The National Association for Business Economics expects the United States’ budding financial recovery to take root over the next two years, with companies once again hiring and banks, at last, easing lending restrictions. Those are welcome indicators, but they come with some caveats for competitive service providers. An upturn, according to industry figures, holds two implications for the next phase of competition: cable operators will continue to stalk CLECs’ and Tier 2 providers’ small and medium business customers, and many non-facilities-based carriers will be forced to merge with or be acquired by infrastructure-owning rivals, or face extinction.
In November 2009, Comcast Corp. acquired CIMCO Communications — a primary example of the cable industry honing in on CLECs’ traditional customer base. While Comcast’s CIMCO purchase still has regulatory hurdles to clear, a surge of similar takeovers will likely force CLECs to rethink their business models.
The Comcast-CIMCO transaction “definitely sets a precedent for other cable companies to make acquisitions,” said Gillis Cashman, general partner at M/C Venture Partners.
In a March 1 client research note, telecom analysts at investment firm Stifel Nicolaus listed likely buyout targets, including tw telecom inc., PAETEC, XO Communications and Cbeyond. That speculation comes as investors start to loosen their purse strings – the pending $1.2 billion buyout of RCN Corp. and Force10 Networks’ planned, $144 million IPO are two very recent cases in point.
Cable-CLEC acquisition deals don’t look so great for competitive providers, though.
“Everyone in the business services market absolutely needs to be concerned about what the cable companies are doing,” said Brian Washburn, research director of network services at Current Analysis.
For one thing, cable could run roughshod over rival carriers’ pricing and products – especially CLECs that sell T1 integrated access to mid-market customers, Washburn said. “Expect to see larger multiline voice/broadband contract bids, which offer much higher DIA/IP VPN bandwidths...compared to T1 services, potentially at equivalent or even lower costs,” he said.
Ed Vilandrie, director at tech consultancy Altman Vilandrie & Co., agreed.
“The dilemma is cable” as the economy rebounds, said Vilandrie. Plus, the predicament flows upstream – the major incumbents, too, will see cable encroach on their business market share as finances strengthen. To help ward off cable encroachment, the Bells should embrace their CLEC customers, provide them lower access rates and view them as crucial partners, Vilandrie said.
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