How does a CLEC innovate?

Question

A CLEC, competitive local exchange carrier, is described...

A competitive local exchange carrier (CLEC), in the United States and Canada, is a telecommunications provider company (sometimes called a "carrier") competing with other, already established carriers, generally the incumbent local exchange carrier (ILEC).

The source for this quote... is a Wikipedia page.

It is my understanding that the ILEC is a former monopoly and that former monopolies usually exist because they were or are natural monopolies. The introduction of a CLEC does not change the fact that the infrastructure of the ILEC has a high cost to create and that cost is an insurmountable obstacle to creating a parallel infrastructure. In fact, the CLEC typically does not create a parallel infrastructure and instead it will rent use of the original electronic or optical fiber infrastructure of the ILEC.

The basis of competition would seem to originate in infrastructure other than the electronic or optical fiber infrastructure. This might take the form of what used to be a call center, although these people can work from home so physical call centers do not even need to exist. Websites can replace call centers for a business that wants to completely avoid talking to people. What remains is the mental effort to create a website to advertise and support customers of the CLEC and perhaps some retail locations to do essentially the same thing that the website does. CLECs exist on what is a small fraction of the infrastructure of the ILEC. If the infrastructure is small there is not a big domain in which to innovate. If the industry is mature there may not be obvious ways to innovate. If there is no innovation then the large scale operation wins; the ILEC wins.

Obviously the CLEC can exist if the ILEC decides not to force the CLEC out of business through competition. The ILEC wants to be popular with politicians and regulators and politicians want to be popular with voters. The CLEC can thrive if politicians want it to thrive and if the ILEC knows what the politicians want. An different way for politicians to be popular with voters is to regulate the profit of the ILEC and voters will pay lower prices. The ILEC profit might be so low that there will be no CLECs.

Edit: The question is "how does a CLEC innovate?" There were comments that suggest CLECs are not innovating and that CLECs are "innovating better ways of getting your money, not better ways of making the Internet work". These comments seem to take a narrow view of innovation being necessarily connected to technological improvement and at the same time seem to allow that "getting your money" is an ironic innovation. I do not subscribe to the narrow view and the irony. I think the word innovative is appropriate to describe any business that can sustain itself in a competitive environment. My broad view is that every form of differentiation is an innovation whether we can prove the individual differentiating choices are beneficial or not. Since there is uncertainty we cannot rule it out. This question recognizes that the status quo shows that the CLEC business model works, but how and why?

Answer 1

Two types of innovation, namely innovation for new services and innovation for alternative network infrastructures, underlie competition in the telecommunications industry. While innovation for new services is provided mainly by telecommunications operators, equipment suppliers provide most of the innovation for new network technologies. A network innovation in the equipment sector is followed by an adoption process in the telecommunications sector. Operators have to decide whether and when to adopt the new technology. Indeed, an immediate adoption may be costly and risky. Therefore, adoption resembles innovation. In the rest of the paper, innovation will refer to both invention (endogenous innovation) and adoption (exogenous innovation).

Generally, regulation can affect these innovative activities via two different channels. First, price regulations (or more specifically, the regulation of interconnection charges and retail prices) alter industry profits, hence the incentives to innovate. Secondly, both price or entry regulations change the terms of entry, and hence innovation decisions regarding new entry.

Regulation and Innovation: M Bourreau and P Doğan 1 Regulation and Innovation in the Telecommunications Industry

https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.477.412&rep=rep1&type=pdf

CLECs are given incentives to deploy capital investments that innovate in terms of services and network technology. ILECs are forced to offer competitive services and improve network technology to keep market share away from the CLECs. In the counterfactual world of natural monopoly the ILEC would not have incentives to innovate services or network technology. The ILEC would profit from investments in POTS - Plain Old Telephone Service - for a considerable period of time without any competitive forces making it adopt innovative services or network technology.

Answer 2

Robert Crandall says the Telecom Act of 1996 is phoney deregulation.

Link to a Robert Crandall article at the Brookings Institution.

The ILEC was required by the FCC to lease a bundle of services to CLECs rather than to unbundle to provide part of their facilities thus forcing the CLECs to provide some of their own capabilities. Justices Breyer and Scalia questioned why the FCC does not limit the mandate to only the parts of the network that are prohibitive to duplicate such as the last mile of copper wire. Ultimately it seems that the legislation prevails even if Supreme Court justices have concerns.

A quote from the article…

Justice Breyer has it right when he opines that “rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace would set the relevant terms.” Justice Scalia doesn’t go quite this far in his criticism of the FCC, because he finds that “the Telecommunications Act of 1996 is not a model of clarity. It is in many respects a model of ambiguity or indeed even self-contradiction.”

Since the CLEC does not have to provide facilities potentially almost all of their facilities costs can be derived from the ILEC facilities. A CLEC with minimal facilities will be able to create only superficial differentiation. As Justice Breyer says, the regulators set the relevant terms. This means the CLEC exists simply because the political process allows it to exist. The CLEC is mainly just another way to market the use of the ILEC facilities.

How does a CLEC innovate? It notices that the legislation allows it to earn a profit and it matches customers to the ILEC facilities in order to do so.