"Sell Data or Sell Your Business" September 1998

Posted: 09/1998

"Sell Data or Sell Your Business"
Networked Enterprises Issue Ultimatum for Voice Resellers

By Bob Titsch Jr.

The rise of the networked firm, or virtual organization, is driving explosive demand
for data circuits and serving up a huge opportunity for long distance resellers, should
they act quickly to exploit it. Complacency, on the other hand, could leave them
vulnerable or worse.

Image: Frame Relay Network

"Sell data or sell your business," warns Bill Capraro, Jr., president of
Chicago-based Cimco Communica-tions Inc., an integrated service provider whose heritage is
long distance resale. "If all you’re selling is voice, you won’t be able to keep your
customers. We’re evolving into a data world, and voice customers will gravitate to service
providers that can meet their data needs."

In the past, the majority of long distance salespeople resisted selling data
circuits–also called private lines.

"I can tell you from my own evolution, when I was with Sprint [Communications Co.]
years ago, that I would never lead with data," says Chip Robertson, director of
carrier sales for CapRock Communica-tions Corp., a Dallas-based carrier. "But I
learned to sell data first, because with many corporate accounts, voice is a mere
afterthought."

Similarly, long distance resellers resisted the notion of selling data circuits. They
were unimpressed with the margins offered by data resale and a little intimidated by the
complexity of the process, selling them only when it was absolutely necessary to retain
other business.

"Until six months ago, I told our agents that private lines were available, but we
didn’t want the business," explains Jack Burk, president and sales manager of
Integrated TeleServices, Fresno, Calif. "Given the pricing we were getting, it wasn’t
worth it. It was just a service we passed through, with no markup. But about six months
ago, we negotiated a data contract with WorldCom that’s made it a lot easier to price a
client and pay agents a commission."

Price Wars

Competition is heating up between the major carriers, and resellers are seeing
substantial discounts as a result. Wholesale rates for DS-3s (the equivalent of 28 T1
channels, or 672 single channels, and operating at 44.736 megabits per second) have
dropped by 25 percent in the last six months, to below a 3-cent VGE (voice grade
equivalent).

The new kids on the block, Qwest Communications Interna-tional Inc. in particular, are
forward-pricing based on future market economics when they fully light their networks, say
resellers. They’re also lowering prices on commodity routes (between major cities) to take
business away from the established network providers–which often respond in kind–and
show revenue flow for valuation purposes.

Further, when a new route is lit, carriers often rush in and commit to sizable
"take or pays" to secure capacity for future needs. Some of them over-commit and
wind up dumping it in the market to meet their take-or-pay obligations, which can run into
the hundreds of thousands of dollars.

"Qwest just lit up a route on the East Coast, and I’ve already got carriers
calling me offering lower rates on DS-3s," says Steve Hesling, vice president of
marketing for American Telesis, a Hilton Head, S.C.-based firm that sells data circuits to
long distance companies. "When that happens, I immediately adjust my pricing for T1
slots in those DS-3s, and that goes straight to our resellers, who pass along the savings
to their customers. Every time a carrier lights a new route, it wreaks havoc on the
market. The trickle down from all this new fiber is substantial."

That havoc is driving explosive demand. When service providers can lower the price of a
T1 by 20 percent, for example, end users suddenly feel they can justify ordering a T1
instead of three or four 56 kilobits per second (kbps) circuits. Couple that with
skyrocketing local area network (LAN) and wide area network (WAN) development (the
networked firm concept, tied together with private lines), and we have a bandwidth vacuum
that will drive private line and data revenues from $13.57 billion in 1997 to $23.79
billion in 2000, excluding Internet service revenues, according to Atlantic-ACM, a
Boston-based research and consulting firm. (See chart above).

Image: Summary of Growth in Private Lines and Data Revenues

Long Term, Less Churn

The majority of private-line and frame relay applications are found in businesses with
remote locations that frequently pass substantial traffic back and forth to the parent.
This traffic, or information, typically is shared via a WAN that connects all the remote
locations by private lines back to a server maintained at the parent.

About 75 percent of all data line opportunities are 56kbps circuits, according to
Hesling. "These are vanilla lines that are configured one way and allow no
options," he explains. "The older, analog data lines, sometimes referred to as
four-wire analogs, 9.6s or voice-grade DS-Os, are a distant second, and account for about
15 percent of private lines."

Analog lines were the mainstays of data providers five years ago, but as digital
technology advanced, they diminished. T1s make up approximately 10 percent of all data
lines, according to industry studies, but are projected by most analysts to make up to 25
percent of the market by 2003.

It’s worth noting that service providers that sell T1s generally get everything else.
"You’re entrenched," says Kieren McCobb, president of TeleConfusion Removal, a
consulting company based in Milltown, N.J. "And when you have a customer that buys
three services from you, you’ve got that customer for a long time, unless something
catastrophic occurs. All the studies show this."

Burk concurs: "Now that we’ve been proactive for a few months, we’ve learned that
customers who buy our data products make much more thorough clients, and the relationships
are enhanced."

What creates the long-term opportunity is the stability of service, according to Ross
Dahl, president of data-centric Huntleigh Telecom, based in El Paso, Texas.

"Voice business is here today but gone tomorrow when a competitor offers your
customer a half-cent better rate, even when you have a contract," says Dahl.
"Not so with data circuits. In fact, there are very few replacement opportunities.
The vast majority of our accounts didn’t know about data circuits when we called on
them."

In other words, first in, you win. And there are plenty of new accounts to call on out
there.

"Our customers often run across medium-size companies with remote locations that
don’t even realize they can have dedicated circuits between offices," notes James
Ross, chief executive officer of Camanco Communications, a private network services
wholesaler. "The opportunity is huge, if resellers go for it."

Looking Ahead

Unless long distance resellers aggressively pursue this opportunity, a growing
contingent of data-savvy companies could take the business, and long distance
minutes-of-use business with it.

These competitors include value-added resellers (VARs) that design, install and support
LANs; competitive local exchange carriers (CLECs) with customer premise equipment (CPE)
and data networking expertise; Internet service providers (ISPs) with similar skill sets;
and interconnects that install voice LANs, better known as private branch exchanges (PBXs)
and key systems.

VARs, in particular, are excellent candidates to "back into" the
minutes-of-use business. They make a living at the customer premises, which is a powerful
position to be in as computing and communications technologies converge. (You know what
they say: If you own the premises, you own the customer).

Cimco is rare in that it began as a long distance reseller and evolved into also being
a VAR. The company sells channel service units/data service units (CSUs/DSUs) for Adtran
Inc. and is a Premier Certified Partner for Cisco Systems Inc., a leading vendor of data
networking gear.

"Many of our accounts get started with a data equipment sale," says Capraro.
"But they typically grow into much more. That’s the great thing about being a
full-service provider. You simply gather facts about the company’s needs and use more of a
consulting approach. You don’t have to lead with anything. If you’re handling local, long
distance, data and Internet solutions, you can let the customer tell you what’s most
important."

Nick Ertz, director of information services at Chicago-based executive placement firm
Witt/Kieffer, Ford, Hadelman, Lloyd, is one of those customers.

"Cimco is truly a one-stop shop for me," he says. "Since it integrates
both my equipment and network services onto one platform, I don’t have to be a referee
between multiple vendors."

Until recently, Witt/Kieffer, et al, was using a Cimco-provided 56kbps point-to-point
data network with routers it had purchased several years ago. Its network was ready for
additional bandwidth because it was reaching its maximum throughput and planned to migrate
to a centralized e-mail platform. Cimco configured a frame relay solution for the firm,
using a minimum of 128kbps to all sites–essentially doubling bandwidth for the same
price, according to Ertz. The firm was able to fine-tune its network port sizes to ensure
it was using the right amount of bandwidth at each individual location without purchasing
too much or too little. Finally, Ertz pays for frame relay network charges, equipment
leasing, equipment installation and maintenance on a single bill.

Still, the idea of becoming a VAR or even acquiring one to immediately procure data
networking expertise doesn’t appeal to most resellers.

"There’s sort of a big black line between equipment and service people,"
notes Rob Mocas, president of Easton Telecom Services Inc., a Richfield, Ohio-based
company that resells private lines. "I don’t want to have a guy on a truck. Cimco’s
model is formidable, but I don’t want to be a VAR. I don’t want to own a VAR. However, I
am interested in partnering with several of them."

Bob Titsch Jr. is group editor for the Telecom Division of Virgo Publishing Inc.,
which includes PHONE+ Magazine.