Deregulation's effect on the telecommunications industry - Brief Article

The signing of the 1996 Telecommunications Act redefined the rules to the local telecommunications game. Local telephone service was going to be competitive for the first time since its inception. Incumbent Local Exchange Carriers (ILEC's were required by law to allow newly created Competitive Local Exchange Carriers (CLEC's) to interconnect and collocate their equipment in ILEC offices and purchase ILEC services at a discount, to resell to the end user.

The first stage of deregulation saw the creation of any "switchless" CLEC's whose plan was to simply purchase services at a discount from the ILEC's and resell them to the end user only to keep a small margin. This initial stage was, at best, marginally successful.

Stage two saw the creation of facilities-based CLEC's who invested large sums of money building out their own infrastructure to compete more effectively with the ILEC's. This stage was much more successful than the first stage. Stage two also coincided with the explosive growth and interest in the Internet. Together these two events received great publicity and an enormous amount of public and private funding. The combination of money flow and notoriety in this area led to the creation, and then the subsequent consolidation, of many telecom companies as well as the creation of great wealth.

Stage three in this enormous telecommunications revolution is going on right now. Some of the more forward thinking companies entering the market realized there is a large captive telecommunications audience in commercial office buildings. These new types of companies have been given the name BLEC - Building Local Exchange Carrier. The BLEC is a company formed to specifically capture the telecom revenue flow from commercial buildings. The BLEC strategy is to run a parallel wiring infrastructure through the core of a building and to get tenants to purchase services from the BLEC. It is very important that building owners and property managers recognize the positive and negative aspects of this new market.

The positive side to the BLEC market is the addition of telecom providers for tenants to choose from. In theory, competition will make the ILEC's more responsive to their customers and will increase the level of service an end user receives. The reality of the market is that many new non-telecommunications companies are reinventing themselves as telecommunications companies to provide services to this large untapped market.

Non-telecommunications companies define companies that are cabling companies, HVAC or electric companies and companies started by real estate professionals. These companies do not have the experience, expertise or technical "know how" to successfully compete in the telecommunications world. Although, short-term, the market will put high valuations on these companies based on square footage under contract, these valuations will give way to actual tenant penetration in the building. Lack of telecommunications experience coupled with inevitable consolidation in the marketplace, will greatly reduce the number of companies in the field and adjust the valuations accordingly. Only companies with the proper experience to sell, service and provision services will eventually remain.

As companies are acquired or shut down due to lack of experience, tenants will become painfully aware of the complexities involved in providing telecommunications To avoid this step, owners must be careful whom they select to provide services in their buildings. As tempting as it is for owners to receive revenue sharing and or equity from the provider, a "piece of the action" should really only be secondary to the owner. Fully leased buildings with premium rents should remain the goal of the owner. The relationship between the owner and the telecommunications provider should be separate from the tenant's perspective. This separation will insulate the owner's from any potential telecommunications problems and ultimately protect their most valuable asset, their rent roll.

While the BLEC's fundamental business plan is sound, the companies being formed to implement the strategy are, for the most part, unsound. It is very important for a building owner to partner with a company with real telecommunications experience. The nuances of the business cannot be learned overnight. To create a fundamentally sound telecommunications business takes an in-depth knowledge of the business. Today's environment is filled with people who want to compete in the game but are not qualified. Real estate, cabling, HVAC and electric are types of companies who are trying to gain entry without proper knowledge of the business. A wireless company placing a dish on the roof of a building does not qualify as creating a smart building. Selling services at a loss to gain market share is not a strategy for long term survival. Building owners must carefully choose their partners. A carefully selected partner with the right experience will create an asset for you and an amenity for your tenants; ultimately, t his is your only goal.

COPYRIGHT 2000 Hagedorn Publication
COPYRIGHT 2001 Gale Group