What is Fueling the CLEC Market

December 29, 2010

This past year has been one of heavy consolidation for US-based competitive local exchange carriers (CLECs), but underlying the need to gain scale through acquisition are a few other prominent trends, according to industry experts.

Cloud Connectivity

Competitive players and smaller incumbents are looking at higher-value offerings including cloud-based and data center services and that has also led to M&A activity. Cbeyond Communications (Nasdaq: CBEY) in November bought two cloud services companies, MaximumASP and its affiliated companies, as well as the outstanding stock of privately held Aretta Communications.

That buy came on the heels of Windstream’s purchase of Hosted Solutions and Cincinnati Bell Inc. (NYSE: CBB)’s grab of CyrusOne, a data center operator. (See Windstream Buys Hosted Solutions)

CLECs are realizing how well network services, data center, and cloud services complement each other and how integral cloud-based or data center services are becoming to business communications needs.

Competitive players are also looking to move up the market chain, and not focus exclusively on the SMB space where many cut their teeth, Washburn adds.

CLECs are building up a portfolio to go after larger business customers and that’s propelled by what they see happening at the small business levels. Large incumbent LECs and cable companies are relentlessly pushing down prices and pushing up speeds. Mid-sized businesses have to wonder why they should buy voice and data on a T1 if they can get a voice trunk and a 20-Meg FiOS link for less money. And let’s not forget the impact wireless is having on the CLEC’s core SMB clients.

The result is “an ugly market” for which many CLECs aren’t well-suited, and so they are building up their Ethernet services and getting more into cloud-based and data center services to move upmarket.

For now, the industry believes CLECs are interested in hosted services and basic data center offerings, not specific applications-on-demand, but that could change. In some cases, the acquisitions are bringing in those new, larger customers.

I have noted that there are several CLEC’s in the market today that are not expanding product portfolio, do not own fiber nor are they venturing into the larger business client market. I have to wonder if they will be acquisition candidates, or simply dinosaurs that will fade from existence. Naturally only time will tell, but if I were guiding an investor or a potential client, I would steer clear of such CLEC’s for now.

Tomorrow – CLEC’s and an Energized Economy? Contact ISG-Telecom do discuss a turn-key CLEC solution today!

Joe Buck, N.C.E.