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Interview with Joseph Isaacs, CEO, ISG Telecom Consultants

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The main reason why an ISP should consider becoming a CLEC is to stay competitive. With standard dial-up service, other than the AOLs, MSNs, and Mindsprings, transforming to high-speed broadband, you really don't have the ability to take advantage of those services, unless you are a CLEC. And there are two main reasons, and you have at this from both sides of the coin. One is the cost savings you have as an ISP/CLEC on a reseller platform with 3,000-5,000 users and even more cost savings for a facilities-based ISP/CLEC with 8,000-10,000. But the more important reason is the additional revenues generated by the CLEC on the peripheral services you are currently selling your business customers such as T1, frame relay circuits, ATM, PRI, Frac Ts, and also, of course the broadband and DSL elements.

The steps involved in achieving CLEC status are actually pretty simple. It requires filing an application with the state Public Utility Commission and it involves filing tariffs, getting operating codes and setting up with the various different ILECs. For us, this is a pretty simple process because we have done over 500 of them in the last four years. For somebody who has never done this, it can be fairly complex, with a lot of correspondence back and forth, and staying up with the current rules and regulations of the PUCs, which seem to change on a week-by-week basis.

When we take on a client, we do a strategic planning session which enable us to get feel for the products and services which the client wishes to undertake, because it varies depending on whether they are going to be a data CLEC or a data/voice CLEC and whether they plan on doing long distance or inter-exchange services. And then we draft their application, draft their tariff, we do the filing, we do all of the follow-up from A to Z. From the time they start until the time they're certified, they are pretty much out of the loop and they can continue to run their enterprise and not have to worry about day-to-day idiosyncrasies of getting that done. Once the certification is completed, we will obtain all the operating codes for them, and we'll have either their interconnection agreement for facilities-based providers or, for switchless resellers, their resale agreement with the ILECs and/or CLECs put in place and also approved by the PUC. Once those steps are completed, they then have to set up their accounting with the ILEC and they have to set up their account maintenance. It's not like doing it on a retail level. It's a little bit more involved when you are a CLEC. Of course there are billing issues that have to be dealt with, OSS issues that have to be dealt with and so on and so forth.

We pretty much take them through that entire process. Typically speaking, depending upon the state, the average certification now takes about 120 days. There are some states that will get it done in thirty and some states take as long as 180. It takes ISG about two or two and one-half weeks to get all the documentation prepared to the point where it's ready to be signed by the client and filed. That's providing we have everything we need from the client and then it's a waiting period at the PUC and a lot of follow-up and back and forth, making sure that everything is on track to be done right and approved.

As far as a ballpark cost estimate, providing that you don't run into any major glitches and the client can provide what they need to begin with, and it's not a state that requires either local counsel or local hearing, the average cost to become a CLEC is about $10,000. There are certain states like Illinois that require a hearing so it costs a little bit more. States like Indiana require a local counsel so we have to take an attorney on in that state and do that filing and you'll have an extra couple thousand dollars in cost. There are states like Maryland or Virginia that require publications be done announcing the fact that you are going to become a CLEC, and that can cost a couple thousand dollars. Barring those eight or ten states, it typically averages about $10,00.

There are two approaches to consider - facilities-based or non-facilities based. Depending upon the types of services that you're going to offer really determines which direction you'll go. If your customer base leans more toward the business customer or you plan on doing an extensive amount of DSL, then you really need to be facilities-based. The advantage of being facilities based is that you don't have to co-locate at the ILEC CO, depending on where your location is in relation to that CO, and your reductions in cost can be as high as 80%. There are a lot of ISPs that are too small to be facilities-based. You really need to be in that 5,000 plus subscriber category with a heavy business customer base.

If you're in the 3,000-5,000 subscriber range, you really need to look at resale. Down the road, you can always transition to facilities-based, but these smaller ISPs generally don't have the capital, cash flow, or the backing to go out and purchase a $300,0000-$500,000 switch or a million dollar switch. So from for an ISP that becomes a switchless reseller, the discounts seem to be increasing with a lot of state-mandated UNE orders lately, and are typically averaging about 20% now. Some states are as high as 40%, some as low as 12%. But I would say the average nowadays is about 20%. And that's 20% not only for your existing inbound PRI and T1 trunks that you use to run your ISP, but also 20% on anything that you would sell to your subscriber base. It will open the doors to be able to do a lot more business customers, and generate significant revenue streams as well as cost savings internally.

If someone starts as a reseller CLEC because they have a fairly small current subscriber base and they end up doing an exceptional job with the CLEC, and add two or three or four thousand more subscribers through the CLEC, then they can look into becoming facilities-based. The costs of doing that are sometimes prohibitive. Most of your smaller CLECs with less than five thousand subscribers typically do not have the cash flow to justify the cost of the switch or they don't have a large enough telco costs to justify the switch based upon the savings. And that's where I usually like to draw the line. Now there are always exceptions on both sides of the table. There are some 10,000 subscriber ISPs that go resale and some 3,000 subscriber ISPs that go facilities-based. It depends on your mid and long term plans. If you are looking to do a public offering down the road, then facilities-based is the way to go. Maybe you've got a bunch of VC money or angel investors just dying to get into the business, facilities-based would be the way to go with a smaller subscriber base. But typically speaking, 90% of the time it is not.

Besides getting through the regulatory process, there are a number of set-up or implementation requirements that the ISP needs to be aware of. If you're on a strictly resale platform, there's no equipment involved or any of the engineering related to that. But there are certain things that you are going to have to be able to do to take advantage of discounts from the ILEC. Number one, you have to be able to bill your customers. You have to be able to perform customer service. And if you are a voice CLEC, you have to be able to do Op services, directory assistance, 911, and SS7. Now those elements can typically be outsourced so that you don't have a massive expense in house, even customer service and billing if you so choose. Flat-rate billing is easy to do. Minutes-of-use billing gets extremely complicated and very, very expensive. So a smaller ISP that's getting into the resale platform typically can do a lot of that billing in house. Those are the big issues, the things that are going to be required.

Reciprocal compensation is a big issue for a lot of ISPs. It's still up in the air with respect to the FCC, the District Court in Washington as well as a lot of the state PUCs. It has been going back and forth for quite some time. There have been some ILECs that have been ordered to pay reciprocal compensation. I have been stating since 1996, do not base your business plan for becoming a CLEC based on reciprocal compensation. If you get it, it's gravy and I still maintain that position because it's not something that's being readily paid out for your ISP traffic. If you intend to be a voice CLEC and sell local POTs, DS-1, etc., reciprocal compensation is paid on those elements. But you need a lot of those elements to make reciprocal compensation worthwhile. And it is only available to facilities-based CLECs, which eliminates all of the smaller ISPs anyway.

Just backing up a bit, reciprocal compensation is compensation designed to reciprocate the interconnecting CLEC and ILEC for the facilities they put forth to transport calls. So depending upon how your call structure is flowing would determine whether you would actually collect more than you would be paying. For an ISP where almost all calls are incoming, they would collect more than they would pay, except for the fact that ISP traffic has been deemed interstate by the FCC, which doesn't entitle them to reciprocal compensation unless they happen to be in a state where the utility commission has mandated otherwise. It's such a small list of states, eight or so, and you're still not going to get paid right off the bat. Every ILEC in the country is fighting it. The RBOCs are fighting it. So until that's all ironed out, which may be in six months or it may never be, it's not something to base your plan on.

The big issue for the ISP is to examine why they want to go down this path. Obviously becoming a CLEC can be extremely beneficial. It gives the ability to become a pier to the ILEC instead of just a retail customer. It gives them discounts that they currently don't have. It gives them access to all the carrier class services and a lot of the UNEs that are not available on a retail level. It gives them the ability to increase their revenue streams and cut their costs. But they need to look at the reason why they are going to do it. It's not something that happens overnight. It's not something that is extremely costly from a filing and certification standpoint, but it does require that you put forth the same sort of marketing and sales effort for your new CLEC as you did for your ISP. And that's probably the biggest problem that most of these guys run into on the smaller side. They figure now that they're a CLEC, customers will just come in droves. No, it requires the same type of marketing as when you had twelve ISP customers and you were trying to get to 3,000. So there are some costs involved in running business, including a CLEC. But it can be extremely profitable, if you have the right customer mix or you are large enough.

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