Should Your ISP Become a CLEC?
By Joseph Isaacs

The direction that the ISP and telecom industry is moving toward suggests that ISPs who want to be competitive in the evolving telecommunications arena must take a serious look at becoming Competitive Local Exchange Carriers (CLECs). The increased demand for telecom services and the passing of the Telecom Act of '96 have opened doors to revenue growth, increased operating margins, and a secured customer base for ISPs that obtain CLEC status. And with the industry moving towards convergence models where voice, video, and data will travel the same fiber optic lines into end-user homes, becoming a CLEC seems to be a lucrative option for ISPs.

ISPs have already made substantial leaps in becoming the "Next-Generation" telecom companies, but just as ISPs are jumping into the telecom business, the local telephone companies are moving into the ISP business, as well. Both Incumbent Local Exchange Carriers (ILECs ) and CLECs have aggressively begun pursuing the Internet business as an addition to their existing telephone company services. Because local telephone companies control most of the lines--including those of the ISP--becoming Internet providers is as simple as installing remote Internet access equipment in their existing central offices.

With the deregulation of local telephone service, ISPs obtaining CLEC status now have the opportunity to expand their service offerings with "competitive dial tone." This means the ISP can further differentiate itself from the competition by offering local and long distance telephony features in addition to the current Internet service. The ability of ISPs with CLEC status to offer a differentiated service set, convergent billing, and responsiveness to customer demand ensures increased revenues from a customer base they have already worked so hard to obtain. Furthermore, because of the Telecommunications Act, ISPs with CLEC status now can take advantage of greater operating margins on their existing trunking as well as on the increased revenues.

ISPs with CLEC status can also lower their cost of doing business, because as a "Peer" to the ILEC, the ISP is able to purchase services at the wholesale price, as compared to the retail prices they are paying now. CLEC status also ensures state mandated 13 to 25 percent below tariff wholesale rates on circuits and services for switchless resellers and even greater discounts up to 45 percent for facility-based CLECs. CLEC status not only provides greater profits due to lower operating costs, but also provides incredible competitive advantages over the ILEC currently providing telephony services to your data customers.

As a CLEC, ISPs also have a definitive advantage by bundling long distance services with local service, additional telecom service, and Internet service. ISPs can cash-in on the local, long distance, and international access that previously belonged to the national phone companies. Carriers Class services are also available to the ISP with CLEC status that were not previously available at the retail level. Not only are the additional revenues available, but once again, deregulation has provided CLECs with the competitive advantage.

ILEC's have spent so many years justifying their high prices to the regulatory commissions that they cannot lower their fixed tariff rates in order to compete with the ISP that has obtained CLEC status. The ILEC must also, by law, offer service to everyone within the service area whether it is profitable or not. The ISP with CLEC status, however, does not. ISPs with CLEC status can offer service to select customers, and they can determine who they want to serve and what level of features they provide.

CLEC status also levels the playing field by virtue of "Peer" status to the ILEC. CLEC status enables ISPs to obtain a new group of negotiation rights, including quality of service, good faith negotiation, and regulatory protections/enforcement mechanisms. This is vital to the ISP who not only decides to enhance their business, but also wants to protect against competition from the ILEC and other CLECs.

Today's highly competitive market environment leaves an ISP with four 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

ISPs who wish to protect their customer base, increase revenues, increase profits, grow their business, and position themselves favorably for the next millennium--against an ever increasing competitive telecom industry--should choose to become a CLEC. ISP/CLECs who control their own destiny will be in a better position to take advantage of new service offerings such as DSL and VoIP, and the ISP that is already a CLEC is better positioned, under current regulations, to keep growing.

Joseph Isaacs is the CEO/Founder of ISG-Telecom Consultant

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