Verizon Arguably Now is Among the Largest U.S. CLECs

At least some veterans of the competitive local exchange carrier (CLEC) industry might argue that “things did not go as planned” in the wake of passage of the Telecommunications Act of 1996.

Ignoring the huge bankruptcies in the sector, which were among the biggest results, other key business model elements did not work out as planned, either.

Initially, AT&T and MCI were the biggest CLECs in the market, anchored by their consumer efforts as much as business segment sales.

But MCI was absorbed by Verizon, while AT&T was acquired by SBC, which promptly rebranded the whole company “AT&T.”

Many business-focused independent CLECs went bust. But the most-successful consumer CLECs--especially in the consumer segment--wound up being the cable TV companies.

And many former independent telcos now earn significant revenues from their “CLEC” operations.

And now Verizon arguably has emerged among the nation’s biggest CLECs, by virtue of its acquisition of XO Communications.

In classic terms, Comcast and Charter Communications arguably are  the largest U.S. CLECs, as measured by metro route miles. But XO Communications likely would be counted among the 10-biggest “CLECs,” on most measures.

Measured other ways, such by carrier Ethernet revenue, XO Communications might rank as high as second among all carriers, incumbent or CLEC.

Today, the business units of the nation’s largest cable operators (Charter Communications, Comcast and Cox Communications) are the fifth, sixth, and eighth largest providers of business Ethernet services in the United States, US Telecom argues.

Cable operator business customer revenue has been growing at double-digit rates for most of the period since 2004.

Carrier	Metro Route Miles	On-Net Buildings
AT&T	940,000	20,000
Verizon	800,000	10,000
CenturyLink	250,000
Charter Comm.	150,000	75,000
Comcast Business	141,000
Frontier	78,838	6,300
Charter	65,000	13,800
Level 3	55,000	30,000
Birch	31,000	580
Cox	30,000	28,000
Zayo	28,798	16,712
EarthLink	28,000	426
Cogent	27,400	2,090
Lightower	20,000	8,500
FairPoint	16,000	3,600
Hawaiian Telcom	15,000
Consolidated Communications	13,038	4,804
XO Communications	13,000	4,000
Fibertech (Lightower)	12,200	10,389
Sunesys (Crown Castle)	8,656	7,202
Fiberlight	8,059	2,018
Lumos Networks	7,955	1,530
Cincinnati Bell	6,600	5,800
Cablevision (Lightpath)	5,800	7,000
Spirit/PalmettoNet	5,000	100
Unite Private Networks	5,000	2,500
Southern Light Fiber	5,000	3,437
Alpheus	3,250	337
Integra	3,000	3,000
Wilcon	3,000	1,014
FirstLight Fiber	1,600	1,500
US Signal	1,100	704
source: Fierce Telecom estimates

Why IoT Funds Rural Internet Access

source: Strategy and Business

In the telecom business, some things do not change: not every customer segment or geography is equally profitable.

In fact, some customer segments and locations are highly profitable, some are profitable and some lose money.

That always is true for mobile networks, which make most profit from a small number of towers. In a typical pattern, half of total revenue is generated by as few as 10 percent of tower sites.

That is why customer segmentation is an increasingly-important part of service provider strategy.

There are some obvious implications.

If, in a country such as India, 75 percent of new mobile Internet customers come from rural areas, then it is possible to say that service providers will likely lose money on almost every account.

The same will be true in Indonesia, the Philippines or other nations with significant rural populations.

That is why it is vital to create access platforms that deliver reasonable quality service at much lower prices, or create new funding mechanisms such as advertising, to defray some of the end user direct spending.

Some argue that programs such as Free Basics are important precisely for such reasons.

But even that will not be enough. Historically, telecom services virtually always have been subsidized in rural areas. They are subsidized for a reason: few services actually are profitable in rural areas.

Several decades ago, profits from voice services sold to enterprise customers were used to support such services in rural areas. More recently, mobile revenues have propped up fixed network services.

That will not change as the new goal is Internet access for rural residents. One way or the other, profits from urban customers and segments will be used to support money-losing services in rural areas.

That is why Internet of Things, smart cities, machine-to-machine services, connected health, connected cars and other new potential revenue sources are so important.

Those potentially big new revenue sources will provide the profits to fund Internet access for rural customers. The connection--if direct--often is missed.

That is why app and service development, Internet of Things and smart cities will be part of the discussion at Spectrum Futures. Unless ISPs make lots of money someplace else, they will not be able to afford to provide rural customers Internet access.

Role of the Fixed Network is Backhaul, it Seems

"Over the past year, cable companies have added about 3.5 million broadband subscribers, while telcos have had net losses of about 500,000 broadband subscribers," says Bruce Leichtman, Leichtman Research Group president.

One has to wonder whether that is a sign of coming structural change in the fixed network markets.

For some time, it has been clear that the role of the fixed network is changing. Specifically, it can be argued that the primary strategic value of the fixed network is its role as the backhaul mechanism for wireless, untethered and mobile services.

Wi-Fi offload of mobile device data traffic provides one example. The universal use of Wi-Fi as the in-building distribution system for fixed Internet access and much voice traffic provide other examples.

The use of cable TV, telco and other Internet service provider distribution networks to support backhaul of traffic from coming small cells provider yet other examples.

In other words, it might be argued that the primary function of the fixed network is to act as the backhaul for untethered traffic and apps.

But the shift of market share also might mean a historic shift in the structure of fixed network communications markets, where policymakers always seem to begin their work with a perspective on “dominant” providers in any market.

Traditionally, it has been the legacy telcos that were viewed as the sole “dominant” providers. But the functional definition of “competition” in any market is that the former leader loses lots of market share. And telcos have seen that happen.

Looking strictly at fixed network services, cable companies now are the market share leaders in the foundation Internet access service, seem to have about a third of the voice market share, and remain ahead in video entertainment account share.

So in two of three anchor services, including the “growth” business of Internet access and the “revenue volume” leader of entertainment video, cable is the leader.

With cable’s success in the small business market now complemented by serious efforts to gain share in the mid-market and enterprise segments, we should expect to see further share losses by telcos, with cable gains, in those segments as well.

To be sure, in 2014 telcos still had about 85 percent business market share. But everyone expects cable to keep gaining share in the business market segment.

Eventually, cable is going to get into the mobile business as well, and virtually all observers believe cable will take share in that market as well.

At some point, assuming legacy telcos can hang on to leadership of the mobile segments of the business, we will have to assume that in the fixed networks business, cable is the leader, not the telcos. All our assumptions about regulatory policy will by then be quite outdated.

U.S. Internet Access Subscribers, 2nd Quarter 2016
Firms	Subscribers	Net Adds
Cable Companies
Comcast	23,987,000	220,000
Charter*	21,815,000	277,000
Altice**	4,105,000	24,000
Mediacom	1,128,000	14,000
WOW (WideOpenWest)	725,700	3,400
Cable ONE	508,317	(107)
Other private firms	4,745,000	15,000
Total Top Cable	57,014,017	553,293
Phone Companies
AT&T	15,641,000	(123,000)
Verizon	7,014,000	(83,000)
CenturyLink	5,990,000	(66,000)
Frontier^	4,552,000	(77,000)
Windstream	1,075,800	(16,200)
FairPoint	311,440	117
Cincinnati Bell	296,700	4,300
Total Top Phone Companies	34,880,940	(360,783)
Total Broadband	91,894,957	192,510

Stranded Assets Always are a Legitimate Reason for Shuttering a Network

Somewhat curiously, as much as many policy advocates want the fastest-possible transition to all-fiber or other equivalent networks, some also seem to want preservation of old copper networks, even when mandating use of those older networks delays the transition to advanced, next-generation facilities. Some seemingly argue that copper is better.

As always, the business model seems the issue. During every network transition, some specific business interests are helped or harmed.

So it is that sellers of high-capacity services want to move as quickly as possible to next generation services, while many buyers of lower-capacity services want to keep buying those services as long as possible, and at lower prices if they can get them.

The problem with legacy networks is that they get more expensive to operate almost in direct proportion to the speed with which customers abandon them. We call that the stranded assets problem: assets deployed that produce no revenue.

That might not be a critical problem when stranded assets are less than 40 percent of total facilities. Beyond that, survival becomes an issue, as borrowed capital spent on those assets cannot be repaid.

That is a growing problem for Incumbent telcos, which have been losing lines since 2001, for example.

source: FCC

The issue is where the trend extends. The US Telecom association estimated in 2014 that telcos would have 18 percent market share in 2015.

Others suggest that could mean as few as 20 million voice lines left out of an original base of 188.5 million lines. That essentially represents stranded assets of nearly 90 percent.

A rational executive would argue that a service provider cannot sustain a whole network when stranded assets are that high.

source: US Telecom

source: CHR Solutions

That stranded assets problem could be a serious issue globally.

source: ITU

At some point, shutting down legacy networks makes sense, if stranded assets become too high a percentage of total deployed capital.