Dan McLean: Hydro spinoffs could succeed where CLECs stumbled

Electric utility companies may succeed where the likes of Competitive Local Exchange Carriers (CLECs) and other alternative communication service providers have failed.

A new breed of data service deliverer has emerged from the unlikely ranks of hydro companies in regional Ontario areas such as Sudbury, Hamilton, Guelph, Barrie, Oakville, Burlington, Kingston and in the Ottawa Valley, among other places across the province and Canada. These are spinoff communication services arms of local hydro companies, which have been established over the last two or three years and are currently offering a range of IP-based data services to a core of what might be considered underserved customers.

The expressed need by these customers – including the likes of small- and medium-sized business customers who operate in outlying regions – for high-speed offerings has spurred the creation of these communication service “utilities.” These hydro companies responded to a growing need for communication circuits delivered through existing fibre-optic networks already in place or being built out.

For FibreWired Guelph, a wholly owned subsidiary of Guelph Hydro, communication service life began in 1998 and the company now offers a range of services including transparent LAN extensions (OC3), high-speed Internet services, collocation facilities, some managed wireless facilities and early next year will introduce backup data storage facilities. The FibreWired consortium, made up of regional operations in the aforementioned group of Ontario communities, focuses on mid-sized customers, and more specifically those that may be underserved or not at all served by incumbent communication service providers. This group of eight electric-utility-owned communication service companies are today delivering high-bandwidth services to regions and customer who might otherwise not have access to such.

The business model of the FibreWired group is ingeniously simple. They build and extend service based upon real customer demand. By leveraging other like utility providers who’ve also constructed data communication fibre networks, individual operations within the consortium group are able to extend the reach and scope of network services. FibreWired focuses only on data, not repeating the mistake of CLECs and other alternative carriers whose downfall may be largely attributed to the threatening encroachment they made upon traditional voice domains of incumbent competitors.

These hydro utility companies construct fibre-optic networks with the existing field and engineering resources used to also build and maintain utility power grids, as well as fibre-optics-based networks needed as the management underpinning for the aforementioned power grid. This approach effectively accomplishes what most alternative carriers could not do: construct network infrastructures in a cost-effective fashion.

Even in the current depressed communications market, the FibreWired consortium is successful. The history of CLECs shows that many built out expensive and sophisticated network infrastructure much too rapidly, without the necessary customer revenue stream in place to achieve the requisite timeframe payback needed for these investments. Network growth for FibreWired is directly related to the existence of real customers and opportunity. Only when a sustainable revenue stream is achieved are investments made in additional infrastructure.

Again, one of the keys to success is service partnerships established between consortium members, who augment, enrich and expand the scope of network services for other individual FibreWired members. This expansive network infrastructure created is clearly much greater than the sum of individually owned parts.

Another past experience downfall among many alternative communication service companies not replicated by FibreWired was an attempt to aggressively capture voice services in consumer and business markets. In addition to the daunting regulatory rules of voice, which often served to delay deployment of services and ultimately increase build out costs, the foray into voice was a wakeup call to the sleeping giant incumbents and their reaction was swift and stern. Going head-to-head with likes of Bell Canada elicited unprofitable back-and-forth price undercutting between alternative carriers and incumbents, which the CLEC community could not afford to sustain.

FibreWired is wary of this history lesson and surely does not want to repeat it. These utility-owned communication service companies, instead, focus on servicing markets where incumbents have little play or interest.

The pragmatic approach of methodical buildout based on real, existing demand creates a sustainable and conceivably long-term business. It’s a fundamental shift from recent years passed in the telecom industry where so much of business expansion was spurred by strategic projections of all-too-ambitious growth.

And, from the perspective of smaller and poorly served business customers, the emergence of a new set of players in the communications services field is happy news.

McLean is director of outsourcing and IT utility research for IDC Canada Ltd. in Toronto. He can be reached atdmclean@idccanada.com.