Identifying profitable niches

It may be a bit superfluous to say that "lean and mean" is the proper strategy for a CLEC today. The capital markets and financing packages offered by equipment vendors and venture capitalists have dried up to the point at which most would-be CLEC's have little choice but to keep capital requirements internally funded. One way to minimize capital expenditures is to select niche markets that require smaller and less expensive equipment with targeted feature sets. For example, a CLEC that focuses on selling inbound communications services to ISPs does not require Class 5 features on their switching platform such as call forwarding, caller ID, conference calling, etc.

There are also niches in the consumer market that don't require large-scale capital investment. One attractive market is providing digital subscriber line (DSL) service in small targeted areas that are underserved by the major incumbent providers. With the failure of many national DSL providers, there are a large number of central offices in major metropolitan areas in which only one DSL provider exists, and in many smaller towns and rural areas service is not available at all. Start-up CLECs can often compete very effectively against incumbent local exchange carriers in these markets. Most ILECs have relatively low-level technical people, allowing CLECs to offer faster network turn-up and more knowledgeable support, both of which are crucial to ensuring customer satisfaction in the still-emerging market for broadband services. CLECs can also take advantage of the high labor costs borne by ILECs to compete effectively on the basis of price.

TC3 Telecom case study

TC3 Telecom is an example of a CLEC that has achieved success by addressing a niche market, achieving profitability and building on that success by moving into new but related niches. The company was originally started as a computer retail store and service company in the small south-central Michigan town of Adrian. In 1995, management saw an opportunity and was first to market with a local Internet product for the community. The success of this company, called TC3Net, which now has more than 7000 dial-up subscribers, meant that it was soon ordering telephone lines and circuits in large quantities from Verizon, the local ILEC. In 1999, the company became aware of the CLEC opportunity. The major impetus in making a move was to reduce its operating expenses as an ISP. TC3 formed a separate company called TC3 Telecom and began the process of obtaining regulatory approval. Management realized it would be important to enlist the service of a qualified consultant. They found one that had experience in moving through the regulatory process and interconnection activities.

TC3 was very careful about its equipment investment. Equipment vendors urged the company to buy a Class 5 switch so it would be able to offer voice services down the road, but management felt the higher upfront cost and maintenance expenses would extend its payback period to an unacceptable length of time. The remote access servers (RAS) that it was using to provide local Internet access have a T3 termination interface, so management determined that it could run a T3's worth of local phone trunks into the company's office and connect it directly to the RAS box. While the CLEC provided savings on the cost of inbound telecommunications services, the company found that an even greater benefit was the ability to consolidate its points of presence (POPs) throughout its service area into one office, rather than the six locations where it had previously located equipment in the past. Consolidating all of the equipment into a single modem pool significantly reduced the ISP's operating costs and improved service to customers.

Once the company's CLEC service was up and running based on the niche market entry strategy, management identified another opportunity: providing DSL service to the local area. The ILEC had chosen not to provide DSL service to its local area, and management had heard that many consumers were unhappy with the local cable broadband service. Furthermore, businesses in the area were for the most part unable to obtain any type broadband service at all. With the CLEC already established, management found that the failure of large national DSL providers meant that used equipment could be obtained for pennies on the dollar. They started by installing a DSLAM (digital subscriber line access multiplexer) in the Adrian central office. This location has already hit breakeven with only 150 subscribers. The company recently opened a second location in Tecumseh that is well on its way to profitability with 50 subscribers. TC3Net is already very profitable, thanks largely to the cost efficiencies generated by the relationship with TC3 Telecom. Although small, TC3 Telecom has established a solid profit based platform to enter into additional voice and data communications services for their current and future customers.

TelNet Worldwide case study

Telnet Worldwide, based in Troy, Mich., is another CLEC that has been successful by focusing on a niche market and closely controlling capital and operating expenses. From Day 1, the company's business plan has centered on proven economics vs. a 'field of dreams' approach. It bases its business on delivering quality and value, and not overreaching. The company's strategy is to become a service provider's service provider. Its niche is providing local access circuits to ISPs. As a new entrant to the telecommunications industry it was able to start with a clean sheet of paper and take advantage of advances in technology. This reduced start-up capital requirements drastically to one-tenth of the traditional CLEC model. The added value that the company contributes is that it has created wide calling areas that make it possible for ISPs to serve large territories with greater efficiencies and convenience. This approach eliminates the need for the ISP to put equipment in remote sites or run a T-1 line to a central location. Instead they can service one or multiple local access and transport areas (LATAs) from a single location.

The company worked with a consultant that brought expertise on how to navigate the quagmire of regulations and various network designs without a lot of false starts. As a result, TelNet was able to enter the market quickly and efficiently, leapfrogging potential competitors. TelNet was profitable by its second year of business. The company provides another example of how a lean, mean and focused strategy can help CLECs succeed despite tough economic circumstances in the overall telecom industry.

These are but two of numerous CLECs that are thriving in today's telecom landscape. The key factors for both have been minimizing external capital requirements, moving quickly to penetrate a niche market and avoiding debt financing by using the profits generated in that market for expansion. With only a small fraction of the $300 billion a year communication market captured by CLECs, there remains a tremendous opportunity for CLECs in today's marketplace.

Tim Sefton is president of Invivo, and can be reached at info@invivo.com. Joseph Matausch is the founder of CLEC TC3 Telecom, and can be reached at joe@tc3telecom.com. Mark Iannuzzi is the president and founder of TelNet Worldwide Inc., and can be reached at mark.iannuzzi@telnetww.com.

Visit these related sites: http://www.invivo.com/, http://www.telnetww.com/, http://www.tc3net.com/.