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July 1, 1999

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CHARGING AHEAD

Posted: 07/1999

CHARGING AHEAD
LEC Billing Remains Viable in Convergent Market
By Susan Helen Moran

CEO Joe Lynam says he has been spending a lot of time pondering corporate strategy. He
knows his local exchange carrier (LEC)-based billing services company, Integretel Inc.,
San Jose, Calif., cannot stand still and expect to flourish in a world where the lines
between providers of local, long distance and advanced telecommunications services are
blurring. So, within the next few months Integretel will roll out a direct billing service
and begin to market its core LEC billing services to a host of new market segments.

Lynam is not alone; CEOs from the country’s largest LEC billing clearinghouses are
executing similar plans.

As reported in last month’s issue of PHONE+, Billing Concepts Inc., San Antonio,
operator of the largest and the only publicly held LEC clearinghouse, split its company
into two separate entities–one for LEC billing and the other for its software and systems
business. The split, approved by the board of directors in April, will allow the companies
to operate more successfully based on their distinct missions, financial, investment and
operating characteristics, the company reported.

Indeed, the LEC billing industry seems upon a transformation of sorts, necessitated by
the change in the competitive landscape. Providers of local and long distance services no
longer are discrete as local markets are opened to providers of long distance services,
and local providers (namely the regional Bell operating companies [RBOCs]) are beginning
to offer long distance services out-of-region and, someday, in-region. It is this change,
spurred by the Telecommunications Act of 1996, that has obvious implications for a
business built on putting call records of long distance providers onto the local service
bill.

"Clearly the growth rate of the LEC billing business has slowed down after some
very strong years," says Bob Venable, vice president of Equity Research, Robert
Baird, Milwaukee. "When a market slows, you see more consolidation."

For those that remain, he says there are many opportunities based on speed to market
and niche expertise.

LEC billers traditionally have focused on collecting billing records from long distance
carriers and resellers and other telecom service providers and sending this information on
to the incumbent LEC (ILEC), to include in the local telephone bill sent to the end user
(see figure, below.)


Image: LEC Billing Process Overview

Aside from billing long distance and operator services on the local telephone invoice,
LEC billers are gearing up to support advanced Internet services and calling party pays
(CPP) as well as other telecom services. And, like Integretel, most are beginning to offer
direct billing services as well.

A Viable Option

Despite the broadened focus, strategists at these clearinghouses say they are not
losing sight of, or faith in, their primary business. "I continue to see substantial
market opportunities for the LEC bill and am very optimistic from a clearinghouse
perspective that the local phone bill will be a viable option," Lynam says.

At least one LEC agrees. "I don’t see LEC billing going away," says Michel
Daley, a spokesperson for Bell Atlantic Corp., New York. "We continue to bill for
most of the large long distance carriers." Even AT&T Corp. long distance, after
trying to pull out of the LEC envelope, is still using LEC billing in several markets, he
notes.

There are many reasons these companies remain bullish on LEC billing. For one,
"long distance carriers that plan to sell to residential customers will always
seriously consider LEC billing," says Alan Saltzman, CEO of Billing Concepts.

It represents a reliable way of billing and collecting from this large market segment,
of which a significant percentage (some 30 percent) still pay their phone bill with cash
or money order, and not a credit card or a check. Many of these people are welfare
recipients living hand-to-mouth or foreign immigrants who did not trust the banking
systems in their own countries and, therefore, distrust that of the United States,
Saltzman says.

In addition, experts say, LEC billing is a less expensive and less labor-intensive
billing method for providers serving residential markets. "For carriers just starting
out, it requires a large capital outlay to bill direct. Many smaller companies [that] are
not ready to take that leap will LEC bill," explains Bell Atlantic’s Daley.

"The alternative [to LEC billing residential long distance customers] is to
unbundle the bill, and this is often cost-prohibitive," Saltzman says. Besides, he
says, most residential and small-business users prefer one bill. In fact, a mid-1998 study
by The Yankee Group, Boston, found 78 percent of consumers were interested in the single
bill.

Other statistics back up the contentions that LEC billing remains a viable vehicle.
"In 1999, on the residential side, we will see [that] 73 percent of all long distance
charges are being billed on a local carrier’s bill," says Julie Reedman, telecom
analyst, International Data Corp. (IDC), Framingham, Mass. This figure will increase to 80
percent by 2003, she says.

But IDC estimates the percentage of corporate charges billed on a LEC’s bill will not
change. "Fifty percent of all long distance charges will be billed on a local phone
bill this year, [and] we expect this to remain the same until 2003," Reedman says.

Niche Products

While some providers inevitably will move to direct billing for presubscribed
customers, LEC billers say there always will be a need for LEC billing for casual
services, such as 10 10 XXX dial-around services and CPP billing plans for calls to
wireless devices, such as cellular phones and pagers.

A 10 10 XXX reseller on its own has limited brand recognition and, therefore, limited
leverage when trying to collect from consumers, Lynam says. Consumers tend to pay by
recognizable brand: "I recognize my mortgage and my local phone bill, which I
intuitively tie to having dial tone," Lynam explains.

Even the large telecom providers are finding value in the speed to market and
dial-around billing expertise of LEC clearinghouses, notes analyst Venable, citing a
recent agreement between AT&T Corp. and Billing Concepts to bill for its 10-10-345
dial-around service.

Calling cards and 1-800-collect also are services that rely heavily on LEC billing for
their viability, says Ron Evans, vice president of Operations, OAN Services, North-ridge,
Calif., the second-largest LEC biller in the country.

"Calling party pays is [another] product that could never succeed without LEC
billing," Evans says. "CPP will grow a lot within the next year. It’s been up
and running in US WEST [Inc.]’s region for quite a while now, and we think it will
spread."

Complementary Services

Even though they say that LEC billing will continue to provide new opportunities for
the industry, LEC billers are not resting on their laurels, but are adding to their suite
of services.

Through its 22 percent stake in Princeton TeleCom Corp., Princeton, N.J., made in
August 1998, for example, Billing Concepts now can provide customers with an Internet
online bill presentation and payment option. Similarly, acquisitions of Computer Resources
Management Inc. (CRM), San Antonio, and Communications Software Consul-tants Inc.
(CommSoft), Albany, N.Y., are the basis for the company’s systems and software division,
which as noted will be spun off into a separate public company.

OAN also is expanding its inventory of tools to bring more and more billing solutions
to the table, Evans says. Last year, OAN acquired a direct billing system, Unicom, along
with the Canadian company–EXL Information Corp., Richmond, British Columbia–that
developed it. Unicom is offered as both a turnkey solution and as a service bureau.
"We have some customers that are taking advantage of both [our LEC product and
Unicom] simultaneously," Evans says. "LEC billing will remain one of our core
services, which we will continue to invest in."

Evans expects OAN’s smaller reseller customers that serve residential end users to
continue to LEC bill, but suspects that several of its larger customers, especially those
serving corporate end users, will move over to direct billing.

Future Challenges

Despite innovations in products and strategies by top LEC billers, some industry
analysts question the market for LEC billing and its longevity. "LEC billers are
going to be as healthy as the customer base they serve," says Douglas Ashton, senior
vice president, Equity Research, Jefferies & Company Inc., a Los Angeles-based
investment bank. "In the LEC billing market, that means your small and medium-sized
reseller."

Recently, the small and medium-sized resellers have had issues such as slamming (the
unauthorized switching of a customer’s long distance carrier) and cramming (billing for
services or equipment a customer did not order), which has hurt the market and jeopardized
LEC billing as a vehicle, Ashton says. The majority of these carriers do proper marketing
and do not slam and cram, he says, but a small minority of carriers has hurt the majority.

In fact, some Bells have refused to bill for certain clearinghouse customers alleging
such practices. In some cases, long distance carrier advocacy groups contend that the
Bells have been overzealous in their crackdown on cramming, classifying any consumer
billing question into this category to justify the withdrawal of billing services.

Nevertheless, the LEC billers have come together as the Coalition to Ensure Responsible
Billing to set forth a code of best practices aimed at policing their own customers using
LEC billing services.

Other forces in the industry have put pressure on LEC billers as well. Large telecom
providers that direct bill have acquired some of the smaller long distance resellers that
once LEC billed. Some industry analysts believe that these acquisitions could decrease the
number of long distance transactions LEC billers handle.

In addition, AT&T Local Services has moved into several ILEC territories and taken
a bite out of the ILEC business. This movement troubles LEC billers because, to date,
AT&T will not bill for anyone but itself, Evans says. A 10 10 XXX provider, in this
case, either would have to send a bill under separate cover or block that end user from
using its dial-around service in the future.

Unlike AT&T, most other CLECs generally do not serve residential markets, but
instead focus on the more lucrative business end users, who have long received separate
local and long distance bills and do not have a need for casual billing. However, LEC
billers say they are in negotiations with some CLECs to add them to their portfolios.

Even some ILECs won’t bill for certain telecom services in their envelope. For example,
beginning in October 1999, Denver-based US WEST may disallow billing of 4250 records
(miscellaneous charges) for Internet service. Also, Irving, Texas-based GTE Corp. has
decided not to renew contracts for billing 900 services, according to industry sources.
Several ILECs have complained about the higher number of end-user complaints associated
with 900 charges. Having the ILEC customer service representatives (CSRs) deal with these
complaints costs the ILEC time and money. "OAN doesn’t bill for 900 services anyway.
But it is something that concerns us when we see unilateral actions like that from
GTE," Evans says.

The ever-slowing process of data transfer from the ILEC to the clearinghouse is proving
the most frustrating challenge to LEC billers. ILECs are processing interexchange carrier
(IXC) transaction data more slowly because of regulatory crackdowns on slamming and
cramming.

Critics in the industry even allege that some ILECs purposefully are slowing down the
LEC billing process to gain a competitive advantage in the long distance market they
intend to enter. Bell Atlantic has some of the longest delays, say two industry sources
who requested anonymity.

"We have never had a problem or delay in billing as a result of competition,"
says Bell Atlantic’s Daley. "Providing billing services is a business at Bell
Atlantic, and we make money from it. Therefore, we do the best we can each and every day.
In some instances, our biggest competitor is our biggest customer–AT&T. We would not
cut off our nose to spite our face."

Optimism Prevails

Despite the challenges, LEC billing executives remain optimistic. "My prediction
is that the industry will prevail and that ILECs will be made to offer billing of Internet
access [including 4250 records] on a fair and equal basis," Lynam says.

Furthermore, ILECs entering long distance even may pose an opportunity for LEC billers.
"When ILECs start offering long distance outside their region, they will have to
either get a direct contract with the other regional Bell operating companies or go though
a clearinghouse," Evans says. "It is quicker and more efficient to go [bill]
through someone who is already established in the regions."

Each of the larger clearinghouses has had discussions with long distance divisions of
the RBOCs, Evans says.

In the future, it seems LEC billers will continue to invest in their LEC billing
operations as well as new direct billing initiatives. Clearinghouses are likely to evolve
into a hybrid LEC/direct biller. And while LEC billers say e-commerce purchases won’t be
showing up on LEC bills anytime soon, charges for Internet access, Internet telephony and
other services such as paging, personal communications services (PCS) and even cable TV
already have or may soon. This evolution to a more comprehensive solution set, they say,
ultimately means more choices for service providers and their other customers.

Susan Helen Moran is a writer and independent consultant based in Oakton, Va. She
can be reached via e-mail at [email protected].

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