(September 2002)LOWER TELECOM COSTS
MEAN HIGH PROFITS
by Joseph Isaacs
Until recently, the physical connection to the business (the "local
loop") has been the sole responsibility of the incumbent local exchange
carrier (ILEC). An ILEC is the carrier from whom you currently purchase
your telecom trunks from such as T-1s, T-3s and local loops. Some of the
U.S. ILECs are Southwestern Bell, BellSouth, Verizon.
The Telecommunications Act of 1996 enabled new
telephone companies called Competitive Local Exchange Carriers (CLECs)
to be formed in order to compete with the ILECs and change the face of
local service. Many companies with huge telecom costs have become
Competitive Local Exchange Carriers (CLECs) to cut costs and declare
their independence from retail pricing and from the incumbent LECs (ILECs)
they must otherwise rely on for access. They're cashing in on the
benefits of reciprocal compensation and taking advantage of wholesale
carrier pricing to resell services and reduce their own line costs. It's
a strategy for success that can pay big rewards.
Why should Prepaid Companies, Debit Card Companies,
ISPs, Telemarketing Firms/Call Centers and Utilities "TAKE THE
PLUNGE"and file to become a CLEC? Here are a few reasons:
State by State mandated 15 to 30 percent
below-tariff wholesale rates on circuits and services for switchless
reseller CLECs
Greater discounts of up to 45 percent
below-tariff wholesale rates on circuits and services for facility-based
CLECs
Lower long distance costs as an
interstate/intrastate/international IXC (Inter-exchange Carrier)
Reciprocal Compensation (fees paid between
carriers for traffic on their networks)
Availability of carrier class services (UNEs)
unavailable at retail levels
Ability to be a "Peer"to the ILEC instead of just
a customer
There are basically two types of CLECs: switchless
reseller or facilities-based provider.
Becoming a CLEC can be very beneficial to an IXC.
It allows the switchless reseller CLEC, under its Resale Agreement
(agreement to purchase services at wholesale prices with a predetermined
discount structure) to obtain discounts on the lines purchased by the
CLEC. Much greater discounts can be obtained by a facilities-based CLEC.
In a facilities-based environment, the CLEC also has the opportunity to
receive all of its inbound trunks to the Tandem Access Switch, at no
cost from the ILEC and/or CLEC. This can translate to a savings of 15 to
24 percent across the board, under a negotiated agreement or by the use
of switching facilities. The savings on local loop and long distance
charges will translate into higher profits and/or lower price, both of
which are key ingredients for a growing and competitive organization.
Furthermore, as a facilities-based CLEC, the
company can now participate in reciprocal compensation with the carriers
and further reduce its line costs. Reciprocal compensation is the term
used to describe the fees that interconnecting local carriers pay to
terminate traffic on each other's network.
Looking at the CLEC arena from the bigger
perspective, the direction of the telecom industry suggests that any
firms that want to remain competitive must take a serious look at
becoming a CLEC/IXC.
WHY BECOME A CLEC?
Because the opportunity is truly vast,
analysts are predicting that incumbent local exchange carriers (ILECs)
will lose up to 25% of the local exchange market. Providing competitive
local phone service was a $1 billion business in 1996. By 2006, that is
expected to grow to $30 billion.
NON-FACILITIES-BASED CLEC
As a Non-Facilities-Based CLEC, you are registered
as a CLEC, but resell ILEC services obtained at wholesale rates rather
than provide services on owned equipment.
PROS of becoming a non-facilities-based CLEC:
Lower entry cost Avoid equipment expenditure
and many operations costs
Less complex Avoid the 6-9 months wait to
complete an interconnect agreement with the ILEC
Potential xDSL entry strategy data only service
option
CONS of becoming a non-facilities-based CLEC:
Difficult to add value to core services
Differentiation depends on envelope functions:
sales & marketing, customer service, etc.
Thin margins
Dependent on difference between wholesale and end
user pricing
Balance of power lies with ILEC
Follow These 9 Steps to Ensure CLEC Success:
1. Define the business: business case, market
strategy, and service definition.
2. Define legal issues: choose counsel, review
legal factors.
3. Define regulatory issues: choose counsel and
review state, federal, Bellcore requirements, negotiate interconnect
agreements.
4. Define the operational process: network model,
resource requirements
5. Prepare the business plan: market
characterization, strategy, risk assessment, financials
6. Detailed network design: detailed architecture,
personnel requirements
7. Procurement: acquire access, switching &
transport facilities, operations support systems, and human resource
acquisition
8. Installation: site selection, site readiness,
equipment installation and provisioning
9. Operations and Integration: sales and marketing,
operations support systems
With proper consultants you can attain CLEC status
quicker than you think.
Although CLEC status has been achieved in as little
as three months, in general you should anticipate a 6 to 9 month process
depending upon the individual states that you intend to establish
service. Some states require only that you satisfy the requirements of
the Telecom Act of 1996 and may have no other filing requirements. You
should consider seeking experienced and knowledgeable legal counsel to
help expedite this process and ensure proper filings are done on a
state-by-state basis.
Section 214(e) of the Telecom Act requires that you
register as an "eligible telecommunications carrier" entitling you to
"universal service" support. If you do not choose to register your
serving area will be limited. Also, several states have additional
requirements for providing service. You must request a copy of these
requirements from each states PUC where you plan to provide service.
The regulatory filing process can be very time
consuming and expensive, particularly if you are establishing a
multi-state operation. An experienced consulting firm will help:
Speed you through the filing process
Assist in post-certification filing
File annual updates about your company and its
operations
Respond to requests for miscellaneous information
Protect your right to privacy when filing
confidential information
The following steps are designed to give a firm who
wishes to plunge into the telecom business an idea of the processes and
procedures necessary to become a CLEC.
STEP I:
Hire a good telecom regulatory consulting firm.
There are two different approaches to the regulatory processes. The
first is to find merely a telecommunications attorney who will help with
the certification process. The second, and more recommended avenue would
be to hire a telecom consulting firm that has regulatory attorneys on
staff. This methodology will not only get you through the certification
process but also help the new entity negotiate agreements, set up the
ILEC accounts, engineer equipment contingencies, obtain operating codes,
etc. Internet searches can yield many good consultants but few have the
ability to handle a client project on a turnkey or end to end solution.
Key word searches such as ISP-CLEC or ISP/CLEC can be helpful.
STEP II:
Make a determination whether to become a "switchless
reseller" CLEC or a "facilities-based" CLEC. Which is best for your
overall business plan in order to maximize existing internal network
infrastructure and also cost savings?
What type of existing equipment is in place? How
many remote POPs are there. How many LATAs do they currently cover? How
many markets are they in and what type of market concentration is there?
STEP III:
Analyze the current telecom costs. Take a close
look at both local loop and long distance. Inbound and outbound analysis
inclusive of 1+ dialing, 800 service and number of trunks as well as
their size. Comparative examples do not exist. Any ISP with telecom
costs in excess of 20K monthly cannot afford to remain merely an ISP and
not an ISP/CLEC. For those with much greater costs, facilities-based
certification is more in order.
STEP IV:
Plan your strategy session with the team of experts
(principals, regulatory and project management personnel). This will
help determine the pricing and service elements that will be set into
your tariff. The strategy session is used to determine things like
pricing elements, interconnection ILECs, whether resale or facility
based certification is warranted, and to gather all of the necessary
information required to start the certification process.
STEP V:
Draft your CLEC application.
STEP VI:
Draft your tariff. There are no typical costs in
drafting a tariff. Many companies include tariff costs in the
certification process. All tariffs must contain service descriptions,
terms and conditions and prices. The prices are determined by the
company wishing certification but in most cases the terms and conditions
are dictated by the Public Utility Commission in which certification is
being applied for.
STEP VII:
Begin negotiations for your interconnections
agreement (or resale agreement approx. $2,500). This cost is usually
assessed if the MFN (Most Favored Nation), or section 252i of the
Telecommunications Act of 1996, is used. The FCC also allows utilization
of the "pick and choose" methodology meaning terms from many
agreements already approved can be combined to formulate a new
agreement. The negotiation process has been streamlined over the past
few years. In most cases a new carrier can opt-in to an existing
agreement to eliminate total negotiation. A complete negotiation of a
new interconnection agreement can involve hundreds of hours and costs up
to $50,000 per agreement. This methodology is usually not necessary in
todays marketplace.
STEP VIII:
All documents are approved by client and sent to
the appropriate Public Service Commission. Typical costs to draft the
application and tariff and file with the Utility Commission are $9,500.
Upon your sign off on the documents, they need to be filed with the
Public Utility Commission. Approval timeframes take between 1 day and 6
months depending on the state. Sometimes the PUC will reject all of the
documents, if not prepared properly, and sometimes they will merely
request additional information. Also many states, specific minimum
financial requirements, and may require a hearing to finalize
certification.
Typically speaking most state certifications can be
achieved in approximately ninety (90) days. Federal certifications can
be achieved in approximately forty-five (45) days.
Obviously, this is only the beginning of the
process. A facilities-based CLEC will now need to undertake a second
phase of due diligence and planning to properly implement its network.
But, hopefully, the above information will assist you in making the
right business decision for your company, and set you on the path to
increased profitability.
Joseph Isaacs is president of ISG- Telecom Consultants. He can be
reached at
isaacs@isg-telecom.com.
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