February 2005

Is There Life After UNE-P?

By Shawn M. Lewis

When the FCC mandated the Unbundled Network Elements Platform (UNE-P), it was envisioned that competitive local exchange carriers (CLECs) would drive revenue in their key markets prior to investing in expensive switching infrastructure. It was viewed as a departure from the “build it and they will come” syndrome associated with the Telecommunications Act of 1996.

While the UNE-P model has been a successful one for many CLECs, the fact that CLECs are still dependant on local access facilities from the incumbent local exchange carriers (ILECs) continues to hinder their long-term viability. In addition, last year’s court rulings drastically limited the future of the pure UNE-P CLEC. There is a lot of talk about migration to a UNE-L strategy that requires a significant capital investment and requires a geographically targeted (and more costly) marketing effort. And what about the new-age high-demand enhanced features?

So, we ask ourselves… Is there life after UNE-P?

One answer is a low-cost, high-quality VoIP solution that speeds time to market, assures carrier-grade quality, and enables early market entry without the CAPEX requirements associated with building a new network.

VoIP addresses cost of goods pressures.
CLECs have to face facts. UNE-P wholesale pricing is going up, putting increased pressure on cost of goods sold (COGS). The FCC has asked that CLECs negotiate with the ILECs directly “in good faith.” In reality, only a few of the larger UNE-P CLECs, such as ZTEL and Sage Telecom, have negotiated UNE-P contract extensions with certain ILECs while most have not. Regardless of the extensions, the costs are going up while retail pricing is going down. This trend is a major threat to the survival of the UNE-P CLEC.

VoIP is an attractive option for numerous reasons. By migrating to a VoIP strategy, a CLEC can realize an immediate reduction in their COGS and in their customer provisioning and moves, adds, and changes costs. Another great benefit that VoIP brings to the CLEC is that they can offer a “bring your own access” product to their customer. This means that the customer may have a broadband access connection from a different provider and still have VoIP service from the CLEC. This completely eliminates all of the local access facility constraints as well as the costs. The ensuing result is that CLECs can reduce retail pricing while increasing their maintained profit margin.

A UNE-L strategy requires high CO density that most CLECs just don’t have.
There is talk that several of the largest UNE-P providers are planning their transition by geographically concentrating their marketing activities around central office (CO) concentration, and then installing softswitching and broadband access gear in central offices to provide next-gen services. These plans still require that the local loop be provided via UNE-L, ROI is risky, and broadband VoIP is an equal or greater threat to UNE-L as the courts are to UNE-P. It is virtually impossible to achieve a return on investment for any collocation facility with less than 800 to 1,000 lines in service. VoIP technology is not CO specific. CLECs have numerous options to connect to their customer via IP. By eliminating the CAPEX in CO equipment, CLECs can price their products attractively to rapidly gain market share.

Retail pricing pressure: It’s about the “net” cost of service to the customer.
There is a misconception about retail pricing for local voice service. It’s not what you charge the customer that really counts. It’s what it costs the customer that matters. Consumers of both wireline and wireless service have long complained about taxes and surcharges on their bill. A very common customer service call goes something like this: “I was told that my unlimited plan was only $49.95 per month but my bill is $65.00!” Although this is likely to change over time, VoIP services are not subject to the taxes and regulatory fees that local and long distance service is. That said, if the provider’s COGS is reduced 25 percent and there is another 25 percent in fees that are eliminated, the provider could reduce the retail price and the cost threshold to the customer by up to 50 percent. This makes for a sticky customer that is not likely to be “won back” by the ILEC.

VoIP services offer high-demand features, eliminating “feature limitations” of traditional voice technology.
For years, ILECs offered Centrex services to their small to medium business customers as add-on enhanced features that they could only get from large-scale, expensive on-premises Primary Branch Exchange (PBX) systems. As the PBX costs came down, customers scrambled to have their own system. In today’s world of hosted IP-based applications, customers can abandon those legacy systems for more robust features that increase their productivity and promote a more mobile, fluid working environment. Multi-branch offices, remote SOHO workers, and telecommuters are now enjoying the benefits of having their PBX functions as an integrated part of their VoIP service. CLECs that don’t offer these rich features will get caught flat-footed and inevitably find their customer base churn away.

Shawn Lewis is the CEO of Volo Communications, a wholesale provider of advanced voice and data services and applications including broadband VoIP service. Mr. Lewis also wrote the first two patents for softswitch and media gateway technologies. For more information, please visit www.volocommunications.com.

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