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What is Fueling the CLEC Market today? December 23, 2010

Posted by TelUS Consulting Services in CLEC catagory.

The past year has been one of heavy consolidation for US-based competitive local exchange carriers (CLECs), but underlying the need to gain scale through acquisition are a few other prominent trends, according to industry experts.

Things motivating CLECs to consolidate include the need to add more fiber infrastructure, the desire to move to cloud-based and data center services, and, of course, the improved economic picture, which is making a lot of this possible.  Also, experts note, CLECs and independent incumbent service providers such as CenturyLink Inc. (NYSE: CTL) and Windstream Communications Inc. (NYSE: WIN), are increasingly looking to serve larger enterprises, and not just the small and mid-sized market.

Fiber Infrastructure:

Fiber infrastructure was the albatross around the industry’s neck during the telecom bust, but fiber is a hot commodity again, because of the current and future demand for bandwidth to support 4G networks and massive amounts of video traffic. (See Copper or Fiber? CLECs Want Access to Both.)

Deals such as Lightower Fiber Networks ‘s acquisitions of Open Access Inc. , Lexent Metro Connect and Veroxity Technology Partners Inc. were driven by the desire to expand fiber footprint.

Even two of the larger CLEC deals of 2010 — Paetec Communications Inc. (Nasdaq: PAET)’s acquisition of Cavalier Telephone Inc. and EarthLink Inc. (Nasdaq: ELNK)’s purchase of ITC^DeltaCom Inc. (Nasdaq: ITCD) had a strategic fiber component. (See Lightower to Acquire Veroxity, Paetec Buys Cavalier Broadband and EarthLink Back in the Game, Buys ITC.)

In the case of the latter two the physical fiber assets as the top driver, it’s not surprising, as demand for bandwidth increases, especially with things such as 4G and Netflix streaming video, fiber becomes more valuable. There is also synergy in a deal like Paetec’s because Paetec was buying transport from Intellifiber, which is owned by Cavalier, so it helps their bottom line as well.

Mobile backhaul growth is one driver is also a driver, although it still only represents a small percentage of the market.

Additionally, an acquisition such as Paetec’s purchase of Cavalier can provide economic benefits in the form of a stronger negotiating stance with incumbents for special access services.

And the traditional reasons for acquisition still hold, to acquire customer base and expand footprint, or to take on new products and types of customers. There should always be  strategic buying going on across the industry.

Tomorrow – the CLEC’s and Cloud Connections

Joe Buck, N.C.E.

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