An Alliance of a Different Color

Posted: 02/1999

An Alliance of a Different Color
By Jennifer Knapp

Take one billing provider, one switch manufacturer and 30 small switchless resellers,
bring them together and what do you have? The TelecomAlliance. This union, however, is
clearly a horse of a different color in the telecommunications alliance corral. Unlike its
predecessors–The Telecom Buying Alliance (TBA), the International Carrier Group (ICG) and
the Associated Communications Companies of America (ACCA)–the TelecomAlliance is not
combining efforts to aggregate minutes in order to secure lower rates. Instead, the
TelecomAlliance was formed last November to give small carriers the opportunity to become
facilities-based and lower operational costs.

With back office and network support provided by founders Wallingford, Conn.-based
Profitec Inc. and Westlake Village, Calif.-based Coyote Network Systems Inc., the
TelecomAlliance will bring together the assets of 30 member companies to create a
homogeneous network for domestic and international voice and data services.

"The network will consist of the areas in which members are currently functioning,
tied together with the Coyote switches they will be purchasing as a function of the
alliance, along with the current Coyote network," says TelecomAlliance spokesman Tom
Wright. An exact idea of what this network will look like cannot be determined until all
alliance members have been selected.

As of late December, 15 companies had signed memoranda of understandings (MOUs) and
were in the due diligence process. The remaining 15 were expected to be signed by January.

Backdrop

The TelecomAlliance’s most recent and most similar predecessor, the Telecom Buying
Alliance is a consortium of about 50 small- to mid-sized long distance carriers
representing an estimated 50 million minutes or more of international long distance
traffic. The TBA was formed in spring 1997 in response to smaller carriers’ desire to
remain competitive in a market that disadvantages low-volume buyers with wholesale rates
that are not decreasing at the same pace as retail rates. To secure better rate structures
enjoyed by the larger carriers, the alliance artificially creates high volumes of
international traffic by aggregating minutes of several carriers under one contract.

After 10 months of being unable to secure an underlying carrier agreement, the group’s
facilitators and members formed their own global gateway in competition with the
established and emerging multinational carriers they say snubbed them. In this
unprecedented move, members of the alliance own nearly one third of the new carrier called
SynergetEx.

The International Carrier Group (ICG) and the Associated Communications Companies of
America (ACCA) also are predecessors to the TelecomAlliance.

Details of the ICG are hard to come by as its two remaining members are bound by
confidentiality agreements. ICG was formed in the late 1980s by four of the country’s
second-tier carriers–MetroMedia, RCI, Allnet and Cable & Wireless Inc. (CWI). Unable
to secure elusive direct operating agreements with foreign PTTs, they were at the mercy of
volume-based wholesale agreements from the Big Three–then the only sources of
international transit. The acquisition and subsequent departure of Metro-Media by LDDS
Communiations (now MCI WorldCom Inc.) and the acquisition of Allnet by RCI (now Frontier
Corp.) left CWI and Frontier as the ICG’s only constituents. The group is inactive, but
its two members still enjoy the benefits of previously negotiated contracts.

Founded in 1993, ACCA is a self-governing, nonprofit consortium of telecommunications
carriers that have negotiated numerous vendor agreements valued at more than $350 million
in contractual dollars. Collectively, ACCA’s 11 member companies represent about $2.5
billion in annual sales; individually they average $150 million. ACCA’s current members
include: ACC Long Distance Corp., ATX Telecommuni-cations Services, Business Telecom Inc.,
Cincinnati Bell Long Distance, Consolidated Communications Inc., DeltaCom, National
Telecommun-ications of Florida, Long Distance Savers Inc., Qwest Communications
International Inc., Telefonica Larga Distancia de Puerto Rico and U.S. Long Distance Corp.

Graph: From Switchless to Facilities

Benefits of Membership

Basic criteria for entrance into the alliance is annual billing of $24 million, but
"we also are looking at switchless resellers who are very successful in the marketing
of minutes," Wright says. "That will be the most important criteria."

The alliance’s equity investment in one network is intended to allow members to
discontinue leasing capacity for their long distance and Internet services.

"Not only does it allow [members] to increase their margins by having their own
equipment," Wright explains, "but the bigger network allows them to move the
calls on their own network rather than leasing it from someone else." Also, it will
eliminate the appropriation of funds for credit purposes.

"Just in terms of margin, there are huge letters of credit that are currently
required for a switchless reseller," he says. "We will eliminate the need for
that, and that goes back to the [members’] bottom line rather than sitting as a letter of
credit with the Big Three."

While the alliance will focus mostly on domestic network capacity, the international
arena will not be ignored.

"Some of the folks that are very interested or already have signed MOUs have
facilities built out internationally," says Robert Cefail, senior advisor for the
Telecom-Alliance. "So, we will be able to link up their existing facilities with the
domestic VPN (virtual private network)."

Once the alliance’s universal network is united, a unit of the TelecomAlliance called
Gateway Carrier Sales will begin marketing the excess capacity of the network to nonmember
long distance, local and Internet services providers (ISPs), both domestic and
international. Alliance members will share in a profit pool earned by these wholesaling
efforts.

In addition to the migration of services onto the alliance-owned network, membership
will include support from a common billing, provisioning and customer service platform.

"Billing agencies cater to large telephone companies and basically leave the
entrepreneur in the lurch," says Dick Minervino, Telecom-Alliance chairman and CEO.
"TelecomAlliance’s job is to address these issues and free up the entrepreneur to
grow the business."

Actual results from the alliance will not come to fruition until the individual
facility-based networks owned by each member company (a.k.a., mini VPNs) have been
successfully attached to a universal network grid.

Upon completion, the network is expected to have a capacity of 550- million minutes per
month, and will cover 20 cities in 14 states.

"We should see initial turn-ups happen by March, and then a significant portion
complete within 12 months of the March turn-ups," Cefail says.

Jennifer Knapp is news editor for PHONE+ Magazine.