Local Resellers Slide Over to the Internet

Posted: 06/2000

Local Resellers Slide Over to the Internet
Even the Die-Hards Back Away
By Ken Branson

A little more than a year ago, UniDial Communications Inc.
(www.unidial.com) and Bell Atlantic Corp. (www.bell-atl.com) announced what they said was the biggest local service resale deal ever: a $300 million, five-year deal with discounts much deeper than the going rate.

Though wholesale discounts in Bell Atlantic’s 14-state region range from 15 percent to 25 percent, UniDial would receive additional discounts of 10 percent the first year, 13 percent the second year and 15 percent during each of the following three years, provided it met volume commitments.

The agreement came after PHONE+ published an article last spring indicating local resale was on its way out as a business strategy: the margins were just too low, industry analysts and observers said. UniDial and Bell Atlantic officials objected at the time that we had been premature in pronouncing the death of resale. When their deal was announced, Ernest B. Kelly III, president of the Telecommuni-cations Resellers Association
(www.tra.org), hailed the deal. Kelly suggested “everybody and his brother” among resellers negotiate similar deals with their wholesale providers.

A year later, UniDial is changing its name and business strategy. The new name is Lightyear Communications Inc., and the strategy is based on the company collocating its own hardware in data centers hosted by MCI WorldCom Inc.
(www.wcom.com) and Williams Communications Group Inc.
(www.williamscommunications.com).

What happened?

“That last mile becomes an issue, controlling that cost,” says G. Henry Hunt, Lightyear’s senior vice president of sales and marketing. “The price of technology is coming down, so there is more available for small and medium[-sized] businesses–the ones who spend between $5,000 and $10,000 per month in integrated services. This is a new way to bring them service, a better way. … The price of the equipment and the way you configure it has changed. So we’re looking at a situation where, instead of spending $8 million to $10 million to build out a PoP, we’re looking at less than $1 million. Then, with our partnership with Williams and MCI WorldCom, we can deploy quickly and economically.”

This isn’t to say that Lightyear has stopped reselling local service, or that it’s sorry about having made the Bell Atlantic deal. Hunt says Lightyear will have 60,000 access lines with Bell Atlantic by the end of the year, and that it also is reselling some BellSouth Corp.
(www.bellsouth.com) lines. In addition, Lightyear is testing the resale of Focal Communications Corp.
(www.focal.com) lines in Chicago and Los Angeles.

But the decision to collocate with MCI WorldCom and Williams is a step toward the future, Hunt says. He points out that most other CLECs built their networks, bought their back-office systems, and then hired a sales force and went looking for customers. UniDial/Lightyear reversed the process, finding customers and building back-office capability. Now, it’s time to get a network.

“We think the time is right for a company with 300,000 customers, an established sales force and back office, [to take] that next-generation network forward at a fraction of the cost, and [to do] this riding some of the best engineering and right-of-way folks at Williams and [MCI] WorldCom,” he says.

What a Way to Make a Living

Last year, UniDial was in a distinct minority in its devotion to local resale, but it wasn’t alone. Sean Dandley, at the time CEO of Digital Signal Communications Inc., a reseller in Lexington, Mass., was eager to start renegotiating his resale agreements with Bell Atlantic and his other suppliers. He said that resale was a perfectly fine way to make a living, and thought the inability of other companies to do it was rooted in their techno-centric view of the world.

“There are two kinds of new telecom companies,” Dandley said last year. “There are technology-oriented, engineer companies, that want to hold, hug and love a switch. And there are distribution companies, which is what we are, that are focused on the best solution for the customer.”

But in October, the switch, in a way, decided to hold, hug and love Dandley and his colleagues. Digital Broadband Communications Inc.
(www.digitalbroadband.com) acquired Digital Signal Communications, because it wanted their customers and their know-how to take care of them.

“When the founders of Digital Broadband met with Sean, they realized this would be a perfect marriage between a company which was focused on data [Digital Broadband], and one that had hundreds of customers, direct sales force and an integrated bill,” says Marilyn Siderwicz, vice president of marketing at Digital Broadband. “Wouldn’t this be perfect: to create Digital Broadband around voice, data, Internet and video services over an integrated bill?”

Dandley and his colleagues came en masse (he is a senior vice president at Digital Broadband, and Siderwicz’s boss). Digital Broadband aims at the same customers Digital Signal Communications went after–small and medium-sized businesses with at least $3,000 per month in telecom expenses
–along with the larger, corporate customers that were Digital Broadband’s data bread
and butter.

Digital Broadband still resells Bell Atlantic services, but Siderwicz says the company plans to stop doing so in the near future, moving all those resale customers over to Digital Broadband’s network.

Digital Broadband also buys unbundled network elements from Bell Atlantic, an option that wasn’t open outside the state of New York last year.

The Digital Broadband network consists of routers, switches and DSLAMs purchased mainly from Cisco Systems Inc.
(www.cisco.com) and collocated mainly in Bell Atlantic COs.

For his part, Hunt will not say that Lightyear will stop reselling at some point and migrate all its traffic over to its new network; the contract with Bell Atlantic has another two years to run.

The company’s new network is optimized for data for now. “We have not put Class 5 capability in there, but the natural extension of this is to do that,” Hunt says. “We can look at that down the road as a future possibility. Or, maybe some partnership with a LEC’s network. These discussions are not under way, but we may have more meaningful conversations with the Bell companies.”

No Surprises

None of this surprises most industry observers. Stephen Trotman, vice president of industry relations at TRA, thought local resale was a tough way to make a living a year ago, and nothing has changed his mind during the past 12 months.

“Though there has been more attention on the part of our members to UNE-P [unbundled network element platform], and more attention to building their own networks,” Trotman says.

UNE-P is easier to pay attention to in the wake of the FCC
(www.fcc.gov) remand order, which required incumbent local exchange companies to offer
UNE-P across their footprints. Prior to that order, only BellSouth and Bell Atlantic had offered
UNE-P to their wholesale customers, and only BellSouth had done so aggressively.

A year ago, Access One Communications Inc.
(www.accessone.org) based nearly all of its business strategy on the BellSouth
UNE-P offering. That offering required a customer to place 70 percent, 80 percent or 90 percent of its traffic on BellSouth’s network for three, five or seven years, in return for steep discounts (about 35 percent) and access to the full array of BellSouth services across its network.

Access One’s CEO Ken Baritz has long maintained that, if anyone could turn a profit using the standard local resale product, Access One was the company. Access One, he maintains, practically invented the original BellSouth UNE-P offer, and Baritz swore by it.

On March 27, Baritz saw his strategy vindicated when Talk.com Inc.
(www.talk.com), a long-distance reseller eager to enter the local market, agreed to buy Access One, at least in part because its executives thought Baritz and his colleagues had proven the
UNE-P concept.

Baritz won’t disagree. He says he and his Access One colleagues have worked the kinks out of UNE-P, particularly where provisioning is concerned. Baritz also claims to have 100 percent electronic interface with BellSouth’s systems.

“When you give an order to our service rep, it’s as if you were talking to BellSouth,” Baritz says. “We can provision in 48 hours when, typically, it can take a facilities-based carrier weeks.”

"UNE-P really is the next best thing to owning your network, if not better, given today’s options,” says John Patton, a partner in MCG Credit Corp.
(www.mcgcredit.com), which has loaned money to at least three carriers using
UNE-P. “Right now, with the sea change in switch and network technology and the provisioning delays experienced by facilities-based
CLECs, UNE-P does look very attractive as a CLEC strategy.”

Not All That Smooth

There are some wrinkles attached to UNE-P, however.

The first is a strategic argument: It’s not a good idea to put all your strategic eggs in one wholesaler’s basket, especially when that wholesaler is your main competitor. When facilities-based carriers argue against the wisdom of using UNE-P, this is the point they make.

The second is that while UNE-P may be less expensive than building one’s own network, it has its own complexities.

“There are some significant hurdles a CLEC needs to be aware of when pursuing UNE-P as a network strategy,” Patton says. “UNE-P does require more billing and telecommunications expertise than total service resale, for several reasons. UNE-P models enable the CLEC to earn access revenues, which require a CABS [carrier access billing system] billing capability–an additional requirement above total service resale. Further, the UNE-P CLEC can create product bundles that capture multiple revenue sources, including access, and as such must have a greater understanding of ILEC tariffs, services and interconnect arrangements to achieve optimal margins.”

Finally, the remand order, by forcing the ILECs to offer unbundled network elements across their footprints, has also cut the strategic legs out from under BellSouth’s original argument for offering it at all. The BellSouth product on which Baritz built his strategy at Access One, Network Combinations, is no more.

“There are no terms,” says Mark Cathey, BellSouth’s sales assistant vice president and a member of the UNE-P panel. “You don’t have to buy particular volume; there’s no length of contract. You buy these things [network elements], and you can order them mechanized or manual. We’d prefer mechanized, of course. You can provision these services for typical resale applications. It’s the same functionality as Network Combina-tions, with a couple of little twists.”

For example, Cathey says, each state may make its own rules on top of the FCC’s rules, and the rules may differ from state to state on such matters as pricing. In addition, ILECs may no longer charge resellers a “network services coordination fee”–affectionately known among CLECs as the “glue charge”–of between $5 and $20 per line. While BellSouth still would rather have traffic on its own network than anyone else’s, the elimination of the glue charge and the exclusivity terms has made the sale of UNE-P a lot less exciting for Cathey and his colleagues than it was a year ago.

As to “building their own networks,” to use Trotman’s phrase, it is important to interpret liberally the words “building” and “own.” Lightyear and Digital Broadband, for example, really mean they will buy hardware and place that hardware in someone else’s data center, and then lease transmission capacity from other carriers.

The leased fiber connecting their hardware constitutes their network. It isn’t as if they had suddenly decided to buy a truckload of Class 5 switches, rent some backhoes, and start tearing up the countryside so they could lay fiber.

Judy Reed Smith, president and CEO of ATLANTIC-ACM Inc.
(www.atlantic-acm.com), the Boston-based telecom consultancy, says that local resale, by itself, has never been a viable business strategy.

“It’s never been a good way to make a living by itself, but it adds an important stickiness, that makes it worthwhile for customer acquisition or retention in bundle of local and long-distance service,” she says. “It’s stickier than long distance would be by itself.”

She says that prepaid local service providers still use local resale as part of the bundle they offer their mainly residential, mainly “credit-challenged” customers.

But, leaving that niche aside, the main trend is toward broadband services. “Not just among resellers, but all companies that are entrepreneurial and forward-looking have at least analyzed, if not accepted the idea that data services offer the best opportunities for growth,” she says.

Ken Branson is business and financial editor
for PHONE+ magazine.