A New Breed of Local Telcos

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A New Breed of Local Telcos

While the Baby Bells concentrated on the long distance telephone market, a new breed of telecom provider aggressively built networks, formed partnerships and rolled out service in the Baby Bells' core local telephone markets.

Known as competitive local exchange carriers or CLECs, these nine publicly held companies now hold only 1 percent of the $105 billion local telephone market. But Bear Stearns & Co. in New York and other investment analysts expect them to grab a much larger chunk over the next few years.

Indeed, these little, largely unknown companies - staffed by entrepreneurs stolen from the likes of MCI Communications Corp. and MFS Communications - are about to give the local monopolies a run for their money.

The regional Bell operating companies' avoidance of each others' turfs has not gone unnoticed. "We have scarcely any competition in the local markets," warned Federal Communications Commission Chairman Reed Hundt in an Aug. 14 speech in Washington. "The pace of investment and new entry is too slow; the success of our country's national deregulatory effort is jeopardized by the delays, missteps and complexities of our legal culture."

ACSI photo Jack Reich, CEO of ACSI

Reich said the real measure of competition is when a company is supporting its customers with its own facilities - not reselling someone else's.

ACSI, a publicly traded company founded in 1995, has over the past two and a half years built a digital SONET-based fiber optic network, mainly in the southern states. Reich estimates building the infrastructure has so far cost the company $180 million, though the bill is expected to hit $300 million by the end of the year.

The plan is to move fast. "I believe strongly in speed to the marketplace and attack and win," Reich said. On Sept. 1, ACSI will begin selling local phone service to businesses in the Washington-Baltimore corridor, where the company has built a 90-mile ring, he said.

Revenues for ACSI in the second quarter of 1997 were $11.6 million. First quarter revenues were $8.2 million. Reich has an ambitious prediction for 1997 annual revenues - $55 million to $59 million.

The Internet plays a pivotal role in that strategy: ACSI will both sell Internet service and use it to boost customer service, by allowing business customers to pay electronically, check accounts and make orders, he said.

Although the company was founded in Chicago, ACSI was soon moved near Baltimore to be close to a high-tech center and the regulatory agencies. "This Netplex has a great pool of talent," Reich said.

Reich said he doesn't compete with other CLECs, such as Winstar Communications Inc. in New York, whose technology he uses. That's because so far, at least, the CLECs have stayed out of each others' regions. But Reich admits consolidation will occur in his niche, and mergers among the CLECs are a future possibility.

The RBOCs' other interests and slowness in competition has been great news for the CLECs. "I don't want to wake up that sleeping giant," Reich said.

In fact the CLECs themselves are sleepers. However, telecom analysts are starting not only to follow the companies but to recommend them.

"ACSI is a compelling CLEC buy recommendation," said Bruce Roberts, an analyst with Dillon, Read & Co. Inc. in New York. Roberts likes ACSI in part because it is not well-known and is therefore underappreciated, he said. ACSI also has attracted some extremely well-known telecom talent, including Reich who had formerly been president of Ameritech's Custom Business Services Division and CFO David Piazza, who was a senior vice president of MFS Telecom Inc. (a subsidiary of MFS Communications). Tony Pompliano, who was a co-founder of MFS, was ACSI's founder.

"By almost any measure - revenues, network, etc. - American Communications is the fastest growing CLEC in our universe," wrote Roberts in a July report.

Selling Internet services is part of that plan. Roberts said ACSI is developing a valuable and large presence in Internet and data communications. The company built a coast-to-coast leased broadband data communications network in late 1996.

Partnerships and mergers are also part of ACSI's strategy. The company purchased Cybergate Inc., an Internet service provider in Florida, in early 1997. Roberts said that deal's potential value can be seen in another similar recent merger: that of Tampa, Fla.-based CLEC Intermedia Communications Inc. and Beltsville, Md.-based Digex Inc.

ACSI also has a five-year agreement with MCImetro in which it is MCI's preferred local provider for dedicated and transport services in 21 markets. MCI and the other long distance carriers are likely to work with the CLECs because they consider the Bells to be the enemy. In fact, last week's re-negotiation of the British Telecom-MCI merger in which the sale price was reduced to $18 billion from $23 billion was in part blamed on MCI's local market loss to the Bells.

Regional powerhouse GTE Communications Corp. in Stamford, Conn., has increased its partnerships with CLECs so significantly that last week it opened a second National Open Market Center in Fort Wayne, Ind., to accommodate the company's 200 agreements with CLECs for local interconnection service.

Still, it's a long road ahead for ACSI. While Dillon Read projects ACSI's revenues to grow 88 percent every year until 2000 and then 22 percent thereafter, the company has substantial debt, which the analysts expect to peak at $541 million in 2001.

But if the analysts are right, it will all be worth the wait. Roberts said by 2007, he expects ACSI will have captured 17 percent of local phone business from the incumbent carriers, giving ACSI revenues of a whopping $1.6 billion that year. Stay tuned.