I have to tell you what I am about to describe distresses me greatly. Why? It is because I am a firm believer of competition, competition in any market, but especially telecommunications.

What the telecommunications industry is experiencing right now is a meltdown. And it is a meltdown of mammoth proportions. Industry experts are claiming that there is at least one business failure per week occurring right now. These failures are companies that provide voice and/or data services in local telephone markets.

It all began late in 2000, when DSL providers, Data Local Exchange Carriers (DLECs) began to see their funding well dry up. This dreaded disease has now spread to voice providers, otherwise known as Competitive Local Exchange Carrier (CLECs).

Why is this happening? Is it the impending recession, or the Incumbent Local Exchange Carrier (ILEC), or maybe evening gross mismanagement and uncontrolled spending of these startups phone companies?

Before I continue, I want to alert our readers that I own a voice CLEC. My CLEC business was started in June of 1998 with a $50,000 SBA loan. So, what I am about to describe is coming from experience as an owner of a CLEC and a telecom professional of almost 30 years (Boy, I am getting old!).

Let's start with the demise of the DLECs or DSL providers. In 1997, the thirst and demand for bandwidth was increasing on a daily basis. It did not matter whether you were a ten-person company or a thousand-person company. More bandwidth became a necessity. Users began to transmit large attachments via email. Companies began to migrate their remote locations off of dedicated data circuits onto VPN's (Virtual Private Networks) utilizing DSL. Software companies began to offer applications via the WEB.

Young entrepreneurs began to feverishly write business plans and develop financial models. In the wings, and equally hungry, were venture capital firms (VC's) who saw DSL as the answer to the bandwidth crisis. So, any and all business plans were funded. Funded not with a million dollars or maybe three million, but more like fifty million up to three hundred million dollars!

These startups had a simple plan with a simple exit strategy. Build a network, lease copper phone lines from the local telephone company, attempt to bill somewhat accurately, give away bandwidth (20 times faster than dialup) below costs, and wait for a big, fat buyer to come along and deposit hundreds of millions of dollars in the owners and VC's pockets.

I recently completed research into the actual cost to provide DSL (128 kbps). If you account for all of the various components, (I won't bore you with them all), in the cost of a DSL circuit, it prices out at around $375.00 per month. The next thing that must be done is to add a decent profit margin (30%) onto the cost, giving us a final retail, recurring, monthly charge of about $487.50.

In addition to the recurring costs, DSL providers incurred significant costs associated with one-time charges. Hardware (DSL modem) is required which was usually given away free. In addition, DSL providers waived most of the one-time network charges that were charged to them by the Local Telephone Companies and Backbone Providers.

Now, I promised myself I would not name names of companies that have recently failed, but there have been several recent failures of DSL providers who provided "FREE DSL". You heard me right. Free DSL services. Well, I bet you can imagine who were the first dominos to fall!

Most of the DSL providers that have filed bankruptcy over the last year sold DSL for around $59 - $149 per month and waived most of the one-time charges. So, one can see how easily these companies burned through their tens and hundreds of millions of dollars. In fact, as of today, right here in New Hampshire the surviving DSL providers continue to sell DSL below cost.

Once these companies began to get critically low on cash reserves, they attempted to go back to their fund manager and ask for more. They tried to convince their investors that profit or, at worst, breakeven was right around the corner. Were they misleading their investors or just plain lousy business managers? My guess is the latter.

As the first few DSL providers began to fail, a snowball effect was started. Funding managers and investors closed their checkbooks to the DSL providers and the meltdown was born.

Like the plague, these failures have now spread to the voice providers or CLECs. The reasons for these failures that have begun within the CLEC industry are somewhat different than the DLECs or DSL providers. CLECs are failing because their business plans are designed around the premise of "build and they will come". Well, this plan is backfiring in a major way right now. Not only are these facility-based CLECs failing, they may, and I emphasis the word "may," bring down their major equipment suppliers that have financed their Central Offices switches. Switches that cost anywhere between $1M to as much as $5M dollars.

Equipment suppliers provided these Central Office switches as "loans" to the CLEC with the hope of seeing a significant return on their "investment". Well, in late April, a major Northeast CLEC providing service to more than 15,000 customers in New York and Boston filed Chapter 11 bankruptcy. Of course, they are placing most of the blame for this failure on their equipment supplier who loaned them around a billion dollars in equipment financing. Their high-flying stock price of $60.00 plus last year is now around $.01 per share. Yes, one penny per share! It is expected that they will close their doors early this summer.

The equipment supplier who provided them financing will probably enter into litigation with the hopes of getting some blood out of the stone. It is safe to say that if this equipment supplier wants to sell its switches to a CLEC in the future, the financing terms are going to be much different.

Most industry analysts expect these failures to continue-although they call it consolidation. In the Northeast, I would anticipate at least two, if not four, major failures to occur in the next six months.

What is this doing to the competitive phone market? It is driving customers in droves back to the incumbent carriers. More importantly, it may also be permanently turning off access to billions of financing dollars for those companies that will survive and have a solid business plan.