MetaSwitch eNews - December 2006

As we engage in our annual research and analysis of the competitive telecom sector and its metrics for NPRG's Competitive Carrier Report™, we keep a keen eye fixed for clues to trends that may define larger industry movement. Our recent revenue review has yielded, we think, a few important directional insights.

Overall sector revenue growth lately has remained relatively flat; our last Competitive Carrier Report™, Vol. 20 (2005), showed 2004-2005 total revenues dead-even. And our revenue forecast last year was that it would, in fact, decline slightly. See Table 1, which illustrates total industry revenue growth over the 2003-2006 (est.) period.

Preliminary actual data available for 2006, however, seem to show some resumption of growth - a happy occurrence, despite our earlier professional (slight) miscalculation. However, at a very slow (single digit) rate.

So, we have decided to throw back the covers a bit to see whether there's something going on we could detect under the overall "low growth" label.

We reviewed a range of materials from a representative sample of eleven of the publicly traded facilities-based competitive carriers. In order to get a slightly longer range view of immediate past trends, we compared their respective 3Q-2006 revenues with their 3Q-2004 revenues. Table 2 illustrates the revenue growth of the targeted companies.

Overall, the revenue growth for the group is predictably, depressingly low, only 12% over the 24 month period or 6% average annual growth.

However, when we looked at the companies individually we spied some significant divergent movement. We saw that we could group the companies into three categories: "Decreased Growth", "Routine Growth" and "Strong Growth". So indeed, something possibly significant has been going on under the "low growth" coverlet.

From the details found in the companies' filings, we see that in the "Decreased Growth" group carriers were focused on shedding low profit lines of business, which of course resulted in them dropping top-line revenues in order to effectuate necessary restructuring. For example, RCN reported shedding its California assets in San Francisco and Los Angeles and is concentrating on deepening its Atlantic Coast footprint. On the left coast, PacWest sold virtually its entire enterprise customer base in a move to pull back into a pure wholesale provider.

The carriers in the "Routine Growth" category have, across the board, seen data and broadband related growth, which has in the case of Time Warner Telecom, been healthy, offset by falling voice prices and the erosion of prices and margins of traditional services. Time Warner Telecom reported that its data related revenue increased 30% and the Company forecasts that data revenues will comprise an ever increasing percentage of its overall income.

The "Strong Growth" group has experienced fairly robust revenue increases from data, Internet and broadband transport. Broadwing, for example has seen an overall broadband related revenue increase of nearly 20% for the period. (This revenue does not reflect revenues from the Focal acquisition). Cbeyond, which has become profitable in five of its six markets, has experienced its 85% revenue growth from organic line growth and its increased revenue per customer due to its bundled, IP-based voice, data and Internet offering.

Eschelon's growth has been largely due to its acquisitions of Oregon Telecom, OneEighty Telecom and Montana Telecom.

When the "old" CLECs moved into switched services they aped the ILECs, same equipment, same architecture, same offerings. As traditional telecom services are being eclipsed, the older network architectures that carried them, anchored by the primacy of the Class 5 switch are becoming just that, anchors not assets.

Surviving competitive carriers and emerging ones are moving to the new IP-based operations at break-neck speed. These operations are characterized by high growth, low operational expense, but also yield low margins. They also lend themselves to innovative offerings that allow for bundled multiple services and / or integration of transport with applications. Successful competitive carriers will not feature "me-too" ILEC offerings, but will be creative, nimble and efficient.