By Tara Seals

IN THE LATE 80S, LONG-DISTANCE resellers were among the first to strike out into a newly competitive galaxy, ultimately settling the planet of the 20- cent Long-Distance Minute and doing very well. Now, atmospheric forces far beyond their control have made living conditions there less habitable. The 20-cent minute has become the 2-cent minute, alternative services tempt their customer bases, and the vendor pool continues to dwindle. These rebillers must now boldly go where few have gone before, to find a viable model for maintaining existing customers while positioning themselves for longterm survival.

Research firm Yankee Group says price compression and cannibalization by VoIP services will yield a negative 8.5 percent compound annual growth rate this year for the traditional wholesale voice services market. The segment is in its sunset phase, the analyst firm notes, although it will provide solid revenue for the next three or four years. Meanwhile, researchers at ATLANTIC-ACM see the overall TDM domestic long-distance market shrinking by 50 percent by 2010, to $33.6 billion in revenue.

Consolidation by the top players is enlarging the asteroid field of reseller danger. The U.S. switched voice market is undergoing a significant transformation, says Judy Reed Smith, CEO at ATLANTIC-ACM. At one level, voice revenues are migrating to the data side of the industry which, when combined with price pressure, will nearly halve the switched voice market by 2010. At another level, the emergence of the RBOCs as major voice players especially when considering the pending SBC/AT&T and Verizon/MCI mergers will cause a significant redistribution of market share within the voice markets. The net effect of these events will be a dramatically altered voice services landscape.

Add Level 3 Communications Inc.s purchase of WilTel Communications Group to the mix, and you have three top long-distance wholesalers with a combined market share of more than half of the wholesale voice market being subsumed by businesses that lack a competency in traditional long-distance.

Everyone is a bit nervous as to whether these companies will maintain their support of legacy voice services, post-merger, says Bob Russell, president at DCI Voice Solutions, a wholesale provider of TDM and VoIP solutions. And at what point will the margin compression cease? Will there be enough margin for the reseller to survive?

STAR CHART: STEADY COURSE

Whats a rebiller to do in such a breathtakingly transformational era? First things first: Take care of the existing business. Many long-distance resellers have substantial and profitable customer bases that count on them for services.

Long-distance is embedded, sold and there, says Shaun Moore, executive director of product development and marketing at ANI Networks Ltd. Generally speaking, why touch it? Its the revenue workhorse, and resellers cant jeopardize that. People that have large customer bases need to focus on having a better way to buy the long-distance, not necessarily on how to sell more things.

To keep services up and running, resellers can choose to ride out the mergers, place business with a nonconsolidating Tier 1 (such as Qwest Communications International Inc., Sprint Nextel Corp. or Global Crossing Ltd.) or find alternative providers. As for the latter, a new breed of vendor has emerged to provide a higher-margin spaceport in the storm for traditional long-distance rebillers.

ANI has the volume to offer traditional long-distance profitably, says Moore. Formerly the network services arm of reseller NOS Communications Inc., ANI built out feature groups and switches, then decided to offer those assets to other resellers that can benefit from ANIs buying power.

Another alternative is Wholesale Carrier Services Inc., which aggregates a wide variety of suppliers to a unified billing platform to mitigate risk, then uses back-office procurement and maintenance systems to contract, provision, bill and provide technical support for wholesale network services.

WCS provides 87 separate carriers via a single purchasing and billing platform, so this reduces technological and pricing obsolescence while retaining a known and trusted supplier, says Chris Barton, president and CEO at WCS.

Change is to be embraced, not feared, but ownership of the asset (your customer) is the key to survival, he adds, citing investment in the customer as the resellers No. 1 priority, in the form of network assets, customer care and employees.

Other vendor options could appear in the market. The carrier pool really is drying up, so another trend we may see is other people building out feature group networks in the geographic areas where they have customers, says Moore. So the smaller, regional resellers who have the minutes could work together to create a wholesale offer. Thats an amazing cultural change.

The next hurdle to overcome is razorthin margins, particularly for those resellers contracted with Tier 1s. As long as they have the right business model, they can continue to support their customers, says Roland Thornton, executive vice president of wholesale markets for Qwest Communications International Inc., which has no intention of withdrawing support for legacy wholesale services, he says.

A successful traditional resale business model hinges on the customer base, the cost of account acquisition, the ability to deliver services reliably, operational expenditures, and billing and collections, Thornton notes. One way to stay viable is streamlining as many of those variables as possible. We have in the pipeline a series of new products around the idea of facilitating the rebillers business to the point where it is really easy, he says. We launched OCN and IP billing, which provides a granular view so they can have control and migrate and route traffic for the least cost. And were looking at quoting tools, beefing up electronic access for ordering and strategic enhancements for the back office. We want to reduce the pre-sale process, streamline all the interactions with us to shorten the sales cycle and move to 100 percent electronic billing.

Sprint Nextel has the same idea, and in the latter half of 2006, it will expand its electronic tools to eliminate the duplication of efforts in paperwork and add online wholesale rates and retail quote development.

Then theres the question of growth. To find new customers for traditional longdistance, the best bet for resellers is to return to their space cowboy roots, scraping out a living on the final frontier by focusing on a niche. It has become clear that those players with a deep understanding of their segments and/or geographies are the most likely to keep their books in the black, says analyst Reed Smith, in a research note. Currently, those with profitable, pure-play long-distance resale programs are typically small, and now must really know their targets. Ethnic, religious and political affinity segments, represented examples of such opportunities throughout the 1990s, and still hold some strength.

Market research is step one, says Skip Lane, president and CEO at Direct Line Communications, which provides longdistance via a private managed VoIP network. You have to know your target, then determine the tools, staffing, skill sets and capital requirements needed to serve them, he says. The differentiator for the next five years will be about people who can focus on a target market with good product suites and do it efficiently. You cant be all things to all people.

Lane is bullish on reseller prospects. No way is the marketplace going away in the next 10 years, because resellers will always be able to carve out a niche, he says. Being a specialist versus a generalist equates to end-user value.

Theres also the option of becoming facilities-based. Its not a move thats right for everyone. Network control requires investment,which in turn requires sufficient business resulting from the investment to achieve an ROI, says Reed Smith.

Ralph Widmar, vice president for FastLign at LignUp Corp., which offers a suite of Web-based telephony services, advocates feature group services as a way to take control. In a Feature Group D (FGD) model, resellers invest in a local switch from the LEC to connect to IXC networks cost-effectively. Customers areaggregated to the facility, lowering the total cost of service delivery. FastLign makes FGD services available to resellers on a managed basis, and IP-enabled.

FGD is the lowest-friction way to get started, says Widmar. You can order a FGD from a local LEC, have a nice Web presence and offer extra features your customers couldnt get otherwise. You can maintain the customer, plus move into local, without spending a billion [dollars] on a network.

BIG BANG: SERVICE EXPLOSION

In the beginning, there was a pent-up, white-hot kernel of possibility known as discounted long-distance. As the services universe continues to expand, resellers now have the option to transition their companies by taking on new lines of business or moving to VoIP.

The typical path was from agent to LD reseller to facilities-based IXC. Now, thats like leaping from one hot pan to another, says Chris Mullen, group manager of wholesale marketing at Sprint Nextel. They must bring on additional value to the existing service offering, because they cant compete on price.

To that end, Sprint Nextel launched a wholesale MPLS product in 2005 and is trialing a non-MVNO, wireless rebiller program. They can have the look and feel of a bundled carrier product, so they can bring voice, data and wireless as a single entity, says Dave Falter, managing director and vice president at Sprint Nextel. For wireless, its Sprint service, phones and calling plans, and theyre paid pure commission.

Rebillers often have no storefront relationships, handset contracts or customer care systems to handle wireless, so Sprint Nextel handles the inventory, distribution, support and feature development, while the service is branded on the bill as the resellers.

While creating integrated offers may make competitive sense, resellers should be careful when expanding their portfolios. Anything they can do to add value is a good thing, but its a cultural shift, says Moore. You have to increase head count, and theres a new software investment to sell, service, provision and support new lines of business. That can add a lot of stress to the organization at a time when wholesale costs are high anyway.

Meanwhile, VoIP is an ever-present topic in the resale community. To boost margins and ARPU, resellers could offer fully outsourced VoIP applications, or sell PRI replacement and voice trunking, which changes the transport but not the internal phone structure for a company. They also simply could install terminal adapters to send traffic out from the customer as VoIP.

Were finding that its not overly difficult to move to IP trunking, says Dave Clark, president and CEO at CommPartners Inc., which offers wholesale VoIP and IP-to-PSTN interconnection services. That leads to a level of comfort, because once you have the pipe, its easy to add hosted applications. We see people having trunking as an adjunct to the 1+ business.

Large carriers have begun pushing VoIP to resellers. Qwest has introduced wholesale IP termination, and plans to offer resellers hosted VoIP and VoIP trunking in 2006. We will continue to provide the same TDM products and services and back-office support we do today, while offering them new things to position themselves for the future, says Qwests Thornton.

Many businesses already are using VoIP internally, says MCIs Mike Yancey, director of wholesale development. A lot of times they still have some legacy connection back out for long-distance. So theres still a market opportunity there to provide long-distance. Is it a long-term play? Probably not.

MCI declined to discuss the future of the wholesale program, post-merger, but Yancey says the company has rolled out new services for resellers. In August, MCI launched the SIP Gateway service, which allows resellers to operate their own softswitches while using MCI for transport, and IP termination with TDM onramps. It can be a relatively lowcapital entry, and these guys cant afford not to transition, says Yancey. There is still money to be made in pure longdistance resale for a couple more years, but if they havent started with some plan, it soon could be too late.

Global Crossing also launched two wholesale VoIP services in the last year: the Enterprise Connect VoIP trunking product, and a gateway service similar to MCIs. If for some reason theyre looking at a network build, they can buy a softswitch, then use our gateway and transport to be up and running in a switched environment, if they have the capex and available pay-back period to make it work, says Deb Swann, director of carrier segment management at Global Crossing Ltd.

VoIP isnt for everyone. Resellers need to ask themselves certain questions, says Thornton. For one, TDM quality is still far superior to VoIP. Since theyre selling voice primarily, should they wait until these are about even? The customer base also dictates the speed with which they can migrate. If the base is mostly financial enterprises, reliability and quality is critical.

A new level of expertise is needed, as well. From a sales perspective, longdistance is nothing more than paperwork, says CommPartners Clark. Now, theres a level of training required to move folks accustomed to long-distance cost savings analysis. They need an understanding of the data transport environment and how the services fit in.

RETIRING THE SPACE PROGRAM

There comes a time in any initiatives life when the sun burns out. Thus, a viable strategy for some rebillers is to come back down to Earth and sell the base. Some companies are looking to purchase customers to gain scale and volume to improve margins, or to establish a presence in a new market.

In the early days, resellers were notorious for grabbing the market then selling the base, says Global Crossings Swann. Now, you cant put up the for sale sign and expect a nibble in two weeks. There are companies looking for a certain base in a certain market; you just have to find them. Global Crossing encourages resellers to shore up any bad debt and to extract as much margin as possible before shopping the customers.

There are other issues to consider. Because of the volatility of the underlying providers, the value of the base has gone down, says Moore. Anyone buying would consider what vendor the base is on, and the cost to move them. Theres a 30 to 40 percent increase in the value of the base if all your customers are on one PIC code. The purchaser will need to move it where the cost structure is as good as possible in order to get the ROI for buying the base. Its not really a sellers market.

What the long-distance landscape will look like in five years is anyones guess. Some resellers are still commanding 10 or 15 cents per minute on a large base and are totally convinced they will continue to get that. The business is still in the billions, even if the analyst reports see a decline every year, says Swann. But, theyll start seeing attrition inevitably.