M. Cap: $540 million
The company helps competitive carriers (wireless, wireline, cable and broadband telephony companies) exchange traffic between their networks without using an ILEC tandem for both long and short distance calls. Each competitive carrier that connects to the company’s network generally gains access to all other competitive carriers’ switches connected to the company’s network. The company claims it to be the “first mover” in the industry.
- SIGN OF COMPETITIVE ADVANTAGE
What did the competitive carriers do before the introduction of the service by the company?
Competitive carriers relied only on ILECs to exchange traffic. As per regulation, ILECs are required to provide local transit service to competitive carriers, which come with “geographical restriction”, “switch capacity shortage” and “competitive tensions” which is a direct result of ILEC losing market share to competitive carriers.
The value of the service offering increases with the number of carriers and non-carriers connected to the company’s network. The addition of each new customer to its network allows the new customer to route traffic to all of the company’s existing customers and allows all of the company’s existing customers to route traffic to the new customer. In a 2013 proxy fight by Clinton group, the activist noted in its filing that, “It was a pioneer in a “network effect” business, with a clear lead, a wide competitive moat and recurring revenue“.
Barriers to entry
Difficulty for new entrants to overcome strong network effect: The company believes that its head start in establishing network and interconnecting 891 competitive switches gives it a significant advantage over new entrants who do not have such connections in place.
Inability to replicate “Shelf Space” within a customer’s switch: The company believes that obtaining new interconnections from competitive carriers may be difficult for new entrants. Each interconnection requires the use of switch ports from the competitive carrier. Switch ports are capital intensive and are traditionally purchased on a just-in-time basis. Competitive carriers may be unwilling to provide switch ports without significant traffic or savings opportunities.