Posted: 12/2002

Remote Control
Virtual Switch Programs Let
Distributors Take Charge

OWNING AND CONTROLLING prepaid
products is an expensive proposition. Besides buying the required switch itself
(often a million-dollar investment), out-of-pocket costs associated with that
switch can include insurance, colocation fees, hiring switch technicians,
network engineers and database administrators, and upgrading applications and
operating systems.

However, a slew of "virtual
switch" offerings allows a company to pay for access to a switch, while the
switch owner takes care of the back-office management. The virtual switch
customer then can control the rates, branding and features of the prepaid
product, without having the upfront and ongoing investments involved with owning
facilities.

PhoenixSoft Maintenance: The rate plan, rate
structure and rate value screens
Source: PhoenixSoft

The Little Guy and the Middle Guy

Industry players say small
distributors that simply can’t afford to buy a switch have a business model —
reselling discounted cards from wholesalers to retail outlets — fraught with
problems. Companies are relegated to selling someone else’s product, over which
they have no control in terms of quality, price, number of minutes offered or
customer service. Maintaining integrity in the business is difficult for these
distributors, who many times essentially have to look into a crystal ball for a
sign the product will be up to snuff.

"They have very little control
over those products, so they’re told they’ll get so many minutes to Mexico and
so many minutes domestic, and the person that controls those products a lot of
times will change them," explains Pete Patullo, president and CEO for
Network IP. "And the guys that bought the discounted products and are
selling to stores were getting say 50 minutes, and now they’re only getting 25
minutes for $5–so the products are changing underneath them."

Cash flow also is a concern.
"They’re getting a 35 percent discount, say," explains says Lenn
Brown, president and CEO for Global Prepaid Alliance Inc. (GPA). "But some
cards have a shelf life of weeks or even months, and [distributors] aren’t paid
the $6.50 [they invested] during that period, they only get the $2 or whatever
is used."

Distributor Dennis Chen of Avenue
Telecom says a virtual strategy eliminates these concerns. "On the quality
side, if we use virtual switch that will really minimize the risk [of selling
bad cards], because we know we use the best next-generation fiber optic
networks," he says. "In our mind we’re leasing their networks, we’re
leveraging their investments."

Going to a virtual switch model also
widens margins by cutting out middlemen, offering better discounts and giving
distributors control over pricing and cash flow.

"We already have the technology
in place and are able to efficiently give the same switch access to the guy
that’s spending $20,000 a month that we give the guys that spend $100,000 a
month," says Brown. "With a virtual switch application, they only pay
for the minutes as they’re consumed."

Knowing the costs and determining
the selling price helps competitiveness. "We know exactly what the other
costs are, so we have more control, in terms of price we can go out and be
competitive," says Chen. "If you do standard private labeling you
don’t know what your true costs are, but [going virtual] allows us to be very
aggressive on the pricing side."

The strategy also comes with a
marketing perk. "It’s completely branded. You can sell pre- and postpaid
calling cards, 1+ services, callback, Web-initiated callback," says Travis
Patterson, director of sales at ComWest Communications, a subsidiary of
PhoenixSoft Inc. "Now distributors have a little more margin and they can
go back to their existing customers, and they can market something that’s theirs
instead of someone else’s — they can bring their own brands to the table."

The virtual programs also reach out
to other customer segments. ComWest for example also targets companies that plan
on migrating to owning facilities later. "We take a customer that is not
ready to buy a switch, or can’t afford it, and they get comfortable using our
PhoenixSoft product," Patterson explains.

"Once they grow their business,
they have the ability to migrate into owning a switch and the transition is
virtually seamless, because we just package the data up onto a CD and we do a
new installation with the new switch they just bought from PhoenixSoft."

Patullo says Network IP offers
"a kind of ASP hybrid." The company provides raw applications for
companies that partition a switch, and customers can plug in their own
facilities. "Companies that went out and bought their own switches,
marketing companies that did deals with the carriers and went through that whole
process because they wanted control and wanted to make sure no one could impact
them underneath, got wrapped up in managing telecom," explains Patullo.
"They’re marketing guys and they know how to get their product in the
store, but managing telecom takes a whole different skill set.

"So they come to us, move those
products over to us, and they control their own rates, activations and product
features, but they pay us on a usage basis to manage the back office," he
adds.

Filling in the Blanks

Getting access to a switch is the
main hurdle to becoming your own operator, and sure, this is an alternative to
the big financial outlay required to buy a switch. However, other issues come in
to play, such as account management and training, carrier relationships and
customer service.

Because virtual switch users create
their own programs, design their own rates and determine their own profitability
by how they design the cards, often via the Internet, some in-depth knowledge of
the technology and the business model is necessary to be successful.

"This is not plug and play, its
not like plugging in a toaster and making toast," says Patullo.
"There’s a lot of complexities to it, trying to do programs, and not
everyone has been successful. So we require training."

GPA has an "A to Z"
training manual that they make available to their customers, and offers a staff
to answer questions about activating cards, generating PIN files, creating rate
decks and so on. "Surprisingly, a lot of prepaid distributors don’t
understand how a switch operates," says Brown. "We have the raw
information, and some of them have the aptitude and interest to learn more, and
we help them at whatever pace they want to."

GPA also requires customers to have
weekly conference calls with a switch analyst to go through their programs.
"They determine that the calls are originating from over here, and they’re
terminating over here, and I’ve got my rates set at this and my costs are that,
and how do we make this a profitable situation while satisfying the end users’
needs for pricing and quality," explains Brown.

Patterson says the PhoenixSoft
application is intuitive but does require some understanding. "Because
we’re using the PhoenixSoft application and it’s very flexible, with a vast
amount of different products you can offer, we do require them to come onsite to
Phoenix for two days of training, and that’s included in their installation
process," he says.

Another piece of the puzzle is the
carrier relationships that must be in place to carry the traffic for the cards.
Most virtual switch operators offer the option for customers to use the
operator’s carrier base, or they can bring their existing agreements to the
model.

"For every single destination,
we have carriers that run from three deep to 10 deep for each termination, and
that’s all set up in a least-cost routing system," says Brown.

ComWest’s Patterson says his company
leverages the existing PhoenixSoft customer base, using volume to negotiate
better deals. "Most of our customers don’t want to be responsible for
contracting their own carriers," says Patterson. "Their buying power
isn’t as strong as ours, and it’s a headache to manage 15 carriers."

For those that do have existing
carrier relationships, GPA has an answer. "We plug their carriers into our
platform so in some cases they’re actually selling to us, and we then extend
those carriers so that our other virtual switch customers can buy from them as
well," says Brown. "We had one customer that had $100,000 a month in
usage, and a few good deals to some countries, better than we had, so now we’re
using that route."

Customer service is another key
area. Virtual switch customers should have their own call centers or outsourced
solutions, or can pay the switch operator in some cases to take over for them.

"We can issue them customer
service numbers that ring to our call center, where they’re actually answered
and branded in their name so it appears as though they have their own customer
service departments," says Brown. "And that’s represented to our
service rep’s monitors so they know who they’re representing when they’re on
that call."

Patullo says Network IP takes a
different approach, providing pop-up Web service screens that companies can
implement. They have relationships with five partners to whom customers can
outsource their service requirements.

Most virtual switches offer online account
management tools.
Source: PhoenixSoft

Growing Interest

Vendors report significant interest
in the virtual model, which seems to be constantly evolving.

"The idea is to give them a lot
of options and the ability to go do many types of applications without having to
make any investments," says Patullo. "We’ve seen an uptick in the last
year and our customer base is more diverse than it ever has been, and our
volumes and profitability this year have all risen. So this model is taking even
more hold in this current environment."

GPA, which says it’s added more than
60 customers in the past three months, says it is always enhancing the features
available to distributors. "We make changes in the software or platform to
accommodate [customer requests], and then we can offer that same thing to
everyone else," explains Brown. "An example is that we now offer a PIN
skip feature, where once someone buys a card they can skip having to enter a PIN
be registering up to 10 numbers they can call from."

Through ANI recognition, when end
users dial the 800 number, it recognizes this number is associated with that
card and it processes the call.

Other examples of new features
include a recharge, speed dial and a new "mobile-to-global feature,"
which turns a cell phone into a phone card by registering the cell phone number
as a PIN. "You dial the 800 number to talk internationally on your cell
phone at calling card rates," says Brown.

Chen says it’s a win-win situation
for the wholesaler and the distributor. "We help them increase the minutes,
increase the customer base so they have more leverage to deal with more
carriers," he says. "And they help us achieve our goals of quality,
good pricing and good service.

"This is going to help the
small guys have a chance to compete in this very crowded market," he adds.