In early 2000, at the peak of the CLEC boom, the challengers to incumbent Regional Bell Operating Companies (RBOCs) represented almost 20 percent of the market capitalization of all telecom services companies. In the past year, that share has fallen by 90 percent to represent only two percent of the total. The incumbents — SBC, Qwest (US West), Verizon and Bell South — once again rule the roost. In fact, together with the big IXCs, the incumbents represent more than 85 percent of all capital spending in the industry. On the other side, in the last six months alone challengers such as Teligent, Winstar, Covad, Northpoint, Rythms, and 360 networks have all filed for Chapter 11 (see figure 1).
And, of course, equipment and component vendors have felt the pain of their customers.

So, does this mean that the Telecom Act of 1996 was unsuccessful? It failed in some ways. But it has also changed the face of telecom forever. In terms of forcing a government-mandated competitive environment, the Act did fail. But, in that process the demand and end-user expectations have significantly changed. The implications are that those competitive service providers with sustainable business models will have a chance at success. Similarly, in the equipment space the rate of innovation has dramatically changed. From three- to five-year innovation cycles driven by telephony requirements, the cycle is now six to 12 months.

All Is Not Lost

Despite the mayhem in the service provider market, we are in a supply-constrained, not a demand-constrained, world. McKinsey and JP Morgan forecast strong growth in consumer broadband, driven by DSL and cable. Currently, 10 million U.S. households have broadband access. By 2005, this number is expected to grow to more than 40 million, plus four million small businesses.

Layer on top of that the increasing demand for IP-based value-added services such as virtual private networks and you have a long-term opportunity to build service-enabled networks.

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