PAETEC Appears to Be Very Well Run, But Based on Flawed Business Model

Implications: 1.      PAETEC is based on the old and classic CLEC model.  2.      It is almost exclusively a reseller without any fiber assets in the last mile. 3.      It needs to get increasingly bigger through acquisitions to keep its revenue up.  

Analysis:  Any CLEC that is still around tends to have pretty decent management by definition. PAETEC is not going away anytime soon.  Its sales momentum for the rest of the year looks fairly good.  In later years, it will be a question of how long it can milk its voice revenue in a tough business.   

As voice opportunities continue to decline, PAETEC needs to keep expanding to show revenue growth.  However, it is like a squirrel in the cage – going around faster and faster, but not getting anywhere.  With an inability to ever get over the hump, its long-term value is questionable.  The best outcome for the company will be to eventually merge with another firm.    

Of course, voice will never go away – the implementation will just be different.  It is like music, which will not vanish either – in fact, there are people with more of it than they ever had because of the new tools to access it. And at least with voice, a business can actually put a dollar figure around it and extract value.  Voice always had a pay as you use model and nobody every questioned the concept.  The other models are struggling because customers can eat as much as they want for a monthly fee, while there are only X number of subscribers.  Service providers are attempting to start going to a fee per usage basis, but it will be tough to pull off because obviously nobody wants to pay for that extra cost.