CLEC INDUSTRY WILL REVIVE IN 2003, REPORT SAYS

Reports of death of CLEC industry are “premature,” Windhausen said. He said publicly traded CLECs were on target this year, and for first time in CLEC history their EBITDA were positive: “For the first time [CLECs] are bringing more revenue than it costs to operate the network.” He said “EBITDA numbers show the most dramatic turnaround.” In 2000, 18 CLEC companies ALTS analyzed posted total EBITDA loss of $2 billion. However, he said, that was cut in half last year to $940 million. In first half of this year CLECs “are on course to attain positive EBITDA of $179 million,” Windhausen said. ALTS report also predicted $5.4 billion net loss, down from $6.9 billion in 2001.

Out of 18 companies analyzed, 4 had gone through bankruptcy, but 3 had emerged “and came out stronger, healthier companies,” Windhausen said. He said that, excluding 4 bankruptcy companies, ALTS projected $3.9 billion revenue for CLECs in 2002 “that’s slightly ahead of last year’s $3.8 billion.” Including bankrupt companies, ALTS expects $6.9 billion revenue for 18 companies this year versus $7.4 billion last year. “Growth isn’t as great as it used to be, but it continues to increase,” Windhausen said. However, he said only 2 of publicly traded CLECs were on course to make profit this year: “Obviously, we need more CLECs turning profit before we can say that we are fully out of the woods.” He said total revenue growth slowed because of “situation with McLeod, that sold off a lot off its ILECs properties, so their revenues show a significant decrease in 2002 over 2001.”

CLECs have attracted more than $1 billion in investments in last 9 months, Windhausen said: “There is money out there available for the companies that have demonstrated they are making progress toward reducing their burn rates and expenses to achieve some level of profitability in near future.” Most CLEC companies still are trying to reduce burn rate, he said: “They have made substantial progress here, but they are still looking for ways to be as efficient as possible.” ALTS Gen. Counsel Jonathan Askin said CLEC companies “have already gone through a very steep learning curve… Now we see solid, well-financed companies [ready] to compete head-to-head with Bell companies.”

Windhausen criticized “The CLEC Experiment: Anatomy of a Meltdown” report released by Progress & Freedom Foundation (PFF) last month: It “was dancing on the graves of the CLEC industry and almost celebrating the fact that CLECs mismanaged themselves.” He disagreed with PFF on role of govt. in CLEC industry development and criticized conclusion that federal govt. had some responsibility for decline in CLEC industry: “The reason they allude to is that the FCC artificially encouraged too many CLECs to get into the market.” However, he said “what fundamentally has been disappointing is the lack of enforcement of the Telecom Act and FCC rules. Billions of dollars have been wasted by the CLEC industry on the expectation that rules that were set out would be actually complied with.” He said “if provisioning had gone more smoothly, CLECs would have been able to generate more revenue to pay for this equipment and we would have had more companies these days.”

Opening of local markets has gone much slower than expected, “and it’s a significant cause of our financial difficulties,” Windhausen said. He said 6 years after Telecom Act was passed Bells had opened their markets in only half of states while they had been expected to do so in 3-4 years: “That’s very, very slow… CLECs haven’t been able to generate as much revenue as we expected because Bell companies failed to provision.” He said CLECs needed to get connections to Bell companies’ networks “to reach our customers. If our companies can’t connect customers to our facilities, we can’t generate revenue to pay for the investments that we've made.”

BellSouth spokesperson said “critical security ‘redundancy’ that ALTS says its members provide will be enhanced greatly if CLECs could no longer depend on a nonredundant nearly free ride on the UNE-Platform.”

USTA spokeswoman said ALTS findings confirmed that “competition is alive and well in the local telecom market.” She said ALTS ignored goals of Telecom Act calling for increased competition and decreased regulation: “If even the CLECs acknowledge that significant competition already exists, how can they possibly justify keeping overly burdensome regulations in place?”

James Smith, senior vp-FCC, SBC Communications, said it was “hardly remarkable that CLECs can use the UNE-P on a profitable basis, since the UNE-P is priced well below the cost of providing local service.” However, he said by allowing below-cost access to incumbent’s network, UNE-P discouraged investment by new entrants and incumbents alike: “Without such investment, the health of today’s telecom infrastructure is at risk and the industry will remain mired in recession, exerting a drag that affects the entire economy.” He said: “Companies that rely on below-cost UNE-P produce no lasting benefits for consumers. While lining their pockets, they siphon the revenues out of the local market and leave the cost of serving all customers to the incumbents.”