This fall's flurry of acquisition activity, kicked off by WorldCom's bids for both MCI and Brooks Fiber Systems, spotlights the thesis driving competitive local exchange carrier (CLEC) valuations northward. For starters, even if new services (electronic commerce, Internet protocol-based video and voice, wireless) never emerge, the business intent of the Telecommunications Act of 1996 is to shift 40 percent or so of current local services market share to new providers. That's something like a $40 billion annual opportunity, growing at 6 percent.
At the same time, all barriers between industry segments are collapsing (local/long distance, wireless/wireline, video/voice/data). The future belongs to all-distance carriers able to provide a rich bundle of services. It remains to be seen whether the primary value of bundling is customer retention or margin; most likely, however, it is some combination of both.
Still, local infrastructure is expensive and time-consuming to build, while simple loop resale offers slim to non-existent margins. Carriers need the local footprint and capability CLECs provide to launch their local service initiatives. Not just the infrastructure, carriers also need the sales channels and relationships. Those are the props underneath the emerging CLEC industry.
Although the business case for an independent CLEC exists as never before, merger and acquisition activity will be relentless. CLECs will acquire other CLECs to get additional footprint and sales heft. It's more than geography and additional customer bases; the sales and product skill sets are important.
The larger carriers (national and international) will, at some point, find CLEC assets compelling as well, especially after they have been aggregated. Sometime soon, all of the original tier-one city competitive access providers who pioneered the CLEC business will be subsumed into larger entities.
That will put a hotter spotlight on developing CLECs that largely are focusing on regional markets, tier-two and tier-three cities, fast packet and Internet services, as well as long distance.
And capital continues to pour into the industry. In late October, for example, Allegiance Telecom Inc., a new Dallas-based CLEC venture headed up by former Metropolitan Fiber Systems executive and founder Royce Holland, raised $100 million to fund its new operations.
The half-dozen or so smaller-market CLECs with broad footprints will reap the rewards of their switched services initiatives early in 1998. Then watch for mergers with second-tier long distance carriers.
Until Next Time,
Gary Kim
Editor
