TCS Daily

CLECs Alive and Well, But Not If Tauzin-Dingell Passes

By James K. Glassman - November 28, 2001 12:00 AM

In a desperate effort to pass the Tauzin-Dingell bill, the four Bell companies - which stand to extend their telecom monopolies if the measure becomes law - have tried to convince Congress and the Bush Administration that the competitive local exchange carrier (CLEC) industry is on the brink of extinction, if not already dead.

According to this logic, the only way to bring Americans high-quality, low-cost broadband connections to the Internet, is to give the Bells free rein to accomplish the job. Thus, it's urgent to pass Tauzin-Dingell.

But, as Mark Twain put it in another context, reports of the death of the CLEC industry have been greatly exaggerated. It is true that many companies have gone under - in large part because the Bells have refused cooperation in unbundling and leasing their network elements, as required by the Telecommunications Act of 1996. But many other firms remain solid. The CLEC industry employs tens of thousands of Americans, and those jobs are in severe jeopardy under Tauzin-Dingell.

To find out just where the industry stands, we recently examined a sample of 15 publicly traded CLECs for potential longevity. We calculated the number of quarters it would take to deplete their stockholder equity (or book value) if losses continued at the same rate as they have over the past year. We found that ten of the 15 would survive for at least four quarters (or two years) under current business conditions and, of those, seven would survive for at least eight quarters (two years).

Those estimates are conservative since business conditions are almost certain to improve if the economy begins to recover next year and if policy changes are made to insure competition, rather than monopoly, in telecommunications.

Among the companies we examined were Allegiance Telecommunications, whose revenues doubled over the nine months ending Sept. 30 (compared to the same period last year) to $365 million. Allegiance had $500 million in cash on its balance sheet at last report (June 30), and, even if losses continue at the current rate, the company will have a positive net worth for another two years.

We calculate that McLeod USA has a longevity at current loss rates of more than four years; Pac-West Telecomm, eight years;, a smaller CLEC that concentrates in the New York City area, four years; and Time Warner Telecom as extending for many decades.

CLECs that have had financial troubles have moved to restructure. For example, Covad Communications, a leading national broadband services provider that uses DSL (Digital Subscriber Line) technology, last week secured $150 million in loans and other financing - part of a restructuring agreement that "should carry the company through to a point when it will be cash-flow positive, sometime in the second half of 2003," according to a Reuters report that quoted Covad's CEO, Charles Hoffman. Covad, with 333,000 customers, reports that it has reduced its burn rate from $233 million in the first quarter of 2001 to $67 million in the third quarter. "Hoffman," reports Reuters, "said it will have a quarterly burn rate below $20 million a year from now."

Meanwhile, companies like Allegiance and Time Warner are not just survivors. They are now "thrivers," as David Fore, a Bear Stearns analyst, stated in a report to clients on Nov. 12. But they are threatened by the politics of re-monopolization - as embodied in the Tauzin-Dingell bill.

In addition, the Association of Local Telecommunications Services (ALTS) recently reported that 150 CLECs are currently doing business in the U.S., with 77,000 employees. (These figures do not include employees of larger, integrated companies like AT&T, Sprint and WorldCom, which provide local as well as long-distance, wireless and cable service.) ALTS also reports that the CLECs have built $56 billion in telecom network infrastructure over the past five years, including $25 billion in the past year alone. Companies such as Cbeyond and Focal have been adding employees in the past year.

It is precisely such companies that provide the innovation and competition that spread advanced technology to U.S. consumers and that drive down prices.

"Competitors," according to an ALTS report, "have developed many technologies, such as Advanced fiber SONET networks, DSL deployment, fractional T-1 deployment, advanced digital telecommunications solutions, collocation options. Eliminating competition will leave our technological innovation to the monopoly carriers that have little incentive to develop new products and services." A Yankee Group survey recently found that customers preferred CLEC service over Bell service - which is hardly a surprise.

Despite the reluctance of the House leadership, which has held it up since the summer, the Tauzin-Dingell bill could go to the House floor in December. The bill would allow the Bells immediate access to long distance - which, under the 1996 act, was supposed to be the "carrot" to induce them to open up their local networks to competitors. More important, the bill would permit the Bells to deny CLECs the opportunity to connect at important points in their networks - even though such connections are at the heart of the 1996 act.

Without access to the "last mile" - the wire from every American home and business to the greater telecommunications system, installed through government protections and subsidy - competition would effectively cease, and the Bell regional cartel would extend monopoly power, with dire consequences for prices and quality.

How many jobs would be lost if Tauzin-Dingell passes? One industry source is unequivocal: "I am comfortable saying that ALL the CLEC jobs are at risk." And those are just for starters. Without competition, demand for telecom equipment can be expected to slacken. Many more jobs will be lost in that sector as well.

So far, more than 17,500 jobs created by the CLECs have been eliminated this year, and no one who studies the industry doubts that the figure will soar if Tauzin-Dingell becomes law. A study that I conducted earlier this year with William H. Lehr of the Massachusetts Institute of Technology found that the very threat of Tauzin-Dingell passing may have been responsible for half of the 84 percent decline in the market capitalization of CLECs. We also concluded that U.S. economic growth would fall significantly if Tauzin-Dingell became law.

The bottom line is this: The CLEC industry is still alive and well. Dozens of CLECs have survived and, in some cases, truly thrived. They have enough cash to overcome a cyclical economic slowdown, but, if Tauzin-Dingell passes, they will be severely damaged. A vote for Tauzin-Dingell is a vote for the death of a competitive industry and for the extension of a monopoly.

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