Interview with Joseph Isaacs, CEO, ISG Telecom
Consultants
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The main reason why an ISP should consider becoming
a CLEC is to stay competitive. With standard dial-up
service, other than the AOLs, MSNs, and Mindsprings,
transforming to high-speed broadband, you really don't
have the ability to take advantage of those services,
unless you are a CLEC. And there are two main reasons,
and you have at this from both sides of the coin. One
is the cost savings you have as an ISP/CLEC on a
reseller platform with 3,000-5,000 users and even more
cost savings for a facilities-based ISP/CLEC with
8,000-10,000. But the more important reason is the
additional revenues generated by the CLEC on the
peripheral services you are currently selling your
business customers such as T1, frame relay circuits,
ATM, PRI, Frac Ts, and also, of course the broadband
and DSL elements.
The steps involved in achieving CLEC status are
actually pretty simple. It requires filing an
application with the state Public Utility Commission
and it involves filing tariffs, getting operating
codes and setting up with the various different ILECs.
For us, this is a pretty simple process because we
have done over 500 of them in the last four years. For
somebody who has never done this, it can be fairly
complex, with a lot of correspondence back and forth,
and staying up with the current rules and regulations
of the PUCs, which seem to change on a week-by-week
basis.
When we take on a client, we do a strategic
planning session which enable us to get feel for the
products and services which the client wishes to
undertake, because it varies depending on whether they
are going to be a data CLEC or a data/voice CLEC and
whether they plan on doing long distance or
inter-exchange services. And then we draft their
application, draft their tariff, we do the filing, we
do all of the follow-up from A to Z. From the time
they start until the time they're certified, they are
pretty much out of the loop and they can continue to
run their enterprise and not have to worry about
day-to-day idiosyncrasies of getting that done. Once
the certification is completed, we will obtain all the
operating codes for them, and we'll have either their
interconnection agreement for facilities-based
providers or, for switchless resellers, their resale
agreement with the ILECs and/or CLECs put in place and
also approved by the PUC. Once those steps are
completed, they then have to set up their accounting
with the ILEC and they have to set up their account
maintenance. It's not like doing it on a retail level.
It's a little bit more involved when you are a CLEC.
Of course there are billing issues that have to be
dealt with, OSS issues that have to be dealt with and
so on and so forth.
We pretty much take them through that entire
process. Typically speaking, depending upon the state,
the average certification now takes about 120 days.
There are some states that will get it done in thirty
and some states take as long as 180. It takes ISG
about two or two and one-half weeks to get all the
documentation prepared to the point where it's ready
to be signed by the client and filed. That's providing
we have everything we need from the client and then
it's a waiting period at the PUC and a lot of
follow-up and back and forth, making sure that
everything is on track to be done right and approved.
As far as a ballpark cost estimate, providing that
you don't run into any major glitches and the client
can provide what they need to begin with, and it's not
a state that requires either local counsel or local
hearing, the average cost to become a CLEC is about
$10,000. There are certain states like Illinois that
require a hearing so it costs a little bit more.
States like Indiana require a local counsel so we have
to take an attorney on in that state and do that
filing and you'll have an extra couple thousand
dollars in cost. There are states like Maryland or
Virginia that require publications be done announcing
the fact that you are going to become a CLEC, and that
can cost a couple thousand dollars. Barring those
eight or ten states, it typically averages about
$10,00.
There are two approaches to consider -
facilities-based or non-facilities based. Depending
upon the types of services that you're going to offer
really determines which direction you'll go. If your
customer base leans more toward the business customer
or you plan on doing an extensive amount of DSL, then
you really need to be facilities-based. The advantage
of being facilities based is that you don't have to
co-locate at the ILEC CO, depending on where your
location is in relation to that CO, and your
reductions in cost can be as high as 80%. There are a
lot of ISPs that are too small to be facilities-based.
You really need to be in that 5,000 plus subscriber
category with a heavy business customer base.
If you're in the 3,000-5,000 subscriber range, you
really need to look at resale. Down the road, you can
always transition to facilities-based, but these
smaller ISPs generally don't have the capital, cash
flow, or the backing to go out and purchase a
$300,0000-$500,000 switch or a million dollar switch.
So from for an ISP that becomes a switchless reseller,
the discounts seem to be increasing with a lot of
state-mandated UNE orders lately, and are typically
averaging about 20% now. Some states are as high as
40%, some as low as 12%. But I would say the average
nowadays is about 20%. And that's 20% not only for
your existing inbound PRI and T1 trunks that you use
to run your ISP, but also 20% on anything that you
would sell to your subscriber base. It will open the
doors to be able to do a lot more business customers,
and generate significant revenue streams as well as
cost savings internally.
If someone starts as a reseller CLEC because they
have a fairly small current subscriber base and they
end up doing an exceptional job with the CLEC, and add
two or three or four thousand more subscribers through
the CLEC, then they can look into becoming
facilities-based. The costs of doing that are
sometimes prohibitive. Most of your smaller CLECs with
less than five thousand subscribers typically do not
have the cash flow to justify the cost of the switch
or they don't have a large enough telco costs to
justify the switch based upon the savings. And that's
where I usually like to draw the line. Now there are
always exceptions on both sides of the table. There
are some 10,000 subscriber ISPs that go resale and
some 3,000 subscriber ISPs that go facilities-based.
It depends on your mid and long term plans. If you are
looking to do a public offering down the road, then
facilities-based is the way to go. Maybe you've got a
bunch of VC money or angel investors just dying to get
into the business, facilities-based would be the way
to go with a smaller subscriber base. But typically
speaking, 90% of the time it is not.
Besides getting through the regulatory process,
there are a number of set-up or implementation
requirements that the ISP needs to be aware of. If
you're on a strictly resale platform, there's no
equipment involved or any of the engineering related
to that. But there are certain things that you are
going to have to be able to do to take advantage of
discounts from the ILEC. Number one, you have to be
able to bill your customers. You have to be able to
perform customer service. And if you are a voice CLEC,
you have to be able to do Op services, directory
assistance, 911, and SS7. Now those elements can
typically be outsourced so that you don't have a
massive expense in house, even customer service and
billing if you so choose. Flat-rate billing is easy to
do. Minutes-of-use billing gets extremely complicated
and very, very expensive. So a smaller ISP that's
getting into the resale platform typically can do a
lot of that billing in house. Those are the big
issues, the things that are going to be required.
Reciprocal compensation is a big issue for a lot of
ISPs. It's still up in the air with respect to the
FCC, the District Court in Washington as well as a lot
of the state PUCs. It has been going back and forth
for quite some time. There have been some ILECs that
have been ordered to pay reciprocal compensation. I
have been stating since 1996, do not base your
business plan for becoming a CLEC based on reciprocal
compensation. If you get it, it's gravy and I still
maintain that position because it's not something
that's being readily paid out for your ISP traffic. If
you intend to be a voice CLEC and sell local POTs,
DS-1, etc., reciprocal compensation is paid on those
elements. But you need a lot of those elements to make
reciprocal compensation worthwhile. And it is only
available to facilities-based CLECs, which eliminates
all of the smaller ISPs anyway.
Just backing up a bit, reciprocal compensation is
compensation designed to reciprocate the
interconnecting CLEC and ILEC for the facilities they
put forth to transport calls. So depending upon how
your call structure is flowing would determine whether
you would actually collect more than you would be
paying. For an ISP where almost all calls are
incoming, they would collect more than they would pay,
except for the fact that ISP traffic has been deemed
interstate by the FCC, which doesn't entitle them to
reciprocal compensation unless they happen to be in a
state where the utility commission has mandated
otherwise. It's such a small list of states, eight or
so, and you're still not going to get paid right off
the bat. Every ILEC in the country is fighting it. The
RBOCs are fighting it. So until that's all ironed out,
which may be in six months or it may never be, it's
not something to base your plan on.
The big issue for the ISP is to examine why they
want to go down this path. Obviously becoming a CLEC
can be extremely beneficial. It gives the ability to
become a pier to the ILEC instead of just a retail
customer. It gives them discounts that they currently
don't have. It gives them access to all the carrier
class services and a lot of the UNEs that are not
available on a retail level. It gives them the ability
to increase their revenue streams and cut their costs.
But they need to look at the reason why they are going
to do it. It's not something that happens overnight.
It's not something that is extremely costly from a
filing and certification standpoint, but it does
require that you put forth the same sort of marketing
and sales effort for your new CLEC as you did for your
ISP. And that's probably the biggest problem that most
of these guys run into on the smaller side. They
figure now that they're a CLEC, customers will just
come in droves. No, it requires the same type of
marketing as when you had twelve ISP customers and you
were trying to get to 3,000. So there are some costs
involved in running business, including a CLEC. But it
can be extremely profitable, if you have the right
customer mix or you are large enough.
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