Competitive Telephone Industry is Alive and Well in Florida.

Business & Technology Editors

TALLAHASSEE, Fla.--(BUSINESS WIRE)--May 21, 2001

The Eastern Management Group Addresses Florida Public

Service Commission on a Variety of Issues Affecting

Competition in Florida's Telephone Industry

Florida ranks as one of the top five states for telephone competition in local markets, boasting twice the national average level for Competitive Local Exchange Company activity, according to The Eastern Management Group, a management consulting firm based in Bedminster, New Jersey.

Speaking at an Internal Affairs meeting of the Florida Public Service Commission this week, John Malone, president and CEO of The Eastern Management Group, reported on the success of CLECs in Florida. The state ranks as one of the top five for competition in local markets, boasting twice the national average level for CLEC activity, according to Malone. He presented a variety of data, showing that CLECs, though clearly affected by the ups and downs of the stock market, have been able to build successful business.

"Revenue growth is up, access lines are up and gross profit margins are up dramatically," said Malone.

Malone did talk about the problems in the CLEC industry that have caused some recent burnouts. According to Malone, companies that over-extended their resources or focused more on capturing customers than running their businesses have had trouble when capital investment became harder to come by earlier this year. Additionally, consistent workforce issues and problems provisioning and billing customers have plagued some companies.

"It's not uncommon to find substantial turnover at a level of 200% per year in some CLECs," Malone reported. "Additionally, many companies have days sales outstanding of 120 days or more which reflects a poorly run business."

Overall, however, the industry is quite healthy, according to Malone. He reported some heartening information about the CLECs average gross margins over time, which continue to push steadily upward. Companies fitting this description are not yet profitable because of the intense amount of investment that it takes to build and run a communications network. Strong performers like Time Warner Communications, XO Communications and McLeodUSA represent CLECs that are focused on building out their networks, while maintaining strict discipline and making their individual market earnings positive as soon as possible.

Malone questioned the viability of too many CLECs operating in the major cities in Florida. According to industry data, there is an average of 15 CLECs operating in each Tier I market. "In the largest cities with a population of three million or more, if each CLEC puts in its own switch and needs 6,000 business customers to be profitable, this accounts for about 75 percent of the market. In cities of about two million that still have an average of 15 CLECs, the number of required business customers exceeds the actual number of customers available. This does not even take in to account the presence of the incumbent. In other words, not every company can or will succeed with this level of competition for business customers," said Malone.

Malone suggested that it is unlikely for CLECs to pursue residential customers any time soon since the cost to market to residences is roughly equal to that of marketing to business, but the return is much greater on the business side. He instead offered up the hope that cable and fixed wireless companies will soon roll out robust offerings and compete for the residential customer.

Malone urged regulators to stay the course and continue their excellent job of facilitating a competitive environment where CLECs and other competitors will succeed or fail on their own. "The Telecommunications Act of 1996 is working," said Malone. "Some companies will go under, but the strongest will survive and ultimately the market will rationalize itself."

The Eastern Management Group is one of the oldest and largest management consulting firms focused exclusively on the communications industry. The company, with offices in the U.S. and Japan, serves over 400 communications industry clients worldwide including carriers, manufacturers and software companies ranging from start-ups to Fortune 50 businesses.

For further information, please contact Robert A. Saunders at The Eastern Management Group ([e-mail] or 908-306-8800).