TDS' CLEC business faces price squeeze from the ILECs' wholesale Ethernet regime

TDS Telecom's CLEC arm, TDS Metrocom, says that delivering Ethernet services to customers, particularly to smaller businesses that want 20 Mbps and above where it does not have its own facilities, is challenged by high-priced wholesale ILEC access services.

As a CLEC serving Tier 2 and Tier 3 markets, 75 percent of TDS Metrocom's business customers have less than 20 employees.

In a FCC filing, TDS Metrocom said that while a number of small business customers in its territory are "satisfied with cable best efforts broadband, even TDS-M's smaller business customers prefer symmetrical speeds of 20 Mbps or higher."

Similar to other service providers like Windstream that operate as both an ILEC and a CLEC, TDS takes a varied approach to building out fiber and delivering higher speed Ethernet and Internet services to businesses.

Inside of its own ILEC territory, TDS will evaluate new buildings it may potentially light with fiber by considering what a particular building's needs are from a bandwidth perspective, outside plant costs and how much it will cost to terminate the fiber inside the building. Given the abundance of fiber it has in its ILEC territory, extending fiber into a building typically requires building a lateral extension and gaining permits to bring facilities into a location.

In the CLEC markets, TDS will purchase wholesale fiber-based Ethernet services from larger providers like AT&T (NYSE: T). This process allows it to reduce costs while getting services to more customers quickly.

However, the problem for TDS Metrocom has where it rents ILEC wholesale Ethernet loops is that the higher rates make it challenging to build a business case to deliver services.

"Although TDS-M has attempted to serve customers using RBOC's wholesale Ethernet loops, this approach for most of TDS-M's potential or existing business is also an uneconomic solution because wholesale Ethernet rates from the RBOCs are notably higher than the RBOCs' retail Ethernet rates," TDS said. "In short, TDS-M is facing an extreme price squeeze that does not allow it to compete in today's retail market."

So why not just build out its own fiber facilities, a process that would give it more control over its service delivery destiny?

TDS Metrocom said it is difficult to economically overbuild fiber into buildings in markets where there's already a cable and telco competitor present.

"The competition for Ethernet services in the limited areas where cable companies offer Ethernet has driven down retail prices further such that, while already uneconomical for TDS-M to build fiber to most business premises with predominantly just the RBOCs operating in the market, it is even less possible for TDS-M to compete in markets with an RBOC/cable duopoly except in very limited situations where a customer is seeking higher bandwidth speeds, is located close to TDS-M's existing fiber, and strongly prefers TDS-M as its vendor," TDS said.

TDS Metrocom suggested that the FCC should work to ensure that CLECs can get access to wholesale services at competitive prices. Unlike TDM-based services, a service provider can upgrade Ethernet speeds from 10 Mbps to 1 Gbps at a lower cost.

"TDS-M argued that because this price squeeze exists whether or not the RBOC discontinues its TDM service, the Commission should take action in this docket to ensure CLECs have access to wholesale inputs to provide competitive retail service at bandwidth speeds where self-deployment is not economical, which in TDS-M's experience is 20-1000 Mbps," TDS said. "Assuming, arguendo, that the RBOCs' current Ethernet services qualify for forbearance, a proposition with which TDS does not agree, all such services remain subject to Section 201/202."

For more:
- see the FCC filing (PDF)

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