Minnows swimming with the sharks?

Economists and investment banking pundits on both sides of the border debate whether we have entered a recession – or even if a bear market has truly arrived. But the fate of the vast majority of competitive local exchange carriers (‘CLECs’) is already as clear as a fibre optic connection: The equivalent of nuclear winter, as one industry insider calls the current crisis, appears to be here. If at the outset of the year 2000 someone predicted that Axxent, with the momentum of 35,000 customers and an impressive 130,000 local access lines, would likely be required to seek creditor protection, I would have replied, "Sure, and BCE will become both a national newspaper publisher and TV network broadcaster." One could not have imagined such industry titans as MCI Worldcom and AT&T floundering with stock prices trading at about a third of their highs, let alone Lucent having to deny rumours of financial instability. Or broadband pioneer Winstar filing for Chapter 11 bankruptcy protection last week. Who could have foreseen Covad and Rhythms becoming penny stocks and Northpoint first filing Chapter 11 then shortly after selling most of its assets for a fraction of the cost of its equipment (and virtually no value ascribed to its vast DSL data customer base); respected Teligent’s trading for as low as 25 cents; or even the canny Craig McCaw’s XO Communications being described by a fund manager in the financial press as among the ‘walking wounded’? And closer to home, would I have believed C1 Communications, founded by the highly regarded Bill Stanley out of Fundy Cable’s telco operations, receiving CCAA protection against its creditors? Or that my own Cannect Communications, with a customer churn rate of under 1% per month, an organically-grown revenue run rate approaching $20 million (even excluding our Delphi Solutions’ $35 million in interconnect contribution) and the most creative, results-oriented team of magical employees in the sector, ceasing to exist? The depth and pace of this North American restructuring of the telecom services new entrant sector has surprised me. Did I forget the tenets of lending that I learned while managing the Royal Bank’s multinational telecom loan portfolio? In assessing any new business that demands massive capital investment years ahead of self-sufficiency (let alone profitability), three magical words had been indelibly impressed upon me: access to capital, the equivalent of real estate’s location, location, location. So what has happened to the capital essential to feed cash-hungry business plans, once eagerly supported by investors and lenders alike just a year ago? Suddenly, the benchmark of success (number of customers lured away from ILECs and their accompanying revenues) has been replaced with a single critical success factor: Does the company have a fully-financed business plan? The rules have changed mid-game. Those who don’t need the money (and they can be counted on the fingers of a single hand) can probably still find it. The rest face layoffs of excellent people, restructuring, creditor protection and – likely in the end for most — bankruptcy. Why is the CLEC sector different from two other capital-intensive communications industries that have rarely shown a profit over their entire history, let alone ever demonstrated ‘fully-funded plans’: cable-TV and cellular/PCS? Capital continues to flow to these sectors, even though profitability in many cases is a mirage pushed further into the distance by the need to once again overhaul technology platforms. A clue to this enigma may be found in a Reuters news headline describing the Axxent/C1/Cannect/Maxlink financial carnage: "Canadian telco giants get second wind as minnows die". Bay and Wall Streets continue to support the rarely profitable cable and wireless names (yes, Rogers once again declares a loss, and it’s business as usual). These industries create their own infrastructure, rarely depend on ILECs for critical last mile connections and don’t need to win marketshare from ILECs to survive: They build their own new customers, essentially avoiding the powerful ILEC and its financial clout derived from years of monopoly protection. The American investment community has left once-darling DSL providers twisting in the wind, concluding that their reliance on RBOCs’ last mile connections leads to an unsustainable business. And in Canada, CLECs still haven’t earned even a 5% local dial tone marketshare three years after number portability. Has the era of local competition proven to be an illusionary Camelot? It’s a question that our business leaders, policy-makers and, yes, every customer should be asking. Ironically, Air Canada’s dominance of this nation’s airline industry has the attention of all three of these constituencies. Concern about the health of airline competition has even led to re-regulation and the sharpening of teeth of the Competition Act. Doesn’t the lifeblood of today’s information highway and tomorrow’s prosperity deserve at least the same concern and scrutiny? I’m not suggesting that any single CLEC’s woes are principally the fault of our telephone companies but the very viability of four major CLECs coming into question in almost as many months points to the potential of a serious flaw in the structure of the competitive industry. Those of us who continue to believe passionately in competitive choice, challenging recently-deregulated monopolies, need to become more vocal in asking our politicians and regulators charged with creating or enforcing the rules governing a competitive industry structure, ‘What’s gone wrong, was it ever right and how do we fix it?’ George Horhota is a communications lawyer who served as president of Cannect Communications Inc from February 1999 until February 2001. He previously worked at ACC TelEnterprises and the Royal Bank and was president of the Canadian Business Telecommunications Alliance in 1991-92.

Minnows swimming with the sharks?

News | April 23, 2001

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