Straight Talk – Part One

Posted: 05/1999

Straight Talk – Part One
Resellers on Becoming Local Telephone Companies

PHONE+ recently hosted an editorial roundtable with several vocal telecommunications
resellers–switchless and facilities-based–covering issues of concern from selling to
billing and from products to personnel. Their candid discussion offers a glimpse into the
real challenges faced by resellers today. We will publish the transcript of their
conversation in segments. Last month, we shared their discussion on building and
supporting sales channels–direct and indirect. This month, we’ll pick up the discussion
with straight talk about reselling local service. And in June, we’ll hear what they really
think about carrier billing.

Bob Titsch Jr.: I hate to bring up a sore subject, but how’s the local
business treating you?

Bob George: I’m probably a day late and a dollar short, but from what people
tell me, it wouldn’t have mattered had I got into it a year ago.

Titsch: Probably saved yourself a lot of money.

George: That’s the truth. Every-body wants the one-stop shop, so we started
talking to BellSouth [Corp.] (Atlanta). Skip (Gene Lane Jr.) warned me about contract
issues. And sure enough, it’s been interesting. Conservatively, if we had $55,000 of local
traffic (per month), which is hardly anything, we’d be lucky to hold $1,800 to $2,500 of
profit. Why bother, other than to offer the bundle and lock up the customer. But there
comes a point when you realize you’re already giving away profit on intrastate because of
the pricing. Do you want to do it on local, too?

Erik Mustad: Is that $1,800 real profit, though?

George: Not really.

Lane: You’re talking about gross profit margin?

George: Before SG&A (sales, general and administrative), yeah.

Titsch: Well then I guess you’re losing money.

George: Exactly.

Lane: We’ve been forging into local for 18 months and we just rolled out our
first launch in West Virginia, where we have a very high density of customers. We’re
certified and tariffed in Bell Atlantic [Corp.] (Philadelphia), Ameritech [Corp.] (Hoffman
Estates, Ill.), GTE [Corp.] (Irving, Texas) and BellSouth territories. But it wasn’t long
before we realized there was no money in any of these states except for a couple in the
New England area where you could get in excess of 20 percent [discounts]. And that’s a
gross discount. There are many items that are not discountable, such as adds, moves and
changes, leaving your net discount at about 20 percent to 25 percent less. So if you’re
getting 15 percent, you could be down around a 12 percent, net-net discount.

Titsch:If you get hit with a $10 surcharge for every line and you have
10,000 lines …

Lane: It adds up.

Mustad: Do you bill it in house?

Lane: We’re using a service bureau and we’ve had customers up since November. We
didn’t know how we were going to sell it, meaning, at what success rate. We have since
learned that by giving a minor discount, we’re very much able to bundle. Essentially, we
felt that we had to have the bundle to retain our customers, to grow business and to
compete against the bigger players in the years to come–as I’m sure the rest of you would
say. It’s absolutely a must.

But we also knew we couldn’t offer service ubiquitously, a la USN Communications Inc.
(a once-thriving carrier that was forced into bankruptcy). We’ve all seen what happened
there. You can’t make any money in local unless you transition to a facilities-based model
at some point in the future. And the only way you can do that is with density. You can’t
have 100,000 access lines in 48 states.

We’ve been in the local resale business for six months, but we’ve been moving on the
facilities-based model simultaneously because it takes another six months to get a
facilities-based contract and negotiate the collocation agreements. And you’re negotiating
with an entirely new team at the Bell–totally different people, rules, playing field,
provisioning, different everything. That’s my 2 cents.

Titsch:Okay, let’s get a quick update from everybody who’s in local. Jack?

Jack Burk: I continue to be very happy as a Pac Bell Centrex shared service
provider. It’s not profitable. We’re breaking even at best. But I get two-year term
agreements from all my clients and, of course, we bundle it with long distance, data and
everything else we can sell the client on one bill. And we integrate that into a bill that
we print ourselves. And it’s working very well.

Mustad: I’ve shied away from it to this point. I’m looking to merge my company
with a CLEC (competitive local exchange carrier) in California so that I can offer my
distribution channel a wider product line. Having listened to what you and others have
been going through, I’ve adopted a wait-and-see approach.

George: I wish I had taken a wait-and-see position for a little longer
(LAUGHTER).

Rob Mocas: I’m reselling Ameritech. We’re giving customers a small discount off
the retail rate and giving agents a small commission as well. It works okay. I don’t have
any trouble selling it. End users are actually coming to me saying they want this quicker
than I want to roll it out to them. We’ve spent about nine months trying to figure out how
to do it. Fortunately, the people I have working for me are good at it.