And ports are useless without clients. I know its obvious but www.internettelephony.com has a good case study:
Portrait of a failure
In a booming CLEC market, GST flopped. For other service providers, this CLEC's misfortune could provide a valuable learning experience
GOLI AMERI
What led GST Telecom to file for Chapter 11, be mired in its inability to find a fitting suitor and forced to auction off its valuable assets while its competitors are thriving in a market flush with cash and expanding with burgeoning customer interest? There is obviously more than one answer to this question, all of which sadly point to the company’s management and its lack of vision.
GST started out as a competitive access provider (CAP) in 1994 providing local access bypass to larger companies. Along with other CAPs like Teleport, MFS, Brooks Fiber, e.spire, Electric Lightwave and ICG, GST was among an elite group of companies that dared to compete head on with the incumbent regional Bell operating companies (RBOCs). The CAPs were ready to take advantage of the Telecom Act of 1996, which deregulated the industry, and evolve into CLECs providing bundled local, long-distance and data/Internet services to small and mid-sized companies.
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A “smart network build” dictates that companies
only install fiber and network infrastructure
when they have a critical mass of customers.
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The original strategy of many of the CAPs-turned-CLEC was to deploy local fiber networks, and install advanced and expensive network infrastructure as they entered every new and, it was hoped, high-revenue markets. CAPs therefore became attractive targets for long-distance carriers eager to establish themselves in the lucrative $110 billion local telephone market. AT&T acquired Teleport and MCI took over MFS and Brooks Fiber, all of which had a national footprint.
Most other CAPs, with the exception of Electric Lightwave, which was associated with Citizen’s Utilities, were left out in the cold and stumbled to varying degrees, especially with the advent of new, more polished CLECs. Some, like ICG, have been able to redefine their business strategy and regain some of their old glory.
CLECs’ requirements for sustainable success can be summarized in five simple ideas that must be an integral part of their business strategy:
Smart network build
Focused target market
High-margin revenues
Rapid time-to-market with new services, and
Rapid service provisioning.
GST failed on all five counts. The company was so focused on building its state-of-the-art network–hoping to be acquired–that it lost sight of its business strategy, core competencies and customer service. And sadly enough, the company never succeeded to be acquired, and never saw its own errors and arrogantly continued its misguided strategy. A “smart network build” dictates that companies only install fiber and network infrastructure when they have a critical mass of customers.
Allegiance Telecom is one of the first companies that coined the lexicon. GST had a tremendous amount of fiber in the ground, but few customers on the ground. The company installed only 58,000 access lines in all of 1999, whereas its competitors were adding 30,000-50,000 lines per quarter.
GST’s publicly stated strategy was to overbuild its fiber network so the company could have the ability to swap capacity with other companies. CLECs swap capacity usually when they have a national or large regional data/Internet expansion strategy. At the most crucial time in its growing phase, GST sat around and passively watched its competitors acquire established Internet service providers (ISPs) to gain a foothold in the high-margin data/Internet services market.
ICG, for example, acquired Netcom and Winstar acquired PacNet and GoodNet to offer IP, ATM and frame relay services. Even Electric Lightwave, which like GST is mainly a West Coast CLEC, quickly embarked on expanding its data/Internet services nationally and has remained focused since its inception.
On a number of occasions, the company publicly stated that it had a tremendous opportunity to leverage its assets in the ground for high-speed access, DSL and Internet web hosting services, yet it nevertheless had a difficult time following through and was late in offering lucrative Internet services to its bandwidth-hungry customers in California.
A CLEC, like any other business ranging from the local bakery to the multi-national oil company, requires a focused target market. For CLECs, an established and well-defined target market is a must since it encapsulates the company’s mission, the expanse and sophistication of its network, types of offered product and its marketing message. GST’s target market was a haphazard maze of West Coast tier 1 and tier 2 cities including Hawaii and the largest and most competitive markets in California.
This strategy worked for a year or so until newer and more focused CLECs staffed with seasoned telecom industry management entered these markets. Yet the company had developed no solid way of differentiating its services, which is the core of a sustainable business strategy for a CLEC.
Larger tier 1 markets in California, the seventh largest economy in the world, have different requirements than tier 2 markets like Spokane, WA. GST sold the same type of product to both of these markets using the same marketing message, treating the savvy business customers of Silicon Valley the same as the smaller businesses in states like Arizona. On the other hand, a highly-successful national CLEC like Craig McCaw’s Nextlink Communications, started out by offering voice-only services to tier 2 markets nationally.
Once the company had all the necessary customer care services in place and had worked out the kinks in its service delivery, it set out to acquire Concentric Network of Seattle and launched its Internet/data product through an established and experienced company. Customer care and rapid service provisioning is what makes or breaks a CLEC, and in GST’s case, it unfortunately tore the company apart.
To turn on a phone or DSL line or to adequately respond to customers’ billing questions, CLECs must spend money and install operations support systems (OSS), a non-revenue generating and complex endeavor that nevertheless becomes their lifeline. Although GST was on time and successful in installing some of its OSS systems, the company was late and struggled with its service provisioning system, leading to delays in turning up services for customers.
GST’s failure to adopt the five key elements of a CLEC’s success stems from its management’s lack of vision. Allegiance Telecom, a successful national CLEC launched by Royce Holland, the former COO of MFS, was based squarely on a smart-build strategy and powerful OSSs. Intermedia Communications had adequate foresight to acquire Digex, the largest provider of Internet services to Fortune 500 companies before any other CLEC was seriously in the data/Internet market. Digex has now been spun off into a multimillion dollar successful and independent company.
GST’s management, on the other hand, had visions of grandeur that were only satisfied through more fiber miles, more switches and more infrastructure. GST’s single-minded obsession with its network expansion without the underlying customer base led to increasing debt and alienated potential investors. The slew of venture capital companies and investment firms who have recently invested in the expansion plans of certain CLECs have been sufficiently astute to distinguish between visionary and imperceptive management.
These firms bet their colossal investments on CLECs’ business plans and their management’s ability to execute the plan. Forstmann Little of New York, for example, has infused $1 billion each into Nextlink Communications and McLeodUSA, the latter a CLEC of small Midwestern origins, focused on national tier 2 and tier 3 cities.
Other CLECs that have attracted substantial cash infusions are Intermedia/Digex from Kohlberg Kravitz and Roberts (KKR), Winstar from Bill Gates’ Cascade Investments and Allegiance Telecom and KMC Telecom from Paul Allen’s Vulcan Ventures.
GST got the formula backward: Instead of building, supporting and retaining its customer base and then pursuing cash to expand its network, it was busy borrowing money to install more fiber and more infrastructure, while ignoring the most important CLEC lifeline–the coveted customer base.
While GST shortsightedness caused it to fail, its flop can serve as a valuable business lesson for other CLECs.
Goli Ameri is the President of AmeriSearch, Inc., a consulting and research firm specializing in the convergence of the telecom and Internet markets. She can be reached via e-mail |
