Become a CLEC: Part 2

For any ISP, the immediate savings on trunk charges justify the move, but those who become fully functioning CLECs can look forward to garnering a portion of a projected $160 billion telecom market.

by Gerry Blackwell

Last month we started to look at the somewhat complex, but by no means impossible process of transforming an ISP into a CLEC (Competitive Local Exchange Carrier)—a mini telephone company.

We also met GiSCO (Geographic Internet Services Company), an upstate New York ISP currently in the process of launching a new CLEC/IXC (Inter-exchange carrier) subsidiary, Thousand Islands (TI) Communications.

So far in the brief history of this VoIP column, we've mainly dealt with the notion of using voice over IP (VoIP) technology to add telco services as a way of increasing customer loyalty and/or adding a higher-margin revenue source.

High-stakes play
Going the CLEC route, as we began to see last time, is a more ambitious play and requires a more complete business transformation - plus an expenditure of anywhere from $10,000 to millions of dollars.

TI Communications' budget for its first two years—on the high side—is $6 million. "We decided there's no point in doing it the cheap way," says TI president Howard Bastedo.

GiSCO had to build a telco from the ground up, as most ISPs will. For one thing, it meant hiring telecom expertise it didn't have—including Bastedo himself, a 20 year-veteran with stints at Bell Atlantic and Sprint to his credit.

Big jackpot
There is an immediate payoff, however. ILECs must offer CLECs trunk rates anywhere from 13 to 45 per cent below the rates ISPs pay. An ISP's CLEC subsdiary can become its trunking service provider and pass on those savings.

GiSCO figures it will break even with Thousand Islands on day one because of the savings on ISP trunking costs.

Another significant and immediate benefit is that CLECs are considered peers to ILECs for regulatory and legal purposes. You become, in effect, your ILEC's partner not its customer. You're one of a few hundred rather than one among millions.

It also means you have more clout with PUCs. It's more difficult for ILECs to get away with providing poor levels of service—they now have contractual obligations. And CLECs have more recourse if ILECs do frustrate them, including appealing to the FCC.

The real payoff
But if you decide to become a CLEC for only these reasons—compelling though they may be—you're probably missing the boat. There is also good money to be made being a fully functioning CLEC.

The Strategis Group, a Washington, D.C.-based market research and consulting firm, recently predicted that CLECs would capture more than 17 percent of the $160 billion local U.S. telecommunications market by 2004.

So how do you get on board this particular gravy train?

One: Decide
The first step is to decide if you're going to become a switchless CLEC—and resell ILEC or CLEC services—or become a facilities-based CLEC, one that owns its own switches and other infrastructure.

Clearly, the first route is much cheaper, the second much riskier. But the potential win as a facilities-based CLEC is significantly greater too.

The right choice depends on your objectives—mere cost savings or serious revenue generation—and, more important, your resources.

If you're an ISP with fewer than 1,500 customers you probably shouldn't be considering going down either path. If you have fewer than 3,500, you should think long and hard about going the capital-intensive facilities-based route.

Part of the strategy, notes Bastedo, is to leverage and upsell telco services to your existing ISP customers. That means you need a reasonable-size customer base to start. GiSCO recently hit the 10,000-customer plateau.

Two: Plan
You next need to do a detailed business plan, including competitive analysis and costing of ILEC services in the markets in which you expect to operate. (The Strategis report argues there is room for additional CLECs even in already crowded markets.)

The business plan will provide the cost justification for going one way or the other—facilities-based or switchless. It should also establish the services you're going to offer and the prices you'll need to charge—all of which goes in a tariff, a legal undertaking with the FCC and local regulators that will govern your CLEC business.

Three: File
The next steps involve preparing those tariffs, filing them with the FCC, and applying for CLEC certification with PUCs and other state regulators in jurisdictions in which you hope to operate.

Technologies Management Inc., a Florida-based consulting firm that specializes in helping CLECs get certified, has good data at its website that will give you a better idea of what is involved.

It includes a neat summary of requirements for each jurisdiction—application only, application plus tariff, application fee (usually none and never more than $1,000)—and also an estimate of how long it will take to get certified. (Up to a year in some cases.)

Four: Negotiate
At this point, it's time to begin negotiating interconnection or resale agreements with the ILECs you'll be dealing with—even though you're not actually certified yet.

Consultants like TMI, of course, say you need help with all of these steps, especially application for certification and dealing with ILECs. They do have long-standing relationships with PUCs and ILECs that can save time—and in the long run, money too.

Given the time it takes to be certified, you need to begin planning network architecture, even provisionally ordering switches and other equipment. Again, there are consultants like TMI that have been through the process multiple times and can help.

GiSCO used several consultants. "We wanted to make sure we dotted the I's and crossed all the T's on the applications for certification," Bastedo says. TI also relied heavily on key equipment supplier Nortel Networks.

Five: Ramp up
It's not just network equipment, of course. There are also the back-end billing systems and customer service systems. And before equipment begins to arrive, you have to hire staff.

When we spoke to Bastedo in February, the company was expecting the first shipment of equipment from Nortel in about a month. It expected to be up and running with alpha tests within three to four months.

In the meantime, the company has already signed up 1,000 customers—not bad for a service that doesn't even exist yet.

Could you do what GiSCO is in the process of doing with TI Communications—and what many other ISPs have already done?

It's like any other business opportunity. It all depends on the resources—human and financial—you already have, and can acquire. It's not something to be undertaken lightly, but clearly it can be done.

—End

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