BUILDING BETTER BUNDLES

For many CLECs, the SMB space has been prime turf since they started selling against the incumbents in the 1990s. While many CLECs have come and gone or been merged into larger competitors, there is still a strong core group whose focus is bringing better quality service to SMBs at competitive prices.

For most of these players, the movement has been to converge applications into IP-based bundles, in some cases using Ethernet as the on-ramp, and to continue stressing both the quality of service and the quality of customer care. They are adding applications — including managed security and hosting of VoIP, e-mail and more — and adding functionality to existing services.

Against this backdrop, most of the CLECs interviewed said they hadn't seen a big change in the intensity of competition for their customers.

“It's certainly become more competitive, but I wouldn't say the rate of change is increasing,” said Greg Davis, vice president of marketing for MegaPath, which last month added primary rate interfaces and session initiation protocol support to its Duet voice and Internet service offering. “We, too, have heard that the cable guys are going to be coming on strong and that the incumbents are going to react, but we haven't seen much of that yet. We are still competing with the same CLECs that we have competed with in years past.”

So far the biggest sign of increased competition from cable has been in advertising and marketing, said Lisa Graham, senior vice president and general manager of wholesale for Covad Communications.

“The ones I'm more familiar with — they are doing a lot of hiring in the market right now,” Graham said. “You can tell that they really opened up a lot of job requisitions to fill communications positions in the business space — sales, exec management — and in addition to that, we are starting to see ads on TV. Some are getting more aggressive than others, and I know Comcast is getting more aggressive. We aren't seeing them calling on SMBs, yet; we're not having to compete against them in the market, yet, but that's coming. My personal opinion is that we will see them this year.”

Most of the CLECs are expecting the cable impact to remain at the very low end of the market, and they say they'll continue to push their own differentiation.

“We differentiate in offering bundled products, and we think we have been a leader for many years in offering bundles that are a bit ahead of the commodity curve; we had a TDM bundle, then the Flex bundle, and this year we offered the IP Folio,” XO's Delis said. “As we move upmarket, XO has a tremendous advantage with its footprint nationally in many larger cities.”

Cbeyond is coming off a tremendous year of growth, in part because it added mobility to its options, said Brent Cobb, vice president of product management for the company. In 2007, it added 30% top-line growth and saw the average number of applications sold per customer go from 5.6 to 6.3. This year, the company is adding Miami and Minneapolis to its footprint along with one other market, Cobb said.

It is the national CLECs that compete most directly with the incumbents, VSG's Cochran said. They are able to target companies with multiple locations that are still on legacy services, such as frame relay, and offer them not only more speed and better service but also lower prices, she said.

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