Survivors weigh opportunities and challenges in wake of CLEC shake-out

The survivors in Canada’s beleaguered CLEC market are moving ahead with renewed optimism these days, knowing they can pick up fallen competitors’ assets at bargain basement prices. They’re also cautiously hopeful that the government will take action to improve the investment climate for foreign investors. In particular, industry lobbyists appear ready to take another run at the government’s foreign ownership limits. Leading the call once again is AT&T Canada, which since its Unitel Communications days has argued that the 46.7 per cent limited (for direct and indirect ownership) discourages U.S. investors from putting their money into Canadian telecom companies. Speaking to financial analysts following last week’s annual general meeting, AT&T Canada CEO John McLennan said he still expects the federal government will reduce the foreign ownership limits on telecom companies. While the government has not announced any plans to amend the regulations, and a government insider tells Network Letter nothing is on the agenda, McLennan’s opinion is shared by several within the telecom community. The president/CEO of Futureway Communications Inc believes outsiders could be persuaded to drop more money into the Canadian market if the ownership limits were raised. Stephen McCartney says he expects the main beneficiaries of this would be smaller competitors. "I think would want to go with local players. For somebody like Futureway it would mean that perhaps we would get an investment we otherwise might not," the president of the Richmond Hill ON-based company explains. He notes that his firm is predominantly Canadian-owned, with only 30,000 shares held outside the nation, while Bell has sold 20 per cent of its stock to the SBC Corp of Texas. "Bell Canada has far greater foreign ownership than Futureway today." How low will CLEC assets go? While the recent collapse of Cannect Communications Inc, C1 Communications Inc and Axxent Inc will undoubtedly spook some consumers and investors, McCartney maintains that the shake-out was both inevitable and necessary. "There’s good and bad here. On the customer side, it does mean you have to reassure them," he told Network Letter. "We need to be able to point out we’re different. The concern on the shareholder side is obviously availability of capital. But the inverse of that is there’s some good news in the fact that the price competitive companies, those that primarily marketed themselves on price, there’s less of them. So that’s not necessarily bad news to have less guys in your sector. I don’t like to see them go that way. I don’t want to sound crass." He says his firm is unlikely to buy up the total assets of any of the defunct entrants. But it is assessing the resources of two companies, which he wouldn’t name, with an eye to buying some portion of their network. McCartney expected the final decision on whether to bid to be made late last week. McLennan says the CLEC survivors aren’t in any hurry to buy assets from bankrupt competitors when there’s a glut on the market. "There’s a lot of CLEC assets out there," McLennan told an Ottawa audience last week. "People won’t buy, they’ll wait for the auctions to get it cheaper." McCartney agrees. "There’re guys trying to figure out how long they can wait and still potentially get a bargain." Survivors still face challenges The government’s dogged attempts to stimulate facilities-based competition has had only limited success in Canada, with all competitors still relying on the incumbent telcos in one way or another for access. Despite recent efforts by the CRTC to better balance the costs, CLECs maintain their profit margins are scant or non-existent. "If you pay $18 and the service retails for $22 or $23, there’s not a whole lot of room there for a business," McCartney says, "unless you sell a lot of additional services. But Bell offers those same services." He describes the current market as an artificial one. Leasing bandwidth and network components from incumbents was supposed to be an interim measure that would gradually end as competitors grew their customer bases and built out their own networks. "But if the margin is too tight that doesn’t work as a phased approach. Today we have the sunset clause indefinitely extended," McCartney notes. "I worry actually that people will enter that market again, be it business or residential, with no urgency on the deployment of new facility again, which is really what we went through already. The rates will have to be slightly lower or the price cap should be moved up. Otherwise there’s no margin there to do that business." Another problem is the hidden costs that have arisen. Under the old system, incumbents did not have to pay much, if anything, for rights of way and other outlays. Now levies are assessed all over the place. McCartney offers an example of steep costs that precluded his company’s expansion into Canada’s major metropolitan market. "Futureway today is still not in a position to deploy in the city of Toronto," he complains. "The city of Toronto remains convinced they should be able to charge us over $20 per metre per year south of Bloor and $11 north of Bloor. We have no business case at that price. In the meantime the incumbent Bell Canada continues to deploy their network. They also have no municipal access agreement with the city of Toronto. So it’s not a level playing field by any means." Utilities could tip the balance Yet another wrinkle may come into the market should utility companies decide they want to be involved in the telecom business. The United Telecom Council has established two Canadian divisions in the expectation that some utilities will want to enter some facet of the industry. "The hydros are in a very unique position vis a vis their relationship that already existed with customers. They know the name, there’s been some acceptance that they’re reliable as a company, those kind of things," McCartney suggests. "They’ve got a good advantage. From my way of thinking though it’s a little unfortunate. The equivalent would be telling Bell Canada or even Futureway that we have a right to enter into the electrical market, which of course we don’t. I would prefer that they not get into that business of course, but they definitely have some advantages should they decide to do a local area the size of their existing hydro franchise." But one of the people who spearheaded the UTC’s move into Canada says the telcos shouldn’t be worried, at least as far as his employer is concerned. "We’re not really interested in pursuing the CLEC side of things," Murray Matiowsky, manager of the communications department for Manitoba Hydro states. "In Manitoba Hydro’s case what we aim to pursue is the carriers’ carrier market, but on the high end, not to be a provider of strand and duct, but to be a provider of high capacity leased circuits." Matiowsky speaks for only one company, although he does serve as chair of the UTC’s western Canadian division. At the trade organization’s inaugural meeting in Canada last fall, several local power firms expressed the desire to get into the telephony market at a greater level than the Manitoba utility is proposing.

Survivors weigh opportunities and challenges in wake of CLEC shake-out

News | 05/07/2001 4:00 am EDT

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