 large metropolitan markets across the country.
Still, both service providers and customers admit the current economic environment is slowing things down and raising red flags. Webb of Merriam-Graves says, "Sure we're worried, and we know how difficult it is to change providers." However, he knows there's always Verizon to fall back on.
With its decentralized management style, Centex uses a mixed bag of telecom providers. "There are gains to be had using a CLEC, but we don't do it unilaterally," says Murrell. In fact, corporate headquarters doesn't give any business to CLECs: "It's still a relatively new market, and while the company is looking to trim costs, we'll only do it if we feel a certain comfort level."
Last September, the Cumberland County Juvenile Assessment Center, a government funded non-profit based in North Carolina, turned to KMC Telecom Holdings for Internet services. "We were looking for a provider that offered decent services at a decent price," says Scott Marshall, MIS/IT coordinator at the non-profit organization.
He reports that the organization shaves off about 10 percent to 15 percent from the price of a Fractional T1 circuit. Does Marshall worry that one day his provider may not be around? "Our major concern is, can they support us?" he says, adding that there'd only be a problem if service levels dropped.
Yankee's Quinn says that despite the market shakeout, no big customer exodus from the CLECs has begun. "The truth of the matter is that there's a need for CLECs; the market wants them and will support them," she says.