BLECS: A New CLEC Opportunity

New FCC rules that are designed to open up multi-tenant environments (MTEs) to CLECs, and a new report from the Chicago-based research firm New Paradigm Resources Group that assesses the BLEC (Building LEC) space, signal the emergence of an important new CLEC marketing opportunity.

In an earlier column, we looked at BLEC pioneer OnSite Access, a fast-growing New York company that wires multi-tenant office buildings and sells voice and broadband data services to their small and medium-size enterprise (SME) tenants. OnSite lies at the heart of this emerging new LEC sector.

But OnSite and the relative handful of others pursuing the BLEC opportunity could be in for increased competition now that new MTE rules announced by the FCC late last month are in effect. Among other things, they prohibit communications providers from making exclusive deals with building owners that would restrict access by other CLECs. They also give CLECs easier access to existing wiring in a building.

While the crucial rule regarding exclusive contracts only applies to new deals for now, the FCC is considering making it retroactive.

"I think [the rule changes] should bring more companies into this space," says New Paradigm Resources Group (NPRG) analyst Steven Weinberg, principal author of "The BLEC Report," also published last month. "It will definitely get people to look at the [BLEC] market and say, 'Hey, this is a possibility.'"

The NPRG report, a new addition to the firm's portfolio, which includes the influential CLEC Report, looks at an industry that is little more than a year old - though hybrid CLEC/BLEC companies, including wireless operators Winstar and Teligent, have been operating in this way longer. The report concludes the BLEC opportunity is potentially huge.

NPRG defines a BLEC as a company that has not implemented a Class 5 switch (the defining characteristic of a traditional CLEC) and is either deploying in-building networks or DSLAMs - Digital Subscriber Line Access Multiplexers, the devices usually located at a phone company's central office that link customer DSL connections to a high-speed ATM line. BLECs offer both voice and data services.

Getting a handle on the current market size is difficult. Only two of the 12 companies to which NPRG accords BLEC status are public - Allied Riser Communications and Cypress Communications - and most of the others are unwilling to divulge revenues. Between them, the 12 companies are only offering services in about 3,000 buildings in the U.S. today.

The market universe meanwhile is enormous. For example, according to Dun & Bradstreet, there are an estimated 1.3 million SMEs (companies with 100 to 500 employees). Current Analysis says there are 20 million apartments and 3.5 million hotels. These figures give a rough measure of the number of potential end customers.

According to Boston-based Torto Wheaton Research, a real estate consulting firm, there were 8,100 office buildings with over 100 square feet as of September 1999. These are the prime targets for most BLECs. Yet fewer than half have even one BLEC operating in them today.

"There is lots and lots of room to grow, and room for many, many BLECs," Weinberg says. "Much more than CLECs, because the infrastructure constraints are not there and the cost to enter the market is lower."

Not that being a BLEC is a slam dunk. Most BLECs do not create their own dial tone, for example, so there is still a resale component to the business, with tricky maneuvering around margins. And once in a building, BLECs still have to compete for end customers against traditional CLECs and ILECs.

And while comparatively low, cost of entry is not trivial. Wiring an average size building for broadband services can take up to $90,000, Weinberg estimates. The cost of DSLAMs ranges from $12,000 to $25,000.

Using DSLAMs is clearly the cheapest way into the business. The BLEC exploits the building's existing copper wiring to provide DSL-based voice and data services. Two companies are already pursuing this strategy - Atlanta-based Edge Connections and Eviaz of Chicago.

Still, BLECs don't have to worry about last-mile bandwidth bottlenecks or co-location issues. In fact, they don't have to deal with ILECs at all if they partner with a CLEC. And they have, if not a captive market, at least one that is easy and relatively inexpensive to reach.

Could traditional CLECs turn themselves into BLECs? "I think they could," Weinberg says. He notes that the skills needed are similar if not identical. While the current market is dominated by companies that have come to telecom via the real estate industry, Weinberg believes telecom skills and experience are more important.

There are already a handful of companies that function as both CLEC and BLEC - arguably Winstar and Teligent, plus Tampa FL-based Intermedia Communications and One Point Communications of Norcross GA.

So why are there so few communications companies working the BLEC space as yet? "I think there aren't more there simply because nobody has thought of it before," Weinberg says. "It's a very new market." But the FCC rule changes will help get people thinking about it, he believes.

And the other thing that will open the market is the emergence of softswitch technology - software for managing packet voice - that can provide all the services of analog phone switches, including creating dial tone.

"If [existing BLECs] haven't already invested in softswitch technology, they're looking at it now," Weinberg says.

MTE tenants aren't exactly a new market for CLECs. They're already on the CLEC's prospect list. But the BLEC approach does represent an intriguing new way to get at them.