Revenue Streams Article

"Taking the Plunge" from ISP to ISP/CLEC

ISPs have made substantial leaps forward in becoming the "Next-Generation" telecom companies in the USA. Just as ISP’s are jumping into the telecom business, the local telephone companies are moving into the ISP business. Incumbent Local Exchange Carriers (ILECs) and Competitive Local Exchange Carriers (CLECs) have aggressively begun pursuing the Internet business as an addition to their existing telephone company services. Local telephone companies currently control most of the lines, which are required to reach end-user Internet customers. They can act not only as the suppliers of lines to ISPs, but by installing remote Internet access equipment in their existing central offices, they are able to provide Internet services.

Why should an ISP "TAKE THE PLUNGE" and file to become a CLEC? Here are a few of the reasons:

1. State by State mandated 13 to 19 percent below-tariff wholesale rates on circuits and services for switchless reseller CLECs;
2. Greater discounts of 20 to 45 percent below-tariff wholesale rates on circuits and services for facility-based CLECs;
3. Reciprocal Compensation at least until the FCC makes a ruling in this area;
4. Availability of carrier class services (UNE's) unavailable at retail levels;
5. Most importantly, the ability to profit from the telecom services used by your existing customer base and community;
6. Ability to be a "Peer" to the ILEC instead of just a customer.

Becoming a ISP/CLEC can lead to major cost savings as well as many potential new revenue streams for ISPs that are currently paying retail tariff prices on circuits provided by the ILECs and/or CLECs.

The Telecommunications Act of 1996 requires that the ILECs and other CLECs open their markets to competition. State Public Service Commissions are charged with regulating new CLECs under the Telco Act of '96.

In today’s competitive environment, an ISP desiring to interconnect with an ILEC and/or CLEC must do the following to become certified as a CLEC:

1. File an application with their State Public Service Commission;
2. File retail tariffs; and
3. Negotiate an interconnection agreement(s) with the ILEC and/or the CLEC's.

If the ISP is only offering intrastate services, the ISP needs to only apply for CLEC certification at the state level. However, if the ISP wishes to offer Interstate or InterLATA services, the ISP must also become certified as an IXC carrier with the Federal Communications Commission (FCC) as well by doing the following:

1. Filing an application with the Federal Communications Commission (FCC);
2. Filing tariffs with the Federal Communications Commission (FCC); and
3. Filing a copy of the FCC tariff with every State PUC that you wish to offer service in.

Although it is not mandatory, ISG-Telecom highly recommends, that the first thing an ISP needs to do to become a CLEC is to create a separate company, which can be owned by the same shareholders as the Internet company. It is important not to co-mingle the activities as well as revenues of the unregulated ISP business with the regulated CLEC entity. Once the CLEC entity is established, the ISP/CLEC, through ISG-Telecom will file with its State Public Utility Commission (PUC) and/or the FCC. This approval process can usually be accomplished by ISG-Telecom in as little as 120 days from date of filing. It will take ISG-Telecom between 30-45 days to prepare all necessary documentation to send to the PUC and the FCC, if necessary. The approval timetables vary, at the PUC level from State to State. These approval timetables range anywhere from one (1) day to six (6) months. See the PUC Timetables for your State

Simultaneously to the certification and tariffing process, ISG-Telecom must now either negotiate (or in many cases opt-in to) an Interconnection Agreement with the ILEC and/or CLEC whose services it intends to purchase, and whose LATA it plans to do business in. The Interconnection Agreement must include agreed upon loop and circuit rates as well as other interconnection points, rates and processes. Several thousands of these agreements have been negotiated and approved by State Public Utility Commissions since the passage of the Telecom Act of '96.

The Interconnect Agreement will also reflect the type of interconnection with the following elements:

1. How to connect the networks;
2. Where to connect to the networks;
3. Unbundled Network Element (UNE's) pricing and/or resale;
4. The quality of service elements;
5. The agreed-on reciprocal compensation rate for terminating traffic,
6. Issues including penalties for non-performance on the part of either the interconnecting ILEC and/or the CLEC.
7. Implementation schedules and manuals

Some ISPs, at least initially, will probably want to become switchless resellers rather than purchasing their own switching equipment (facility based reseller) and Unbundled Network Elements (UNE’s) from the local telephone company network. If the ISP/CLEC switchless reseller plans on adding its own switching equipment within a twelve month period, ISG-Telecom usually recommends that the certification application and tariffs reflect this, which can eliminate having to re-draft tariffs and certification papers within such a short period of time from the initial filing. It may be necessary to expand the flexibility of the interconnection agreement to take into consideration the Unbundled Network Elements (UNE’s). If the new ISP/CLEC does not have sufficient current costs to justify becoming a facility based CLEC, then ISG-Telecom will recommend beginning as a switchless reseller. It is our objective to redistribute current costs vs. increasing them. When enough savings are realized by implementing a switch, then it becomes cost justified to do so. This philosophy does not take into consideration the additional revenue streams generated, in addition to, the current revenues.

Plunging towards becoming an ISP/CLEC is very beneficial because it allows the Switchless Reseller ISP/CLEC, under it’s Resale Agreement to obtain discounts on the lines purchased by the CLEC. Much greater discounts would be obtained as a facility based ISP/CLEC or by entering into a term and volume agreement with the ILECs and/or CLECs. In a facility based environment, the ISP/CLEC also has the opportunity to receive all of their inbound trunks, to the Tandem Access Switch, at no cost from the ILEC and/or CLEC. A savings of 13 to 19 percent across the board (these discounts may be higher if ISG-Telecom negotiates a term and volume agreement on behalf of the client), under a negotiated agreement or by the use of switching facilities. This puts the ISP/CLEC in a much more competitive position within its markets. The savings on local loop lines can translate into either higher profits and/or lower price, both of which are key ingredients for a growing ISP/CLEC organization.

Additionally, the new ISP/CLEC will have to consider the set-up and implementation of full Back Office functions including:

1. Billing
2. Customer Service
3. Operator Services
4. Directory Assistance
5. 911
6. SS7
7. Tax Compliance
8. Tax Software

Back office functions should not scare you away from moving towards becoming an ISP/CLEC. Most of these functions can be set-up on an outsourced basis and performed by 3rd party vendors with reasonable and cost effective methodology. Depending on the service offering, and the convergence of products, the cost of set-up and implementation will vary. ISG-Telecom offers a wide array of 3rd party vendors for these functions based upon the goals and objectives of the individual clients. Some of these functions are an expense (billing & customer service) and some of them are an additional revenue stream (operator services & directory assistance). Flat rate service models are simple to bill but MOU billing can be extremely complex and more expensive to set-up. Long distance services are the most complex to bill and should always be done by a 3rd party vendor for at least the first 12 months of operation.

Furthermore, as a facility based CLEC, the ISP/CLEC should be able to participate in reciprocal compensation with the carriers, providing there is not a negative ruling from the FCC in up and coming months. Reciprocal compensation is the term used to describe the fees that interconnecting local carriers pay to terminate traffic on each other's network. As an example, where the ISP/CLEC and the interconnecting ILEC and/or CLEC have an interconnection agreement, both the ISP/CLEC and the interconnecting ILEC and/or CLEC must pay each other for the amount of local traffic (per minute) that each carrier terminates on each other's network. The payments for reciprocal compensation vary from ILEC to ILEC but are typically between 0.2 and 1.04 cents per minute. Although reciprocal compensation could be a new revenue source for the ISP/CLEC, we at ISG-Telecom NEVER recommend creating a business plan or business case model around reciprocal compensation. ISP/CLECs that choose to become CLECs to participate in reciprocal compensation should be aware of the current regulatory climate. Reciprocal compensation, in light of recent FCC considerations, should be considered "gravy" income ONLY.

Many ILECs have claimed, and fought, that reciprocal compensation for ISP-related traffic is not due, to the ISP/CLEC, under the existing FCC and state rules. These ILECs do not consider that the typically one way traffic, generally created by an ISP, to be reciprocal and thus are fighting the reciprocal compensation payments for ISP traffic. The ILECs also claim that reciprocal compensation is meant only for local calls, not calls to ISPs, which they claim, are interstate in nature. There has not been a current ruling from the FCC on this issue yet, but is expected sometime in 1999. These ILECs have withheld payments to CLECs who serve ISPs, who the ILECs believe are accumulating large amounts of ISP traffic for the purposes of collecting reciprocal compensation payments. In over 20 challenges to State PUCs, the reciprocal compensation payments for ISP traffic has been upheld as both local in nature and subject to the payment of reciprocal compensation on those states. In other words, the ILECs have lost every case, with the State PUCs, in which it has challenged the payment of reciprocal compensation. The FCC and numerous states are currently addressing this issue, which likely will be resolved, as part of total access reform and/or new internet service regulatory actions. It is most likely that reciprocal compensation will be re-formulated, with a lower percentage payment for ISP traffic and a higher percentage payment for conventional true voice traffic, within the next 12 months.

Other advantages in becoming an ISP/CLEC, besides obtaining discounts on lines and advantageous reciprocal compensation arrangements, is that by becoming a CLEC enables the ISP/CLEC to operate as a "PEER" to the ILEC, which creates a virtual level playing field. As opposed to the end-user retail customer status, an ISP/ CLEC can obtain a whole new group of negotiation rights, including quality of service, good faith negotiation, and regulatory protections/enforcement mechanisms.

Another advantages to becoming a facility-based CLEC is the opportunity to profit from long distance calls. Termination and origination fees may be collected and usually average between 0.017 and 0.03 per minute. These collected fees will outweighs the reciprocal compensation fees. Switching equipment is more expensive but the revenues can overcome the costs. In today's market environment, convergent services are taking the lead, as the #1 reason for customer retention, instead of price, as it was just a few years ago. Churning can be virtually eliminated by offering your customer base a package that is all inclusive of both internet and telephony services.

Looking at the ISP/CLEC arena from the bigger perspective, the direction of the ISP and telecom industry suggests that an ISPs who want to remain competitive must take a serious look at becoming an ISP/CLEC. With the telecom industry moving towards convergence models where voice, video and data will travel the same fiber optic lines into end-user homes, becoming a ISP/CLEC will be a critical step for a current ISP to position itself competitively.

Today’s market environment leaves an ISP with only four (4) choices:

1. Become a CLEC
2. Partner with a CLEC
3. Be bought out or merge with another large ISP and/or CLEC
4. Be pushed out of business

ISP/CLECs who control their own destiny will be in a position to take advantage of new service offerings, such as VoIP and the ISP that is already a CLEC is better positioned, under current regulations, to enter into VoIP as just one of many other telco services available.

In conclusion, the telecom industry is rapidly evolving, and ISPs need to change with it if they are going to remain competitive. Therefore, ISPs should contact ISG-Telecom and "TAKE THE PLUNGE" by becoming an ISP/CLECs. To find out if your ISP qualifies to become an ISP/CLEC fill out the by becoming an ISP/CLECs. To find out if your ISP qualifies to become an ISP/CLEC fill out the ISG-Telecom ISP/CLEC Questionaire and fax it back to us for immediate review and a NO COST initial analysis.