Excel 'Switches' Strategy

Posted: 03/1998

Excel ‘Switches’ Strategy
Deal with DSC Facilitates New Moves to Switch-Based Services, Attracting Business
Customers

By Peter Meade

Excel Communications Inc.’s $30 million deal with DSC Communications Corp. is
declarative of the meteoric long distance carrier’s big push into new markets.

While the Dallas-based service provider’s rapid ascent to becoming the nation’s
fifth-largest long distance company has been fueled by great gains in the residential
market, the addition of four DSC MegaHub 600E tandem switches will help Excel move into
the business market, according to Gerald Hamilton, vice president of network
administration for the carrier.

Excel is known for its grass-roots marketing. It’s like the Tupperware of telephone
services in which independent reps sell services primarily to family and friends. The
business services marketing strategy will not deviate much from Excel’s residential market
strategy, according to the company.

The carrier will cut over the first of the quartet of new switches next month in Los
Angeles, he says. Deployments in San Francisco/Sacramento, Chicago and Dallas are
scheduled for July. The new switches will help Excel gain control over its existing
traffic, some of which was running over other switch-based carriers’ networks, Hamilton
adds.

"Our intent is to get as much of our traffic on our own network," he says.

Excel began its move toward becoming facilities-based when it acquired eight DSC DEX
switches in its $1.2 billion merger with Chantilly, Va.-based Telco Communications Group
Inc. That deal, which was completed last October, means Excel now operates switches in
Austin, Texas; Chattanooga, Tenn.; Cleveland; Davenport, Iowa; Fort Lauderdale, Fla.; Las
Vegas; New York; and Washington, D.C. The combined entities serve 6.3 million subscribers
with an expanding network that includes 100,000 miles of DS-3 fiber capacity.

"We were looking for a solution that would let us maximize our existing network
while giving us the greatest functionality for rolling out new products and services and
lowering our costs," Hamilton says. "Adding new switches to the technology
acquired in Telco’s network let us accomplish this."

Excel already is broadening its service portfolio. Last month Excel made its first move
into the business market by unveiling Prime Business, a pair of long distance voice
products aimed at small- and medium-sized businesses. Prime Business Select 3 offers
businesses flat rates and interstate volume discounts based on total account usage with no
term commitment and a minimum monthly usage requirement of $100. Prime Business Select 4
offers the same package at a lower flat rate because it requires a 12-month term
agreement, he says.

The addition of business traffic could serve to balance the load on Excel’s network,
explains Boyd Peterson, director of consumer communications at the Yankee Group Inc., a
Boston-based research house. While residential traffic typically is busiest during evening
hours, adding business traffic would put minutes on the network during the daytime.

If Excel is successful in its quest, it will have proven the inverse of the business
model being implemented by most competitive local exchange carriers (CLECs), which have
concentrated their early efforts on building networks and pursuing business customers. But
doing things the expected way has never been Excel’s way.

"With its legacy in long distance, Excel has no worries about being a phone
company," Peterson says. "Unlike some CLECs, which have been preoccupied with
building out their networks before marketing for customers, Excel sees itself as a
marketing company that happens to sell phone service."

Now that Excel is selling phone service to a substantial number of customers–2.5
percent of all U.S. households, according to a recent Yankee Group report–it has both the
resources and need to build and acquire its own network, he says.

"Now Excel can slowly burn in its new switches while improving margins,"
Peterson says. "Investing in the new switches serves as much to improve the care of
its existing customers as get new ones."

Long Distance and the Big Three
Responding to a Changing Marketplace

By Peter Meade

The balance of the long distance market is changing.

According to a Federal Communications Commission (FCC) study released in October,
AT&T Corp.’s revenues accounted for about 48 percent of all long distance carrier
revenues. MCI Telecommunications Corp.’s long distance market share was 20 percent in
1996. Sprint Communications Co.’s was 10 percent. WorldCom Inc.’s was 6 percent. And
smaller long distance carriers collectively made up the remaining share.

The smaller long distance carriers are seeing the largest growth, while MCI and Sprint
are holding their own, and AT&T has been losing share. But it’s going to get more
difficult to make a buck as the Bell companies and competitive local exchange carriers
(CLECs) enter the long distance marketplace.

According to Boyd Peterson, director of consumer communications for consulting company
The Yankee Group Inc., it will take only two to three years before the Bells garner 25
percent of the active households in the long distance market.

Al Fross, president of consulting firm Pelorus Group Inc., adds that the Big Three
should not overlook the potential impact of CLECs, which he characterized as "like
hyenas on a carcass," building networks in niche markets while siphoning off business
customers from established carriers.

In an attempt to hang on to existing market share and retain new growth, AT&T’s new
chair C. Michael Armstrong is on a highly publicized campaign to slim down and focus on
its core business.

AT&T’s fourth quarter earnings were above expectations. But the gain comes with
some pain: AT&T has committed to further reducing its expenses, from 29 percent of
revenue to 22 percent by the end of 1999, a move that Armstrong characterized as
"aggressive." A significant amount of the future cuts, which reportedly will
save $1.6 billion, will come at the expense of 15,000 to 18,000 jobs that will be cut from
AT&T’s long distance operations over the next two years.

But trimming down alone will not make AT&T a more successful player, says Peterson.

"AT&T has come to realize that chasing the same 25 million customers is
stupid," he says. "The best strategy is to hang on to your most valuable
customers. It’s now OK to admit you don’t want to serve not-profitable customers."

MCI, meanwhile, has announced plans to merge with WorldCom and continues to focus
heavily on the data side of long distance.

For the year, MCI’s revenue reached $19.7 billion, a 6.3 percent increase. MCI’s growth
was led by strong gains in data and Internet sales, which accounted for more than 50
percent of the company’s annual revenue growth.

"MCI showed solid improvement in the fourth quarter with revenue and traffic gains
that position the company well going into 1998," says Gerald H. Taylor, MCI CEO.
"With data, Internet and information technology services now accounting for a quarter
of the company’s revenue and growing more than 20 percent a year, MCI has effectively
transformed itself into a new-era communications company."

Yankee Group’s Peterson says data services are growing at a faster rate than voice
services.

"The world of long distance will be much different 10 years from now,"
Peterson says. "It will not involve the ‘star’ architecture we have known for
decades. Instead, a distributed architecture with edge switches will be predominant."

Sprint, meanwhile, last month reported record quarterly revenues for its long distance
business. Fross sees Sprint as "a wild card" in the long distance dance. Rumors
have persisted about the No. 3 long distance provider merging with another
telecommunications carrier. GTE Corp., which appears as a most eligible bachelor, is often
mentioned as an attractive mate. But Sprint Chair William Esrey has vehemently denied any
such discussions.

AT&T WorldNet to Offer IP Voice

By Paula Bernier

AT&T Corp. has joined the IP (Internet protocol) voice revolution.

The company next quarter will launch a market trial of Internet voice services through
its AT&T WorldNet Internet business unit.

A limited number of WorldNet subscribers will be able to sign up for domestic,
state-to-state Internet voice services at 7.5 cents to 9 cents a minute. Customers will
purchase prepaid calling accounts from WorldNet, and input their account codes prior to
dialing to get the low-rate service.

WorldNet would not provide information about where or specifically when the trial will
be or to how many people the company will make the test services available.

The company also wouldn’t comment on whose IP voice gateway equipment or services it
will use to convert the voice signals into packets for transport over the Internet. The
company could resell IP voice services of other carriers, invest in its own IP voice
gateways or own its own gateways and partner with other gateway owners for a wider service
footprint.

It’s probable that WorldNet will use the services of ITXC Corp., a company headed by
former WorldNet executive Tom Evslin. ITXC’s WWeXchange Service allows companies with or
without IP voice gateways to connect with multiple Internet telephony service providers
worldwide via ITXC, which provides routing and settlements among its carrier clients.
WorldNet spokesman Mark Siegel would not comment as to whether the company would use
ITXC’s services.

In related news, AT&T now allows customers to order traditional AT&T long
distance service from the company’s website at www.att.com . For a $1 monthly fee they can
receive a flat rate of 10 cents a minute on direct-dialed, state-to-state calls made from
home.

FCC Adopts New Payphone Rate Disclosure Rules

By Jennifer Knapp

The Federal Communications Commission (FCC) adopted a rule in late January that
requires long distance carriers providing service at public payphones to give callers
advance notice of their right to obtain rate quotations before being charged for a
telephone call.

The new rule is meant to give consumers the option to not place a call from a phone
with high rates, or place long distance calls by accessing another carrier.

Currently, public payphone owners are required to post directions on acquiring rate
information, but callers must hang up and place another call for rates. The rule should
make rate inquiries easier, but callers will have the option to bypass such information.

Genevieve Morelli, executive vice president and general counsel for the Competitive
Telecommunications Association (CompTel), says the ruling will affect "all companies
that provide operator services from aggregator locations, which include not only public
pay telephones, but also payphones in hospitals and hotels."

The FCC ruled that all public phones must comply with the price disclosure requirement
by July 1, but there is little indication yet as to the effect the ruling will have on
such companies. According to Michele Sadwick, senior manager of public relations for
Frontier Corp., it is still too early to know to what extent this will change operations
or how much it will cost. "We’re in the process of starting to develop procedures to
comply, which will entail giving our operators the required information and training them
appropriately on how to handle requests," she says.

CompTel Elects New Board
of Directors at Annual Convention

The Competitive Telecommunications Association, at its 16th Annual Convention and Trade
Exposition last month in Las Vegas, elected a new board of directors.

J. Lyle Patrick, executive vice president of McLeod USA Telecommunications, is the new
chair of the board of directors for CompTel. He succeeds H. Brian Thompson, chair and CEO
of LCI International, who held the top CompTel post for two terms. R. Chadwick Paul, vice
president of business services for NextLink has taken on the post of vice chairman.
CompTel’s new vice chair/treasurer is Tony Cassara, president of carrier services for
Frontier Communications.

The new executive committee of CompTel’s board of directors consists of Dave Malfara of
Pace Communications, Drew Walker of Interstate Fibernet, Catherine Sloan of Worldcom Inc.
and Anne Bingaman of LCI International.

Others on the board of directors are Rich Yalen of Cable & Wireless Inc., Tricia
Breckenridge of KMC Telecom, Gwen Rowling of Westel, Jeff Buckingham of GST Call America,
Cindy Schonhaut of ICG Telecom Group, Doug Hanson of Rocky Mountain Internet Inc., Jerry
James of Thrifty Call Services, Joe Garrity of Qwest, Mark Scully of New Global Telecom,
Gary Mann of IXC Communications and Ulysses G. Auger of CGX Telecom.

The trade show last month drew more than 3,000 attendees, compared to attendance levels
of 2,712 in 1997, 2,116 in 1996 and 1,300 in 1995.

"We are extremely pleased by the growing interest in CompTel," says Genevieve
Morelli, executive vice president and general counsel of CompTel. "Not only are our
annual conventions growing–as reflected by a 50 percent increase in numbers of attendees
in just two years–but our membership roster is also growing, from 180 companies at last
year’s convention to 227 today."

Rock icons the Doobie Brothers entertained the crowd Tuesday evening, as did surprise
guest entertainer, comedian Dennis Miller.

During the welcome reception Monday evening, employees of Santa Barbara, Calif.-based
Star Telecommunications Inc. announced their donation of $100,000 to cover costs of
medical treatment for Tab Hebert, formerly of ACC Telecom, who has been stricken with
cancer.

"Tab has been not only a good friend to us (at Star Telecom), he also has been a
good friend of the industry," says Chris Edgecomb, CEO of Star Telecommunications.
"We understand he has been undergoing treatment that is not completely covered by
insurance, so the employees of Star donated options and stock shares that, together,
amounted to $100,000."

The reception was videotaped along with well wishes for Hebert, who was unable to
attend. A tape of the evening will be presented to him along with the check.

Star Telecommunications has established a foundation for Hebert, and anyone wanting to
make a tax-deductible contribution can contact Edgecomb at (800) 899-1962.

FCC Rejects BellSouth’s Louisiana Bid

The Federal Communications Commission (FCC) has rejected BellSouth Corp.’s application
to provide long distance service in Louisiana.

"Shortly we expect to submit other applications that we believe will meet even the
FCC standards that we have seen so far, provided the FCC doesn’t continue to raise the
bar," says David J. Markey, BellSouth’s vice president, governmental affairs.

The FCC says BellSouth failed the same two aspects of the 14-point competitive
checklist it tripped over in its South Carolina application.

First, BellSouth failed to demonstrate nondiscriminatory access to operations support
systems (OSS) by using the same systems "previously found inadequate in the South
Carolina decision," says FCC Chair William E. Kennard.

"When a customer signed up for BellSouth service, the ordering process worked
without a hitch more than 80 percent of the time," he says. "But when a customer
signed up for a competitor’s service, the ordering process worked without a hitch only 39
percent of the time."

Second, the FCC cites "refusal to offer contract service arrangements available
for resale at a wholesale discount."

News Briefs

HOLD Billing Services Ltd., a clearinghouse for local exchange carrier (LEC)
billing of 1+ and enhanced services, has relocated to 4242 Medical Drive, Suite 2100, San
Antonio, Texas 78229. Although the company’s toll-free number will remain the same, its
main line now is (210) 593-0222.

Network One Inc., an Atlanta-based telecommunications firm, recently acquired
the assets of ProCom Inc., a West Virginia-based long distance provider. ProCom
currently serves more than 14,000 mostly commercial customers.

Telscape International Inc. has acquired MSN Communications Inc. of
Calsbad, Calif. MSN, through its Telefiesta brand, distributes prepaid telephone calling
cards primarily to the Hispanic community.

Advanced Telecommunications Network Inc. (ATN), a multiservice long distance
provider, has acquired the assets of New Jersey-based telecom company WATS
International. The annual billing value of the acquisition exceeds $4 million and
consists of 1+, toll-free and calling card customers.

OAN Services Inc. has entered an agreement with National Tele-Communication
Inc. (NTC), a national long distance services company based in Bloomfield, N.J., to
provide invoice-ready billing services. OAN also will provide a local exchange carrier
(LEC) and direct billing services package to NTC.

Davel Communications Group Inc., an independent provider of pay telephone
services, closed its acquisition of Communications Central Inc. (CCI) based in
Atlanta. Davel paid about $70 million to acquire all of CCI’s issued and outstanding
common stock and assumed the company’s outstanding debt.

PRIMUS Telecommunications Group Inc. has entered a merger agreement with Fort
Lauderdale, Fla.-based TresCom International Inc., a facilities-based international
company specializing in Caribbean and Central and South American markets. PRIMUS will
acquire all of the approximately 12.5 million outstanding TresCom shares at $10 per share,
or $125 million in PRIMUS stock.

IDT Corp., in conjunction with Daewoo Corp. and Naray Mobile Telecom,
released Net2Phone Direct, IDT’s phone-to-phone-via-the-Internet service, in Korea. Daewoo
and Naray are offering $20,000 of free trial calling to businesses and residents
throughout Korea, and will release Net2Phone Direct commercially this month.

VoiceLog, LLC, an automated third-party verification provider, released its Anti-Slamming
Rules Report on the World Wide Web. The report lists each state’s rules regarding the
unauthorized changing of a customer’s telecom services known as slamming. The report can
be viewed at http://www.voicelog.com/vl_rules.htm