Competitive Local Exchange Carriers (CLECs) offer voice, data services, and value-added services at significantly lower prices than the Incumbent Local Exchange Carriers (ILECs), enabling residential and business users to save money on such things as local calls, call-handling features, lines, and Internet access.

Typically, CLECs offer service in major cities, where traffic volumes are greatest and, consequently, users are hardest hit with high local exchange charges from the incumbent carrier. Some CLECs call themselves integrated communications providers (ICPs) because their networks are designed from the outset to support voice and data services as well as Internet access.

Others call themselves Data Local Exchange Carriers (DLECs) because they specialize in data services such as Digital Subscriber Line (DSL), which is used primarily for Internet access. As of 2002, the ILECs still controlled 97 percent of the market for local services, according to the FCC, which means that the CLECs are trying to sustain themselves on the remaining 3 percent as they attempt to take market share from the ILECs. To deal with this situation, the CLECs have adopted different strategies based on resale and facilities ownership.

Resale versus Ownership

CLECs may compete in the market for local services by setting up their own networks or by reselling lines and services purchased from the ILEC. They may have hybrid arrangements for a time, which are part resale and part facilities ownership. Most CLECs prefer to have their own networks because the profit margins are higher than for resale.

However, many CLECs start out in new markets as resellers. This enables them to establish a local presence, build brand awareness, and begin building a customer base while they assemble their own facilities-based network. Although this strategy is used by many CLECs, many fail to carry it out properly. They get into financial trouble by using their capital to expand resale arrangements to capture even more market share instead of using that capital to quickly build their own networks and migrate customers to the highmargin facilities.

Depending on the service, it could take a carrier 3 to 4 years to break even on a pure resale customer versus only 6 to 9 months on a pure facilities-based customer. With capital markets drying up for telecom companies and customers deferring product and services purchases, prolonged dependence on resale could set the stage for bankruptcy. CLECs employ different technologies for competing in the local services market.

Some set up their own Class 5 central office switches, enabling them to offer “dial tone” and the usual voice services, including Integrated Services Digital Network (ISDN) and features such as caller ID and voice messaging. The larger CLECs build their own fiber rings to serve their metropolitan customers with high-speed data services.

Some CLECs have chosen to specialize in broadband data services by leveraging existing copper-based local loops, offering DSL services for Internet access. Others bypass the local loop entirely through the use of broadband wireless technologies, such as Local Multipoint Distribution Service (LMDS), enabling them to feed customer traffic to their nationwide fiber backbone networks without the incumbent carrier’s involvement.

Despite the risks, some CLECs view resale as a viable long-term strategy. It not only allows them to enter into new markets more quickly than if they had initially deployed their own network, it also reduces initial capital requirements in each market, allowing them to focus capital resources initially on the critical areas of sales, marketing, and operations support systems (OSS).

In addition, the strategy allows them to avoid deployment of conventional circuit switches and maintain design flexibility for the next generation of telecommunications technology. Unfortunately, the resale strategy also results in lower margins for services than for facilities-based services. This means that the CLEC must pass much of its customer revenues back to the ILEC to pay the monthly fees for access lines.

When investors stopped stressing market growth over profits in 2000, these CLECs found that capital was hard to get. By then, many had no money to invest in their own facilities where margins are greater. Most financial analysts doubt that CLECs can rely strictly on resale and survive.

Although the ILECs have a vested interest in survival of some resale CLECs in order to receive regulatory approval to provide in-region long distance, once that approval is gained, some analysts believe that the ILECs may have no further interest in cooperating with the CLECs.

With the Telecommunications Act of 1996, CLECs and other types of carriers are allowed to compete in the offering of local exchange services and must be able to obtain the same service and feature connections as the ILECs have for themselves— and on an unbundled basis. If the ILEC does not meet the requirements of a 14-point checklist to open up its network in this and other ways, it cannot get permission from the FCC to compete in the market for long-distance services.