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A CLEC STRATEGIES FOR INDEPENDENT TELEPHONE COMPANIES review of the motivation and options for independent telephone companies to expand through offering competitive services outside of their existing region. A MetaSwitch™ White Paper CLEC Strategies for Independent Telcos: A MetaSwitch White Paper SUMMARY Independent telephone companies are faced with increasing competition in-region. At the same time, regulation and technology have opened up opportunities to expand out of region with competitive offerings such as IP Centrex and Voice over IP, as well as traditional circuit-switched services. This paper reviews the motivation for such expansion, and options available to independent telephone companies seeking to go down that route. We conclude that the opportunities are real, and that there are several different viable strategies for growth; each company must decide for itself which of those strategies best applies to its situation. NOTICE Copyright © 2004 MetaSwitch, a division of Data Connection. This white paper is provided for informational purposes only. MetaSwitch and Data Connection make no warranties, express or implied, as to the accuracy of the content. MetaSwitch and Data Connection are registered trademarks of Data Connection Limited and Data Connection Corporation. All other brand and product names are trademarks or registered trademarks of their respective owners. Copyright © 2004 MetaSwitch, a division of Data Connection Page i CLEC Strategies for Independent Telcos: A MetaSwitch White Paper CONTENTS 1. Introduction.........................................................................................................................1 1.1 A Tradition of Reliable Service......................................................................................1 1.2 CLEC Doesn’t Have to be a Dirty Word........................................................................1 2. Approaches to Out-of-Region Expansion..............................................................................2 2.1 UNE-P / Resale .............................................................................................................2 2.2 Collocating TDM Digital Loop Carriers........................................................................2 2.3 Traditional Class 5 Switch ............................................................................................3 2.4 Class 5 Softswitch .........................................................................................................3 2.5 Moving Beyond the Traditional ....................................................................................3 3. Vendor Selection ..................................................................................................................6 4. Conclusion...........................................................................................................................7 Copyright © 2004 MetaSwitch, a division of Data Connection Page ii CLEC Strategies for Independent Telcos: A MetaSwitch White Paper 1. INTRODUCTION 1.1 A TRADITION OF RELIABLE SERVICE Your telephone company is a local exchange carrier with a capital “L.” It’s been around for a long time, maybe even since the Wright brothers birthed the aviation age at Kitty Hawk, and Henry Ford promised his customers that they could have any color car they wanted, “as long as it’s black.” You have a longstanding tradition of reliable service to your rural community, and you value your close customer relationships. You’re proud of your hard-won telecom expertise. You have a steady stream of revenue from your bread-and-butter POTS business. You can look back over your company’s history with a strong sense of satisfaction. But in the back of your mind, the ghost of the great pitcher Satchel Paige murmurs, “Don’t look back. Something might be gaining on you.” And as the 21st century opens amid a welter of new telecom industry acronyms, technologies and competition, you’re wondering, “Where, if anywhere, should we go next? What, if anything, should we do differently?” 1.2 CLEC DOESN’T HAVE TO BE A DIRTY WORD Where to go? How about next door, into the neighboring service territory of that big “Regional Bell Operating Company”—whose customers are feeling so underserved and ignored? What to do? Consider reaching out to touch some new customers with an attractive set of competitively priced services, such as a combined Internet and telephone package or Web-based control of their phone features. In short, consider becoming an out-of-region competitive local exchange carrier, or “CLEC.” Wait, that’s not a dirty word. Despite the notorious failures of companies such as NorthPoint and Rhythms NetConnections,“CLEC” doesn’t have to be a four-letter pejorative for an independently owned local exchange carrier such as yours. Those failed CLECs got caught trying to compete with the RBOCs on a national scale, and found themselves saddled with massive levels of debt from over-investment in high-priced legacy equipment, just as the tech bubble collapsed—along with the in-vestor confidence that had kept them afloat. Their business model was doomed to failure from the start. In sharp contrast, you can initiate CLEC operations from a position of strength, building incrementally on your own well-established and mostly amortized network. You can also take advantage of a new generation of much more cost-effective equipment, investing sensibly to gradually expand and extend services as business conditions and prospects warrant. As an established local exchange carrier, you have a number of options for expanding beyond your current service region. Copyright © 2004 MetaSwitch, a division of Data Connection Page 1 CLEC Strategies for Independent Telcos: A MetaSwitch White Paper 2. APPROACHES TO OUT-OF-REGION EXPANSION 2.1 UNE-P / RESALE The simplest option is to enter into agreements with incumbent operators, or with CLECs still operating in target markets, to resell their services. This approach relies on leveraging the unbundled network elements of other carriers’ systems. It’s technically simple and the up-front costs are low, particularly if you can get regulated unbundled network element platform (UNE-P) tariffs. But there are serious tradeoffs that should make you think more than twice about this option. First, as a reseller, you give up most of your ability to differentiate services, other than by shaving margins, which reduces your profits and leaves you little scope for cost-effectively delivering a voice-and-data package. Second, this approach ignores—instead of exploiting—your single biggest advantage, namely your existing network and engineering expertise. And, finally, UNE-P is a construct of law and regulation. What government gives, government can take away, and lobbyists for incumbent carriers have been successfully working overtime at federal and state levels to make sure UNE-P goes away. In the current regulatory environment, out-of- region services built on UNE-P could turn out to be like castles built on sand. 2.2 COLLOCATING TDM DIGITAL LOOP CARRIERS Another option for expanding out of region is to collocate digital loop carriers (DLCs) or next generation DLCs (which also provide the ability to deliver DSL) in out-of-region incumbents’ central offices. In this case, traffic is backhauled via GR-303 TDM trunks from the DLCs to your own existing Class 5 switches. The advantage of this approach is that it lets you sell your own services and keep more of the revenues, while leveraging some of your existing infrastructure. The drawbacks include the capital cost of the new equipment and capacity upgrades for your in- region Class 5 switches, to support GR-303 and/or to allow for out-of-region growth. More importantly, you’ll have to contend with the ongoing costs of backhauling all calls, and the trunking costs associated with routing calls back to intra-LATA numbers that your own company doesn’t serve, as well as remote Public Safety Answering Points (PSAPs) to support 911. Finally, this approach depends on your ability to negotiate with out-of-region incumbents for collocation space for your DLCs. As a number of now-defunct CLECs learned the hard way, this isn’t easy, and it can be expensive. Bottom line: You may find that the combined capital and operational costs associated with this approach, particularly of backhauling all calls to your in- region switch, seriously reduce the return on your investment. Copyright © 2004 MetaSwitch, a division of Data Connection Page 2 CLEC Strategies for Independent Telcos: A MetaSwitch White Paper 2.3 TRADITIONAL CLASS 5 SWITCH A more aggressive approach to out-of- region service involves the deployment of new traditional TDM Class 5 switches in each new service area, either collocated in an incumbent’s central office or—more likely— in other facilities. Each Class 5 switch serves multiple end offices, each in turn equipped with a collocated DLC connected to the Class 5 switch via TDM/GR-303. Local off- switch traffic is routed to the incumbent’s Class 5 switch, while long-distance traffic can be backhauled to Class 4/tandem switches in your own network, or via other providers, depending on the backhaul cost. This approach reduces the cost of delivering local calls, compared to using the switches in your existing service region, and it enables you to leverage your own network for non-local calls. It also gives your company end-to-end ownership of the service-delivery platform. However, while traditional Class 5 switches are “tried and trusted,” they are also expensive—both in terms of upfront capital outlay and ongoing power, cooling and maintenance requirements. Aside from the cost considerations, this approach raises a strategic issue: The acquisition of costly additional legacy Class 5 switches locks your network into a TDM model that precludes innovation with advanced services or a fully converged next generation network. In other words, you could end up investing in a telecom dinosaur. 2.4 CLASS 5 SOFTSWITCH At this point, you might want to consider other approaches that enable out-of-region expansion using alternatives to traditional “big iron” Class 5 switches. One of these options calls for a great leap forward to a full next-generation network that relies on “softswitches”—a whole new architectural approach with components such as feature servers, call agents, media gateways, media gateway controllers and signaling gateways—to deliver the line-side functions of Class 5 switches. Media interfaces can be easily and optimally housed in out-of-region switching centers, and network intelligence is housed in your existing, in-region facilities. If you’re thinking that this sounds complex to deploy and manage, you could be right, depending on the size of the deployment. While the architecture may be attractive for major carriers with millions of subscribers, it does not scale down well for smaller operators, and requires equipment from multiple vendors to work together, while the standards for such interoperability are immature and still evolving. 2.5 MOVING BEYOND THE TRADITIONAL Reselling another company’s services may yield low margins and force you to rely on a short-lived UNE-P business model. Collocating DLCs in out-of-region incumbents’ central offices enables you to leverage your existing network, but leaves you with backhaul costs for all local calls and intra- LATA trunking expenses for non-local calls. Installation of new out-of-region TDM Class 5 switches reduces the cost of delivering both local and non-local calls, but involves high capital costs and locks your network into a TDM model that doesn’t migrate easily to next-generation services. Softswitch technology is promising, but a large, distributed network architecture may not be appropriate for your initial deployment. Copyright © 2004 MetaSwitch, a division of Data Connection Page 3 CLEC Strategies for Independent Telcos: A MetaSwitch White Paper Fortunately, these aren’t the only options for out-of-region expansion. There is another approach that maximizes your ability to balance capital and operating expenses against potential revenues, leverages your existing network and positions you to deliver evolving subscriber services well into the future. This option relies on a new breed of Class 5 switches. Integrating seamlessly with the existing TDM network, these next-generation switches are more compact—supporting from a few hundred to tens of thousands of lines per rack—and consume much less power (less than one quarter of one watt per concurrent call). In addition to the traditional TDM interfaces you would expect, some such next-generation switches also include ATM- and IP-based broadband voice capabilities. This opens the door to advanced services that legacy TDM switches don’t support and lays the foundations for a network that can evolve as next generation architectures become more widely adopted. Figure 1: Diagram showing several different strategies for out of region expansion. From left to right: backhauling GR-303 to the existing Class 5 switch; Voice over Broadband using in-region next generation Class 5 Switch; Next Gen Class 5 Switch deployed out of region Copyright © 2004 MetaSwitch, a division of Data Connection Page 4 CLEC Strategies for Independent Telcos: A MetaSwitch White Paper With this approach, you can deliver traditional subscriber services out of region by collocating a DLC in an incumbent’s central office. Or you can collocate a broadband loop carrier (BLC) to convert access lines to either ATM or IP voice, enabling voice and data services to be delivered over a packet-based access network. More interestingly, the ability to deliver voice services over a “broadband local loop,” whether ATM or IP, opens up the possibility of delivering up to 24 voice lines over just one copper pair using Voice over DSL. It even opens up the option of bypassing the incumbent’s central office altogether using alternative broadband access technologies. For example, if you operate a cable TV network that reaches beyond your incumbent telephone territory, or are able to partner with cable companies, that IP network could become your delivery vehicle for voice services. Alternatively, you might be able to expand using fixed wireless technology to deliver broadband Internet and voice services. This strategy offers significant advantages. It minimizes the cost of delivering both local and long- distance calls and maximizes your ability to generate revenues with competitive voice and data services that will differentiate your offerings from the incumbent. Disadvantages: As with several other approaches, you may need to negotiate with incumbents for collocation space, and you’ll incur capital costs and space-lease costs for collocated DLCs or BLCs—although, as described above, you may be able to avoid collocation altogether. You’ll also face acquisition costs for the next-generation Class 5 switch, but the price tag won’t be as high as the cost of a new legacy switch; ongoing operational costs will be significantly lower—and you may even decide to migrate your in-region network to the new switch as a platform for strategic evolution and service innovation. Copyright © 2004 MetaSwitch, a division of Data Connection Page 5 CLEC Strategies for Independent Telcos: A MetaSwitch White Paper 3. VENDOR SELECTION With start-ups going out of business and established vendors withdrawing previously-committed product lines, service providers need to select their strategic partners based not just on product features, but also the organization’s engineering excellence, quality of support, track record and long-term financial viability. In this regard, MetaSwitch stands out from the crowd. As a division of Data Connection, MetaSwitch leverages over 20 years’ experience supplying communications technology and support to the leading service providers including Verizon, SBC and BT and major equipment vendors. The company has world-leading products and expertise in networking protocols (MPLS, MGCP, Megaco/H.248, SIP, …) and applications (unified messaging, conferencing, …), with the result that we provide technology to most of the major players including Lucent, Nortel and Cisco, as well as emerging softswitch vendors. Data Connection is a relentlessly profitable and stable private company, creating a basis for long-term investment and growth that ensures our ability to fund ongoing product investment and deliver first-class customer support. MetaSwitch has offices in Alameda (California), Reston (Virginia), and Enfield (North London), Chester and Edinburgh in the UK. Copyright © 2004 MetaSwitch, a division of Data Connection Page 6 CLEC Strategies for Independent Telcos: A MetaSwitch White Paper 4. CONCLUSION Executives and managers of established independently owned local exchange carriers are faced with an exciting opportunity to grow their business by expanding out of region—while learning from, and avoiding, the past mistakes of the grow-fast, risk-it-all CLECs. There are numerous options for out-of-region expansion. The trick is to pick the approach that makes the most sense for your company—and is backed up by a financially stable and reliable vendor. As Satchel Paige’s fellow baseball hall-of-famer Yogi Berra once said: “When you come to a fork in the road, take it.” Copyright © 2004 MetaSwitch, a division of Data Connection Page 7 CLEC Strategies for Independent Telcos: A MetaSwitch White Paper GLOSSARY BLC Broadband Loop Carrier BLES Broadband Loop Emulation Service, the standard for Voice over ATM/DSL signaling, defined in ATM Forum document af-vmoa-0145 CALEA Communications Assistance for Law Enforcement Act CLEC Competitive Local Exchange Carrier DLC Digital Loop Carrier DSL Digital Subscriber Line GR-303 A digital signaling protocol used between DLC and Class 5 switches in North America H.248 An ITU protocol for media gateway control, also known as Megaco IAD Integrated Access Device, customer premises equipment providing DSL data and voice connectivity ISP Internet Service Provider LATA Megaco An IETF protocol for media gateway control, also known as H.248 MGCP Media Gateway Control Protocol NEBS Network Equipment Building Standards NGN Next Generation Network POTS Plain Old Telephone System PRI Primary Rate Interface PSTN Public Switched Telephone Network RAS Remote Access Server RTP Real Time Protocol, a media-bearing protocol for Voice over IP SIP Session Initiation Protocol SS7 Signaling System 7 TDM Time Division Multiplexing V5.2 A digital signaling protocol used between DLC and Class 5 switches outside of North America VoB Voice over Broadband Copyright © 2004 MetaSwitch, a division of Data Connection Page 8
