Posted: 04/1998

By Casey Freymuth

Whether or not the world is a big place is debatable. Whether or not there is more to
it than Europe, however, is not. Thus, the question: If most of the international
telecommunications community is focused on Europe, how does one shop the rest of the world
for wholesale rates? In recent months, I’ve been involved in numerous international
telecommunications projects and have gained perspective on this question.

Europe Makes for a Great Business Plan

Understanding the focus of competitive telecommunications companies on Western Europe
requires only a cursory review of these markets (market size, little demand risk,
short-term arbitrage opportunities, etc.). Numerous private companies, many of which
involve entrepreneurs that successfully built and sold ventures in the United States, are
aggressively pursuing this market in an attempt to duplicate what they did in the past.
This investment-friendly environment has provided carriers of all sizes with multiple
choices for economical European termination.

Moving beyond Europe is a different story. With the exception of a few routes that
became well established via the callback boom (i.e. Brazil and Argentina), options for
economical termination are limited. Some emerging multinational carriers (EMCs),
recognizing the demand for termination to the rest of the world, are building routes to
handle traffic to countries ranging from Russia to Taiwan.

STAR Telecommunications Inc., for example, is one of the Top 10 EMCs. According to
investment banking firm BT Alex.Brown, the carrier’s success revolves largely around its
traffic pattern, which is weighted toward non-European routes such as Argentina, Brazil,
China, Columbia, India, Israel, Mexico, Pakistan, Taiwan and others. This differentiation
from other wholesale carriers’ routes turned the company into a $200 million-plus telecom
provider that quickly became a major success story on Wall Street within five years of the
company’s inception.

Many of the opportunities in these markets, however, are being pursued by lesser-known
providers that are establishing networks and settling in to establish themselves as major
providers to underserved markets. Trilogy Telemanagement LLC, Omaha, Neb., is one example.
With an executive background that includes the original design and implementation of MCI’s
Friends and Family program and the successful deployment of the latest in
technology-driven services such as voice over frame relay, this quiet company has
methodically established itself in international telecommunications through a creative mix
of enhanced services development and the wholesale of minutes to international
destinations.

Company president and cofounder Jac Barben says the firm’s move into underserved
markets is the product of market study and old-fashioned common sense. "We knew that,
as the world opened up to competition, there would be a need for providers to focus on
markets that would most certainly be overshadowed by Europe and Japan, which now have been
overrun with both mature and fledgling companies. We knew that focusing on becoming a
provider in underserved markets would provide us with a healthy business over the long
term while allowing us to provide additional value to our enhanced services customers. Our
client list includes some big names in callback, like USA Global Link Inc. and Dial-Thru
International for instance, so international termination is crucial to their business. We
felt that many of our clients would take advantage of the offering. After running the
numbers, it became clear that if only a few of them took advantage of it, the venture
would be cost-justified and we’d have a powerful value-added product that our customers
appreciated regardless of whether or not they took advantage of it," Barben says.

Once the decision to offer the services was made, the company needed to choose some
target countries for the deployment of networks.

"We decided that we should focus on five markets that were likely to be overlooked
by larger providers and exploit relationships with our own customers and underlying
carriers to provide cost-effective termination to other countries. Paraguay and South
Korea seemed to be ideal countries to pursue because of population densities in their
principal cities. Each country has tens of millions of inhabitants, but 70 percent or more
can be found in Asuncion (Paraguay) and Seoul (South Korea). Beyond these two countries,
we based the other three countries on personal motivation and selected Russia, China and
South Africa. We believe that communications is the key to improving conditions for the
people of these countries and wanted to be able to claim at least a small piece of
ownership in the overall effort to develop infrastructure and, ultimately, improve
conditions. It may sound a bit dramatic, but there was justification for market entry when
we crunched the numbers, and it allowed us to pursue something we felt strongly about. In
reality, it probably strengthens our commitment. We’re doing something right because we
have zero attrition on both the platform and traffic sides of our business," Barben
adds.

While many small- and mid-sized wholesale providers could mirror the efforts of a
company such as Trilogy with respect to establishing networks in underserved markets, the
company’s enhanced services offerings raise the hurdle a bit. Having tailored its services
to meet the needs of customers ranging from small callback operators to global
mega-providers of both wireless and wireline services, Trilogy has developed an array of
applications that is arguably among the most extensive in the telecom industry, despite
the company’s low profile. The ability to provide end users with an extensive list of
high-margin enhanced services, in most business models, has a much more meaningful impact
on the bottom line than shaving a penny or two off of international termination rates when
better country-specific rates crop up here and there.

Finding These Providers

The single largest challenge for wholesale providers of international services is
exposure. STAR was launched from the personal fortune of CEO Chris Edgecomb. His
personally funded parties at Competitive Telecommunications Association (CompTel) and
Telecommunica-tions Resellers Association (TRA) meetings provided the company with
high-profile exposure to veteran players and new players alike, which paid off in big
returns.

Companies without the benefit of resources like the "Bank of Chris," as
Edgecomb recently characterized his financial contribution at an industry conference, have
had difficulty establishing themselves in the marketplace.

Most financial resources among up-and-coming companies are tied up in technology.
Trilogy, for example, serves some major providers both here and abroad. The odds are,
however, if you’re not in the callback/bypass business, you haven’t heard of the company.
Barben admits that he is the company’s primary salesperson for wholesale traffic.

Interfax LP, Dallas, is another company that is largely unheard of, despite positioning
itself in underserved markets. Founder Dennis Miga was the president of Matrix Telecom
Inc., a founder and board member of the TRA and instrumental in founding Pacific Gateway
Exchange (another EMC that has been enormously successful on Wall Street). Yet, save some
serious digging, you’d be hard-pressed to find the company on radar. Like Trilogy, the
most likely representative you’d speak to is Miga himself.

This presents a bit of irony. Logic dictates that some of these smaller providers
should be able to offer highly cost-effective services because they don’t incur the
massive marketing expenses of the larger providers. Yet, because they don’t spend that
money, they’re overshadowed by their larger competitors and are difficult to locate. The
question, then, is how to find them. Here are a few ideas:

It’s Up to You

As values for domestically focused long distance providers have begun to decrease with
the introduction of competitive local services, investment dollars and cash-based
acquisitions have shifted toward local services and World Trade Organization (WTO)-driven
global telephony. With leading investment analysts projecting conservative valuations of
12-to-18 times monthly revenues for EMCs, there are many companies establishing networks
in underserved markets. Even domestic providers see nearly 20 percent of their revenue as
international, which makes a little shopping worthwhile. Young carriers are establishing
networks at a staggering pace and have capacity to offer. The question is: Can you find
them?

Casey Freymuth is president of Group IV, a consulting and publishing firm to the
telecommunications and utilities industries. He can be reached by e-mail at [email protected]