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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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