Posted: 01/1999

Carriers Target ISPs as Distribution Channel
By Liz Montalbano

A variation on the oldest trick in the sales bible, telecommunications service
providers are tapping an obvious but largely untapped distribution channel: Internet
service providers (ISPs). Though industry experts snickered when Tel-Save Holdings Inc.,
New Hope, Pa., commissioned America Online Inc., Dulles, Va., to sell its long distance
service in 1997, they didn’t get the last laugh when the ploy was enormously successful.
(Tel-Save currently is planning a name change–to Tel-Save.com–and resurgence after
handing the company reins to Gabe Battista, former CEO of Network Solutions Inc.)

Since, the AOL-Tel-Save deal, long distance carriers increasingly have been acquiring
or forming alliances with ISPs–which have an estimated current customer base of 25.02
million that is expected to grow to 53.34 million by 2002, according to The Yankee Group,
Boston.

Image: Number of Households with Online Service

Qwest Communications Inter-national Inc., Denver, is one of the latest long distance
carriers to jump on the bandwagon, partnering with Big Planet Inc., Provo, Utah, to sell
its long distance service. Meanwhile, international long distance provider Teleglobe
International Corp., McLean, Va., has taken the ISP/carrier alliance one step further by
opening the door to all comers with a resale program for international ISPs.

Clearly, there’s more for carriers to gain in these ISP alliances than simply selling
long distance. In the growing convergence of the telecommunications market, there’s
pressure to offer a one-stop shop for products and services. To achieve this end, carriers
and ISPs are near-perfect partners.

Tyler Gronbach, director of communications for Qwest, says his company is viewing its
relationship with Big Planet not just as a way to reach new customers, but for strategic
purposes as well.

"Qwest is moving away from the traditional long distance telco model to one of a
global communications model," he says. "With the construction of our IP
(Internet protocol) nationwide network, we are looking to drive the convergence of data,
voice and video communications. It’s a natural fit for us to work with companies like Big
Planet."

The ISP Connection

"Access to distribution channels has always been a struggle for companies looking
to sell their products. It’s a classic marketing problem: How do I sell? What’s the best
way to sell?" says Jonathan B. Haller, principal analyst, network services, Current
Analysis Inc., Sterling, Va. "And if I’m a company and I’ve got a sales channel and
I’m damn good at that, I need to get my products to market. It’s just an obvious
no-brainer. It’s a way, way, way old business model."

How do ISPs fit into this age-old scheme? There are a few ways, says Andrew Burroughs,
vice president of global marketing and product management for Teleglobe.

"Many of them (international ISPs) are well-positioned to broaden their horizons
in their countries to offer telephony [and] voice and add value-added products and
services," he says. "They have an existing base that has a high per-capita
income, has computers, is usually on the cutting edge of trying new things. They have a
very good target base there."

The marketers at Qwest also had global issues on their minds when they chose to partner
with Big Planet, Gronbach says. Since Qwest has its eye on the complete integration of
telecommunication services in the future, Gronbach says a partnership with Big Planet is a
step in the right direction.

"I think you’re seeing emerging companies like Big Planet and Qwest identifying
the future of communications and looking to leverage that," he says.

Agent Alliance

This marriage of long distance carriers and ISPs certainly is not a new one. Other
ISPs, too, have partnered with long distance carriers to sell long distance products and
services. Back in April, Frontier Corp., Rochester, N.Y., and Rocky Mountain Internet
(RMI), Denver, signed an agreement allowing RMI to sell 1+ long distance and other
services under a newly formed subsidiary, Rocky Mountain Broadband.

In a more indirect way, RSL COM Primecall Inc., a subsidiary of RSL Communications
Ltd., formed an alliance with Planet Net Media, a New York-based Internet marketing
company, when it announced Nov. 10 it would be selling prepaid calling cards over the
Planet-maintained portal www.callrsl.com. The website offers customers a chance to buy
long distance calling cards to specific geographical areas (such as Central America,
Mexico and South America) and, as Arnie Goodstein, president of RSL COM Primecall, says in
a press release, "attracts agents and dealers, as a result of which we expect will
generate much larger sales volumes."

Pumping up that volume, among other things, is a big draw for carriers and ISPs when
considering a partnership to offer telecommunications services.

"If you think about it, ISPs are really looking for new revenue sources, so for
them it fits in perfectly from two angles: One, it gives them a new service to sell to
their customers," says Sanjay Mewada, senior analyst with The Yankee Group, Boston.
"Two, it gives them an additional source of revenue. And three, they can do this
without having to really invest in customer care or support."

In return, Mewada says, carriers who form similar alliances get a nice percentage of
revenue and gain access to an active customer base to which it can market its other
products.

Teleglobe’s Burroughs agrees, and adds that while most ISPs generally are not
interested in going the whole nine yards to become competitive long distance carriers,
they are interested in becoming more well-rounded in the services they can provide.

"If they can add products and services, that’s all upside revenue for them, but
they don’t want to build giant telephone companies, they don’t want to put platforms, they
don’t want to go into the capital investment," Burroughs says. "All they need to
do is market and distribute, which is something they should do well. They want the
potential to get a part of that share."

The share of the telecommunications market is what Big Planet’s Nelson says his
company, which "is more than just an ISP," wants. Offering long distance is a
foot in the door to becoming a more integrated provider, he says.

"We’re looking for services that we can round out an entire product portfolio
with. We pride ourselves on offering high-tech products and services … anywhere from
Internet service to web hosting to an array of telecommunications services to educational
services to electronic commerce. Telecommunications is one of those high-growth markets
where tons of opportunities exist."

Channel Scrambling

The integrated services mantra sounds logical enough, but analyst Haller also cites
self-preservation on Qwest’s part as the impetus for its Big Planet partnership.

"I think it’s just something that has to happen," he says. "There’s no
way Qwest can grow fast enough–given the state of the market now, given the difficulty of
finding salespeople and getting them up to speed and all of that other good stuff–there’s
no way that they can grow as fast as they want without tapping into other sales channels
as soon as possible."

Gronbach agrees to an extent, but says it also has to do with those sales channels
making the Qwest brand a household name through attentive customer service.

"We’re looking for creative ways to reach new customers," he says.
"You’ve got a lot of people in the executive management here that come from some of
the larger telcos. They just know that to really build a solid brand, the Qwest brand, is
to work with partners that have solid relationships with their customers. That’s how we’re
looking to leverage the Big Planet relationship."

Sounds like a nifty deal, but it’s nothing like the opportunity Qwest missed when the
Supreme Court thwarted its plan to sell long distance through US WEST Inc. and Ameritech
Corp. Gronbach insists, however, that the Big Planet alliance is in no way a response to
the High Court’s actions.

"Those deals with Ameritech and US WEST–we never factored what the potential
revenues were going to be into our base projections for the year," Gronbach says.
"We knew that there could be some proceedings and review proxies at the regulatory
level. This [Big Planet partnership] isn’t to supplement any kind of lost revenue. This is
really a deal we were looking to do, and we will continue to look to do with other
partners."

Analyst Mewada concurs. "It’s hardly a substitution," he says. "Qwest is
just looking to explore new channels–new partners, creative partnerships."

Current Analysis’ Haller agrees with the strategy, but is puzzled by Qwest’s choice of
Big Planet, which has been relatively obscure, as partner. "I think Big Planet’s kind
of weird," he says. "It’s an Amway or a Cambridge Diet. They’ve got a pretty
impressive management team, but, as far as Qwest [goes]–Qwest just needed to find some
other distribution channels. Qwest is scrambling to find distribution
channels."

Casting Call

Unlike Qwest and others that have partnered with an individual ISP, Teleglobe is
casting a wider net with a reseller program targeted specifically at ISPs.

So far, only StarMedia Network, a New York-based ISP that markets to Latin and South
America, has taken Teleglobe up on its offer, but Burroughs is optimistic other channels
will open in the future.

"I think that the StarMedia [deal], since it is a really credible company and
they’re targeting a specific ethnic base outside the United States–the success of
StarMedia should bode well," he says. "Others will look to that as a
model."

Burroughs says Teleglobe is reaching ISPs through its "direct sales force, because
we have lots of ISPs that use us for other purposes. We may look at things like direct
mail for 10,000 web-based content providers, so we may use other techniques to reach
them."

Once ISPs take Teleglobe up on its offer, here’s what they get: "Basically we put
together a full turnkey solution where we provide the ISP or the web content provider with
access to the e-commerce system as well as access to our platform, where their customers
can buy products right online," Burroughs says. "We provide them with the
billing system, the order-entry system and the credit-card collection system."

Though Teleglobe helps the ISPs set up billing functions, the name of the ISP, not
Teleglobe, is on the bill. The ISPs also can set their own rates for selling Teleglobe
services after buying them at wholesale price.

This is in contrast to Qwest’s agreement with Big Planet, which Scott Nelson, vice
president of marketing for Big Planet, calls a "hybrid deal somewhere in the middle
of agent moving to reseller" program. Though Big Planet brands the long distance
service as its own, the deal still gives the carrier the bulk of responsibility in terms
of pricing, billing and customer service.

"We basically get the orders (for long distance) in and those orders are given to
Qwest," Nelson says. "Qwest processes the orders and turns on the service,
essentially. The same happens with customer service."

He adds that in the future, Big Planet will take more responsibility for price-setting
and customer service.

"As soon as we get to the point where we do our own billing and our own customer
care, and we take over those elements and we’re just using the Qwest network, we will have
more control over those kinds of things," he says.

Name Recognition

Of course, the key element that differentiates Teleglobe’s program from other
individual partnerships with ISPs is its availability to more than one ISP to take
advantage of the long distance telephony opportunity. So any global ISP can offer the
Teleglobe services and brand them accordingly. This not only adds revenue, Burroughs says,
it "positions them stronger before their customer because it’s under their brand, so
they’re seen as a more capabilities-rich company."

And for customers, this means saving money.

"For the customer, it’s an obviously value-added service because it’s a global
platform, you can access it anywhere in the world," Burroughs says. "They can
now buy products and services that give them low international and domestic telephone
costs."

Burroughs says Teleglobe plans to roll out other products in the near future, such as
postpaid calling card, global calling card and, "frankly, any of our products in our
entire company the ISP and the web content provider feel that they can sell."

This may position ISPs as the new "hot" channel for long distance carriers
… or not.

"I think some of our larger competitors realize they need to compete in that
space," Qwest’s Gronbach says of partnerships that spur the growth of service
integration, adding that his company will continue to be a big player.

"Because we’re more of a nimble and flexible player in the market, we’re able to
be quicker to market with these kinds of services. I think that’s a trend that’s going to
continue."

Analyst Haller, on the other hand, doesn’t think carrier/ISP alliances are anything to
get excited about. "I don’t think it’s a big deal, I don’t think it’s a trend,"
Haller says. "It’s just standard operating procedure."

"Who knows?" he adds. "I could be completely wrong."

Liz Montalbano is copy editor for PHONE+ Magazine.