Study Shows Poor Business Plans, Over-Expansion Caused Telecom Carriers' Troubles
Wednesday, June 27, 2001 04:31:36 PM - US Newswire
WASHINGTON, Jun 27, 2001 (U.S. Newswire via COMTEX) -- The new competitive
local exchange carriers (CLECs), born in the wake of the 1996 Telecommunications
Act, have increased their share of the local telephone market over the past year
despite the decline in the equity values of most telecom companies over this
same period, according to a new study by Robert Crandall, a senior fellow at the
Brookings Institution. The study shows that a number of these new companies are
expanding and continuing to attract capital, but many have failed because they
pursued poor business strategies and attempted to expand too quickly.
Crandall's report, which was released today at a press conference at the United
States Telecom Association (USTA), represents a timely and comprehensive
analysis of the CLEC industry. The report found that some CLECs attempted to
grow more quickly than the market could sustain, adding new geographic markets
before eliminating crucial network operating problems. Others relied too heavily
on unsustainable revenues such as reciprocal compensation that ultimately proved
harmful to their long-term viability.
"Instead of focusing on fundamentals, too many CLECs opted for rapid expansion,"
Crandall said. "They put short-term growth ahead of long-term success, and when
the capital markets dried up, they paid the price."
The report found, however, that certain facilities-based CLECs have been able to
grow dramatically despite the recent stock market contraction. Each has
succeeded by deliberately building its own network, carefully analyzing
competition and consumer demand prior to market entry, and consistently
increasing revenues. These CLECs have been able to successfully combine the
resale of incumbent companies' networks with the construction of their own to
form a viable business strategy.
"The 1996 Act never guaranteed that every competitor would be successful," said
Gary Lytle, interim president of USTA. "It only guaranteed the right of new
competitors to compete on a level playing field. CLECs have captured more than
16 million switched access lines across the country. This number will surely
only grow as natural consolidation leaves healthier remaining competitors.
"Interestingly, one of the companies best-positioned to compete in the local
residential market-AT&T-has largely ignored this market altogether," Lytle said.
"At the same time, AT&T and other cable companies have amassed over 70 percent
market share in the broadband services market, while working hard to keep
incumbent local phone companies out of this market by opposing efforts such as
H.R. 1542-the Internet Freedom and Broadband Deployment Act by Reps. Billy
Tauzin and John Dingell. This bill eliminates regulatory barriers incumbent
local telcos face when deploying broadband networks and guarantees that all
customers will have access to broadband services within five years."
Crandall found no evidence that incumbent local telephone companies were
responsible for the financial troubles of some CLECs. "The fact that two of the
most successful firms were able to employ a resale and/or unbundled network
element strategy as part of their business plan provides strong refutation that
the large incumbent local telephone companies are in some way responsible for
the recent spate of CLEC failures," he said.
"This new study proves false the accusations some of our critics have made that
H.R. 1542 would lead to the demise of the CLEC industry," Lytle said. "The study
offers strong evidence that CLECs that have failed have their own bad business
plans to blame for their problems. Congress should move forward with H.R. 1542
by bringing it to a vote on the House floor and avoid further delay in bringing
broadband services to all Americans," Lytle said.
Since most CLECs are still in an early stage of development, Crandall's report
studied the ability of CLECs to translate fixed assets into revenues, rather
than profits or market value. That analysis showed some CLECs were able to
generate revenue growth through investment in fixed assets, while others showed
far less ability to generate revenues from their asset expansions. Additional
empirical analysis demonstrated that building one's own network is the best
entry strategy, and that carriers that made such investments were far more
likely to succeed.
"The most important business decision that determines the success or failure of
a particular CLEC is its choice of network platform," Crandall said. "There is
strong evidence that CLECs that build their own networks or parts of their own
networks, rather than relying simply on reselling the services of the local
phone companies, were best able to produce solid revenue gains."
Crandall also found that many CLECs still have impressive market values. Some
actually have market values per access line that are substantially higher than
the market values per access line of three of the Regional Bell Operating
Companies.
"The total market capitalization of all publicly traded CLECs was $95 billion on
December 31, 1999," Crandall said. "This was comparable to the market
capitalization of the Big Three U.S. auto producers and about three times the
market capitalization of the entire airline industry. These companies-like many
during the technology stock boom-were clearly overvalued when one considers that
combined they had less than five percent of the local exchange
telecommunications market in 1999. By May 2001, the value of these firms had
fallen to $28 billion-still comparable to the market capitalization of the
entire airline industry. And new entrants are continuing to increase their
market share-to 8.5 percent in a recent FCC study," Crandall said.
The study noted that the forces of change buffeting the CLEC industry of late
are similar to the patterns that have been seen in other industries after
deregulation, notably the airline and trucking industries. "When entry is first
opened, new competitors flood the marketplace with little history to guide
them," Crandall said. "Some succeed, many fail. Bankruptcies ensue, and after an
industry shakeout the strong entrants are left standing. The local exchange
market is no different."
(The full study and executive summary are available at www.usta.org/media.html .)
--- For over a century, USTA has represented the interests of service providers
in the dynamic telecommunications industry. Today, USTA is the nation's premier
trade association representing the converged telecom industry, serving more than
1,200 telecom companies worldwide that provide local exchange, long distance,
wireless, Internet, and cable services.
CONTACT: Michelle B. Tober of the United States Telecom Association (USTA), 202-326-7363 or Email: mtober@usta.or
Copyright (C) 2001, U.S. Newswire
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