By Khali Henderson

Posted: 03/1998

By Khali Henderson

Tel-Save Holdings Inc. must be the envy of its second-tier long distance carrier peers.
The company commenced a month-long test Dec. 31, 1997, joint marketing a 9-cent long
distance minute to select subscribers of America Online (AOL), the country’s largest
Internet service provider (ISP) with 11 million customers. (If that wasn’t enough to
inspire jealousy, deadline reports say the company was awarded an exclusive contract to
provide services to subscribers of AOL’s recent acquisition, CompuServe, raising the
potential pool of subscribers by 2.5 million.)

By mid-January, Tel-Save reported at a Solomon Brothers/Smith Barney conference having
signed 105,000 new customers each turning up an average of 1.4 lines. That’s nearly 50
percent more than the test’s projected take of 100,000 lines. Although final results are
not in, the test, which was set to end Jan. 31, can only be declared a whopping success.
It also dramatically highlights the opportunity for telephone companies to use the
Internet to sign up new customers.

Cyber Power

The Internet is proving itself to be the world’s largest shopping mall. Out of the 20
million households now online, 25 percent use the Internet to purchase goods and services,
according to the Yankee Group, Boston. By the year 2000, the research firm expects 41
percent of 43.2 million online households to be online shoppers, spending an average of
$550 annually. The Yankee Group predicts total Internet commerce to reach $4.9 billion in
1998; $10 billion by 2000. Even more grand projections for electronic commerce are
available for the asking, but the safe conclusion is that consumers are viewing the
Internet and the World Wide Web as an increasingly acceptable place to purchase goods and
services.

The question is whether or not telephone companies have decided that the Internet is an
acceptable place to find good customers. But who are online users? In Electronic Retailing
Magazine, columnist Kim Komando, The Komando Corp., offers the following list of probable
online consumer characteristics:

"It’s fairly widely known that core online users are an upscale demographic
mix," says Harold Wolhandler, director of research for ActivMedia Inc.
"By definition, computer use correlates with education and managerial status, and so
most are well educated and middle-aged." The company’s new FutureScapes study shows
that one-fourth are executive or managerial, one-sixth are technical, one-tenth are
professional and another one-tenth are in education.

"There has been a surge of the less traditional type of online user who more
closely reflects the mainstream-clerical and administrative. Even retail sales clerks are
showing up as computers come down in price under $1,000," says Wolhandler.
"That’s the outlook for early 1998. By 2000, the profile will more closely resemble
the American public–at least the cable-using ones that are willing to pay a premium for
service. At that time they will access the Internet over their television."

Of the core online users in ActivMedia’s FutureScapes study, 85 percent say they
research online purchases carefully; 87 percent check competing prices. Only one-fourth
say they shop at the same stores they do offline and one-fifth say they prefer to buy from
new companies; a third had no preference.

"The Internet gives the power to the buyer. You have to earn their loyalty,"
Wolhandler says. "They shop around but don’t look as hard the second time. In the
current environment, there is an opportunity to assert a new message."

The Medium is the Message

The success of the AOL/Tel-Save test market is a powerful warning to telephone
companies that are ignoring the Internet as a sales, billing and service tool, says
Richard Crone, vice president of CyberCash, an Internet payment processor based in Redwood
City, Calif. "They had better be experimenting and getting their first generation
systems out. What’s at stake is a very loyal customer base," he says.

In all fairness, few, if any, long distance companies are going to replicate the
results of the Tel-Save experiment. A "forced consumption" ad on AOL, the
premiere online gateway serving millions of Internet users, is akin to winning the
lottery. (The co-brand probably didn’t hurt either.) However, there are other
opportunities for long distance companies to purchase a similar advertisement on search
engines like Yahoo! The beauty of this approach is that companies can target their ad to
appear to browsers based on their key word entry. For example, if a user types in
"telephone service," an ad for ABC long distance company might head up their
list of matches.

Otherwise, long distance companies must use traditional advertising methods to draw
users to their website. Electronic Retailing Magazine reports that in 1996, 50.5 percent
of web visitors learned of a web address in print ads; 39 percent from a television spot
and 26 percent from a direct marketing program.

Just because a company is not promoting its web site doesn’t mean consumers aren’t
looking for it, warns CyberCash’s Crone.

"Don’t underestimate the value of the brand. When consumers think about telephone
service, they think of their phone company. Telephone companies need to be ready with a
virtual storefront just the same way they are ready with a call center," he says.

ActivMedia’s Wolhandler is less urgent with his warning, but nonetheless agrees
that telephone companies need to be operating in an interactive environment with their
customers. "The sooner they prepare for what we expect in two to three years, the
further along they’ll be in two to three years," he says.

In its research, Boston-based strategy consulting firm ATLANTIC*ACM learned that niche
long distance player Working Assets, San Francisco, signed 5 percent of its customers via
its website with no promotion.

Verification

One outstanding issue concerns order verification. Federal regulations require long
distance companies to verify orders for service generated through outbound telemarketing
by either:

Currently, inbound telemarketing orders do not require verification, although pending
proposals would change that. Since the Federal Communications Commission (FCC) has not
addressed online sign-ups specifically in any of its rules and it is unclear whether they
would fall under outbound or inbound telemarketing verification rules, telephone companies
must decide for themselves what measures to take to protect against slamming charges. In
researching current industry practices, ATLANTIC*ACM discovered that most of the major
players and some smaller providers are offering online sign-up options but are using
inconsistent verification procedures. (See table: Big Four Online Sign-Up Systems.)

ATLANTIC*ACM cautions long distance companies that third-party verification is required
under some state regulations and recommends that companies institute a policy that
includes multiple confirmation methods.

Payment

Purchases on the web can be made using existing credit cards as Tel-Save is doing, bank
debit cards, electronic checks and purchase orders as well as new Internet payment
vehicles, called electronic wallets. In addition to streamlining paper payment processes,
online bill presentment offers additional opportunities to up-sell and cross-sell. (See
the second installment in this series in the April issue of PHONE+ for information
on online billing and payment.)

Cost Savings

Aside from attracting new users, online sign-ups’ chief advantage is cost reduction. As
a case in point, Tel-Save claims to have reduced its customer acquisition costs by 20
percent to 30 percent. In addition, it saves another 6 percent to 12 percent from
electronic bill presentment, 5 percent to 10 percent from credit card payment processing
and 2 percent to 3 percent in customer service.

Savings like these may be good news to long distance companies faced with ever-thinning
margins. "With networks running for 25 cents an hour, current margins cannot be
sustained. Long distance companies have to find new ways to control costs–labor being the
primary one," explains Kevin Randolph, president of Whole Earth Networks, a San
Francisco-based ISP which recently launched its long distance services through online
sign-up. The self-service concept is one the company plans to implement across its product
lines. Websites are already ordered online through the company. The company is a living
lab, developing its self-service interface over time.

Industry experts say that although a self-service component seems to be
counterintuitive to a solution selling process embraced by most telephone companies, the
Internet has capabilities that may offer more insight into what customers want than
customers will reveal themselves. For example, companies can track browsers’ movements
throughout their website and plant "cookies" that record what areas they visited
and, when they return, recall their preferences. Order screens or pop-up messages can
gently offer consumers exactly what they want.

As electronic commerce is in its nascent stage, it remains to be seen how sophisticated
these tools will become. In the end, we can always default to plain old telephone service
(POTS), but maybe we won’t have to. Be sure to read the May issue for information on
customer service online.

A frequent contributor to PHONE+, Khali Henderson is a principal with Marcom Support
Services, a Phoenix-based firm providing marketing communications services to
telecommunications companies. She can be reached at [email protected]

Editor’s Note: This the first of three articles looking at ways telephone
companies are using the power of the Internet to acquire and serve their customers. Part
One covers online sign-ups. Part Two, coming next month, will examine online billing
options. And in May’s issue, Part Three will delve into online customer service.