That being said, as NPRG sifts through the hundreds of competitive carriers certified each year to determine which are facilities-based, we notice a number of trends that we believe effect the industry as a whole. In the past year, ILECs have entered the CLEC arena, CLECs continue to receive financing at breakneck permitting extensive network build-out, and data services continue to drivehas emerged as a growth driver. The 12 th Edition of the CLEC Report 2000™ chronicles these changes for each facilities based company. And as always, NPRG will continue to monitor the competitive telecommunications industry as it matures.

Enter the ILECs

Since the passage of the 1996 Telecommunications Act, incumbent providers have recognized the opportunity to poach customers from their neighboring ILECs through a CLEC subsidiary. Although most have done so on a resale basis, choosing to backhaul traffic to their ILEC switch, a few CLEC subsidiaries have purchased their own switching equipment. CTSI (a subsidiary of Commonwealth Telephone), Logix Communications (recently spun off from Dobson Communications), and XIT Communications (a subsidiary of XIT Rural Communications), are three examples of this trend. During 1999, three more ILECs jumped into the CLEC fray. ALLTEL Communications, an ILEC with sizable wireless interests (with 1999 revenues of $1.6 billion and a market capitalization of $20 billion), announced intentions to offer CLEC services in 19 markets. On a smaller scale, CTC Exchange Services, a subsidiary of CT Communications, began offering services in suburban Charlotte, NC. But the biggest giant to enter the CLEC game is SBC through its CLEC subsidiary, SBC Telecom (SBCT). When SBC completed its merger with Ameritech Corporation in October 1999, it created the SBCT brand to market CLEC services nationally, competing with its fellow RBOCs. As part of the merger agreement, SBCT will enter 30 out-of-region markets, the first by the end of 2000. It could be argued that the ILECs are bringing to the table a proven ability to run a telecommunications company. Thus, by leveraging management teams success in the ILEC business and brand awareness, the ILECs have recognized the ability to meet success as a competitor.

Money Talks

Building a CLEC is a costly proposition, especially when a new carrier does not have the money and power of an ILEC behind it. Athough BTI postponed its initial public offering, the financial markets have embraced a number of CLECs. ChoiceOne (NASD: CWON), Covad (NASD: COVD), DSL.net (NASD: DSLN), Log On America (NASD: LOAX), Net2000 (NASD: NTKK), and Pac-West Telecom (NASD: PACW) all went public during 1999. Bluestar and Jato, two DSL upstarts, and FirstWorld Communications went public during the first quarter 2000. Additionally, Broadview and Birch Telecom have both filed with the SEC to go public during 2000. That brings the total number of publicly held facilities-based or future facilities-based CLECS to 70. Not bad for an industry still in its infancy. We also cannot forget the significant equity investments that occurred during 1999. Paul Allen invested $355 million and $1.65 billion in Allegiance and RCN, respectively. Kohlberg Kravis Roberts & Company (KKR) invested $60 billion in Birch Telecom, Forstman Little invested $1 billion in McLeodUSA, and the Soros Fund invested $50 million in Onvoy. On the other hand, investors dealt harshly with e.spire and GST after their turbulent fourth quarters.

The Revolving Door

Along with a wave of financing has come a number of management changes. Joe Basile of GST resigned after a year at the helm but remains on that company’s board of directors. Convergent Communications named Joseph Zell, former President of US West’s !nterprise Networking, to replace founder, John Evans as President and CEO. This follows a $175 million investment from Texas Pacific Group and Sandler Capital Management. MGC Communications changed their name to Mpower, moved to Rochester, NY, and lost founder Maurice Gallagher, but gained Rolla Huff, former COO of Frontier Communications. @Link moved from suburban Milwaukee to suburban Boulder, CO, leaving their original management team behind with the exception of Doug Zolnick, the CTO. In doing so, @Link has gone from focusing on the Milwaukee and Chicago markets to including markets in Texas and Colorado in their plans. Each management change brought a change in strategy for the companies involved, not to mention experienced executives without jobs. Often, the displaced executives simply turned around and started new CLECs, as was the case with Robert Brooks, formerly of Brooks Fiber, now at Gabriel Communications, Royce Holland, formerly with MFN, now with Allegiance, and Brad Evans, formerly with Phone Michigan and City Signal, now with Cavalier.

New Technologies

The infusion of capital into the competitive telecommunications market has primarily meant one thing: network build-out. As companies build their networks, the buzzword has been “convergence.” CLECs have been at the forefront of recognizing that building two distinct voice and data networks can be a costly endeavor. Therefore, many new technologies have been embraced to meld voice and data into a single pipe. First, softswitches represent a growing trend to break down the central office; that is, to decentralize the functions of a Class 5 switch, thus reducing costs and allowing voice and data transmissions to be transmitted on the same network. Currently, Level 3 and Primary Networks are using softswitches for voice over Internet protocol (VoIP), and as the technology is perfected, softswitches will be used for local calling as well. Closer to the network edge, a number of CPEs and aggregators have been introduced that packetize both voice and data calls, eliminating customers’ need for multiple lines, while simultaneously decreasing providers’ cost of service. But the number one driver of convergence thus far has been DSL.

DSL, DSL, DSL

Data services remain the main driver of CLEC growth. And there is no faster way to get in the data game then to offer DSL. Established CLECs such as Allegiance and Mpower are deploying their own DSLAMs and reinventing themselves as DSL providers. Intermedia, the oldest and largest independent CLEC, is embracing DSL to solve last mile connectivity issues. Additionally, NEXTLINK and PaeTec, two companies that originally had no intention of providing data services, citing that 70% of telecommunications traffic is for voice, have announced DSL strategies. Meanwhile, the straight DSL play has emerged. These are CLECs, or DLECs (data local exchange carriers), that will deploy DSLAMs only and not Class 5 switches. Therefore, the carrier will only have to deploy one network, not two. However, thanks to the technologies touched on above, such as softswitches, even the DLECs will be able to offer VoDSL. This dual ability has caused the number of straight DSL players to grow from nine in 1998, to 21 by the end of