Summary

By April 2001, 17 CLECs out of a total of approximately 410 in the United States either had ceased operations or filed for Chapter 11 bankruptcy. A majority of the remaining companies are operating at a loss and investors are leery of investing in them. Economic reverberations of business failures were felt beyond telecommunications. According to PriceWaterhouse Coopers, 36% of total first through third quarter investments by venture capitalists were for telecommunications. The article, “Telecom Tightrope,” published in Barron's Online, 8 January 2001, by Jacqueline Doherty reported that total investment in telecommunications in 2000 was $157.4 billion. Poor performance by telecommunications companies has an impact on banks, stock and bond holders and financial firms that invested in telecommunications.

The industry is in a quandary. It takes enormous investments to build new infrastructure for telecommunications. New cable TV systems capable of supporting high-speed Internet access cost $3000 per customer. Laying fiber, digging up streets and purchasing hardware for voice and data communications also are costly. However, with the proliferation of over 400 local competitors, capital is spread too thin and it's difficult for any one company to have enough resources. Given these problems with developing infrastructure at the local level, there is a concern that innovation will be hampered if there is a lack of competition. Without competition, incumbents have little incentive to invest in capital improvements or improve efficiencies to lower prices for end users. Suppliers have no incentive to develop new products without a diverse group of purchasers. In their first quarter 2001 financial statements, both SBC and Verizon announced cutbacks in capital spending due to poor business conditions. One wonders if declining fortunes of their competitors also is a factor.

In addition to legal issues, there are questions of availability of technical resources at the local level. Metropolitan areas of the country have a higher percentage of advanced central offices than rural and poor areas: Even metropolitan areas have pockets of old equipment. Frequently, poor neighborhoods in major cities have central offices that impair even standard plain old telephone service (POTS). For the most part, competition is already spurring investments in cabling, signaling systems and new switches. The first groups of consumers to gain from these investments are large corporations, hospitals and universities. Gains for middle-class consumers and small-to medium-sized businesses will take longer to achieve.

Regulatory factors also have given an enormous edge to incumbent local telephone companies. There is now a bill before Congress granting RBOCs permission to sell interstate broadband data services without first opening up their networks to local competition. The RBOCs see high-speed data, in addition to cellular, as their most promising opportunity for growth. Passage of a bill such as this would give them an enormous advantage. Finally, the incumbents have an enormous advantage in miles of cabling, thousands of central offices and established business practices they have to rely on. Their challenges are to upgrade their billing and operation systems and sales expertise to serve multilocation customers. Most of the competitors, other than WorldCom and AT&T, have new operational and support systems (OSS) with up-to-date billing packages. Their objective is to obtain capital from investors to continue building infrastructure and, in some cases, to conserve cash to continue operating.