Clicking on banner ads enables JWR to constantly improve
Jewish World Review Dec. 4, 2001 / 19 Kislev, 5762

James K. Glassman

Jim Glassman
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

CLECs alive and well, but not if Tauzin-Dingell passes --
IN a desperate effort to pass the Tauzin-Dingell bill, the four Bell companies - which stand to extend their telecom monopolies if the measure becomes law - have tried to convince Congress and the Bush Administration that the competitive local exchange carrier (CLEC) industry is on the brink of extinction, if not already dead.

According to this logic, the only way to bring Americans high-quality, low-cost broadband connections to the Internet, is to give the Bells free rein to accomplish the job. Thus, it's urgent to pass Tauzin-Dingell.

But, as Mark Twain put it in another context, reports of the death of the CLEC industry have been greatly exaggerated. It is true that many companies have gone under - in large part because the Bells have refused cooperation in unbundling and leasing their network elements, as required by the Telecommunications Act of 1996. But many other firms remain solid. The CLEC industry employs tens of thousands of Americans, and those jobs are in severe jeopardy under Tauzin-Dingell.

To find out just where the industry stands, we recently examined a sample of 15 publicly traded CLECs for potential longevity. We calculated the number of quarters it would take to deplete their stockholder equity (or book value) if losses continued at the same rate as they have over the past year. We found that ten of the 15 would survive for at least four quarters (or two years) under current business conditions and, of those, seven would survive for at least eight quarters (two years).

Those estimates are conservative since business conditions are almost certain to improve if the economy begins to recover next year and if policy changes are made to insure competition, rather than monopoly, in telecommunications.

Among the companies we examined were Allegiance Telecommunications, whose revenues doubled over the nine months ending Sept. 30 (compared to the same period last year) to $365 million. Allegiance had $500 million in cash on its balance sheet at last report (June 30), and, even if losses continue at the current rate, the company will have a positive net worth for another two years.

We calculate that McLeod USA has a longevity at current loss rates of more than four years; Pac-West Telecomm, eight years;, a smaller CLEC that concentrates in the New York City area, four years; and Time Warner Telecom as extending for many decades.

CLECs that have had financial troubles have moved to restructure. For example, Covad Communications, a leading national broadband services provider that uses DSL (Digital Subscriber Line) technology, last week secured $150 million in loans and other financing - part of a restructuring agreement that "should carry the company through to a point when it will be cash-flow positive, sometime in the second half of 2003," according to a Reuters report that quoted Covad's CEO, Charles Hoffman. Covad, with 333,000 customers, reports that it has reduced its burn rate from $233 million in the first quarter of 2001 to $67 million in the third quarter. "Hoffman," reports Reuters, "said it will have a quarterly burn rate below $20 million a year from now."

Meanwhile, companies like Allegiance and Time Warner are not just survivors. They are now "thrivers," as David Fore, a Bear Stearns analyst, stated in a report to clients on Nov. 12. But they are threatened by the politics of re-monopolization - as embodied in the Tauzin-Dingell bill.

In addition, the Association of Local Telecommunications Services (ALTS) recently reported that 150 CLECs are currently doing business in the U.S., with 77,000 employees. (These figures do not include employees of larger, integrated companies like AT&T, Sprint and WorldCom, which provide local as well as long-distance, wireless and cable service.) ALTS also reports that the CLECs have built $56 billion in telecom network infrastructure over the past five years, including $25 billion in the past year alone. Companies such as Cbeyond and Focal have been adding employees in the past year.

It is precisely such companies that provide the innovation and competition that spread advanced technology to U.S. consumers and that drive down prices.

"Competitors," according to an ALTS report, "have developed many technologies, such as Advanced fiber SONET networks, DSL deployment, fractional T-1 deployment, advanced digital telecommunications solutions, collocation options. Eliminating competition will leave our technological innovation to the monopoly carriers that have little incentive to develop new products and services." A Yankee Group survey recently found that customers preferred CLEC service over Bell service - which is hardly a surprise.

Despite the reluctance of the House leadership, which has held it up since the summer, the Tauzin-Dingell bill could go to the House floor in December. The bill would allow the Bells immediate access to long distance - which, under the 1996 act, was supposed to be the "carrot" to induce them to open up their local networks to competitors. More important, the bill would permit the Bells to deny CLECs the opportunity to connect at important points in their networks - even though such connections are at the heart of the 1996 act.

Without access to the "last mile" - the wire from every American home and business to the greater telecommunications system, installed through government protections and subsidy - competition would effectively cease, and the Bell regional cartel would extend monopoly power, with dire consequences for prices and quality.

How many jobs would be lost if Tauzin-Dingell passes? One industry source is unequivocal: "I am comfortable saying that ALL the CLEC jobs are at risk." And those are just for starters. Without competition, demand for telecom equipment can be expected to slacken. Many more jobs will be lost in that sector as well.

So far, more than 17,500 jobs created by the CLECs have been eliminated this year, and no one who studies the industry doubts that the figure will soar if Tauzin-Dingell becomes law. A study that I conducted earlier this year with William H. Lehr of the Massachusetts Institute of Technology found that the very threat of Tauzin-Dingell passing may have been responsible for half of the 84 percent decline in the market capitalization of CLECs. We also concluded that U.S. economic growth would fall significantly if Tauzin-Dingell became law.

The bottom line is this: The CLEC industry is still alive and well. Dozens of CLECs have survived and, in some cases, truly thrived. They have enough cash to overcome a cyclical economic slowdown, but, if Tauzin-Dingell passes, they will be severely damaged. A vote for Tauzin-Dingell is a vote for the death of a competitive industry and for the extension of a monopoly.

JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.


11/15/01: The "Next Big Thing" in Technology?
10/30/01: A National I.D. Card? Yes; Run By Larry Ellison? No
10/25/01: Without Bayer, we're bare to bioterror
10/18/01: The Battle of Biotech
10/05/01: Two Techs for Tough Times
09/26/01: The Information War
09/05/01: Tech firms built to last through tough times
08/23/01: Stocks on the A-List
08/17/01: Labor and management finding online learning to their liking
08/08/01: Game makers poised to profit
07/19/01: Trade Promotion Authority: High-Techís Key Component for Competitiveness
07/12/01: Nothingís arbitrary about the contrarians
06/27/01: Look to Politics to Find Broadband's Market Cap Shortfall
06/22/01: Tech Commodity Buys Available for Mining
06/18/01: The Blackout Portfolio
06/14/01: The conservation myth stars as latest (sub)urban legend
06/07/01: Will America go high tech on the high seas?
06/05/01: 'Price gouging' doesn't cut it as reason for rising energy prices
06/01/01: Authentication tools opening up opportunities in online security
05/25/01: 'Price gouging' doesnít cut it as reason for rising energy prices
05/21/01: Banking on High-Tech Education
05/17/01: It's No Time to Go Wobbly on Kyoto
05/02/01: Diversify with techís leaders
04/26/01: To Revive The New Economy, Release A Chokehold   —   Break Up The Bells
04/24/01: Whoís To Blame For Broadband Crisis? Wired Article Points To Bells
04/19/01: The Bush Budget
04/12/01: To revive The New Economy, release a chokehold --- break up the Bells
04/04/01: Even as stocks have fallen, the Net keeps booming
03/28/01: Whereís The Profit In Biotech Future?
03/22/01: The Joy of Debt: The last thing we should want is a U.S. Treasury flush with cash
03/19/01: 'Defensive' Stocks in the NASDAQ
03/15/01: Bush administration must say no to Jane and Kyoto
03/08/01: Time to buy small caps? Consider these five great techs
03/01/01: Billís and Larryís continued political adventures
02/26/01: Chips on the Dips?
02/23/01: How Tauzin Can Keep His Word And Stop Telecom "Remonopolization"
02/13/01: Consumers, WAKE UP! Middlemen are ripping you off
02/02/01: Publicity-Seeking Politicians and Contingency-Fee Lawyers Corrupt the Law
01/26/01: DoubleClick, eBay And Their Promising Ilk
01/24/01: Will Cyberspace Look Like France or America?
12/27/00: Cut interest, taxes and regulation to save high-tech economy
12/20/00: Close, But No Big Czar
12/15/00: A Down Year? Maybe. But Letís Put It in Perspective
12/13/00: Clintonís sorry midnight race into history
12/07/00: Is Telecomís Future The Bells, The Bells, and Only The Bells?
12/01/00: Money talks and walks in election aftermath
11/29/00: Climate Treaty Deadlock Shows Lack of Consensus and Common Sense
11/23/00: Climate change participants donít listen to reasons for uncertainty
11/21/00: Will Regulators Create a Recession?
11/14/00: The Election and the Market
10/26/00: Hang on for the long term
10/25/00: On privacy, one size doesnít fit all
10/24/00: Perish the bearish thought
10/19/00: Beating hunger --- the biggest prize
10/13/00: Way to play biotech
10/12/00: Bush vs. Gore on Technology
10/11/00: Global Climate Scare: Fools Rush In
10/05/00: Avoid the Apple Trap
10/03/00: Goodbye, anti-Microsoft crusader --- and good riddance
09/29/00: Should You Invest in Tech IPOs?
09/27/00: Could technology end airline delays?
09/22/00: Donít Forget Small Caps
09/20/00: Is the New York Times Rooting for Disaster?
09/13/00: The Best Argument Against Net Regulation
08/30/00: Political Risk in Big Drug Stocks
07/27/00: Tech Dividends
07/25/00: Government Privacy Violators
07/20/00: If I Had to Pick One Tech Stock
07/18/00: Our Favorite Lawsuit
07/13/00: Silicon Valley East
07/11/00: Election 2000: Year of the Investor Class?
07/07/00: Adventures on the
07/06/00:The Difference Between Bill Gates and Larry Ellison
06/29/00: In the Chips
06/27/00: Free market wins in Federal Court!
06/22/00: Wireless Bargains?
06/20/00: Is Your SUV Warming the Planet?
06/15/00: Shopping for Government
06/13/00: Top 10 Tech Stocks
06/08/00: Riding the eBook Wave
06/06/00: "The Last Mile"
06/02/00: Keep Buying!
05/31/00: Who Asked the FTC to Regulate Online Privacy?
05/25/00: "When Itís Time to Sell"
05/23/00: End the "Telephone Tax"
05/16/00: Time Warner Gets a Bad Rap

© 2000, Tech Central Station