Looking Ahead to 2009
December 23, 2008
Happy Holidays to you and yours. While we all take time to be with with friends and family, I thought you would enjoy a look into what is in store for CLECs in ‘09. This is an excerpt of my regular series on xchange magazine’s blog.
There’s a question that keeps coming across my email lately, especially from agents. It’s asked in various forms, but the long and short of what people are wanting to know is this: “how long do you expect the regional and national CLECs to keep their heads above water?”
I have no doubts that additional consolidation will occur. Sadly, the next round of consolidation will occur around marginal CLECs. Who are marginal CLECs?
Marginal CLECs will be those CLECs that are faced with pricing pressures as the result of not having an ability to differentiate services or hold a margin due to reliance on ILEC infrastructure. In addition, those ILEC-dependent CLECs carrying debt greater than 3x EBITDA, in my opinion, may be forced into the situation as credit markets remain elusive and expensive. For example, in the State of Missouri, the ILEC has been relieved to raise prices to CLECs. In general, Special Access costs across the United States will increase as the ILECs are no longer obligated to provide volume or terms. The ability for ILECs to raise prices of wholesale pieces and parts via forbearance is not an issue of “if” just when – that’s reality. Most CLECs relying on Type 2 ILEC will not see costs decrease as prices decrease.
If the telecom meltdown of 2001-2003 is any indicator of how the current market conditions may force behavior, the squeeze could be on. It is important to note that the current downturn is not network-centric as in 2001-2003, but it is deeper, wider, sinister and global.
Some unsophisticated CLECs will make an attempt to survive by lowering prices believing that lower prices will stimulate growth and cash flows. I agree with this somewhat but only to the extent you have 100% control over your network operating costs and by increasing volume you get economies of scale for better margins. However, the more a CLEC relies on the ILEC for pieces and parts, the more likely the CLEC in a price lowering market cannot achieve margin sustainability. The ILECs are not benevolent and will not lower their wholesale pieces and parts unless the law says to do so. We saw many companies go bankrupt 2001-2003 by lowering prices as a single, unsophisticated strategy.
Season’s greetings from the Straight Shooter and the entire AFS team. If you’d like to receive Dave’s posts direct to your inbox, click here. We always welcome your questions and comments. Email Dave or post a message below.
Written by Dave Rusin - Telecom Executive
Posted by admin | Filed Under American telecom, Dave's Corner, Telecom Blogs, Telecom USA, Telecom bloggers, Telecommunications bloggers, Telecommunications blogs, Telecommunications companies, Telecommunications industry, Trends + telecommunications, Trends in telecommunications
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[...] continuation of my recent post on xchange magazine’s blog. You can see part one of this post, Looking Ahead to 2009, [...]
[...] continuation of my recent post on xchange magazine’s blog. You can see part one of this post, Looking Ahead to 2009, [...]