ISPs See Telcos as Strategic Partners, ResaleDistribution Channel October 1997

Posted: 10/1997

ISPs See Telcos as Strategic Partners, Resale
Distribution Channel

Among the many value-added services telecommunications
resellers are looking at to round out their product portfolio,
there is one–Internet access –conspicuous as much by its
absence as its allure. Annual surveys by Boston-based strategy
consulting firm ATLANTIC-ACM reveal that many inter-exchange
carriers fell short of great expectations to offer Internet
access by 1996 but remain hopeful they’ll do so by 1998. Despite
their theoretical understanding of its appeal to their customers,
few (if any) telephony providers are on the cutting-edge of
Internet technology and most are playing catch-up. Aside from
AT&T, which is now trying to build a nationwide IP backbone
after launching its WorldNet product through BBN Planet, the
larger late-entry telecom companies are acquiring their Internet
capabilities prefab through mergers, acquisitions or alliances
with existing Internet Service Providers (ISPs) vis-`-vis
WorldCom’s 1.2 billion acquisition of CompuServe Network Services
and America OnLine subisdiary ANS Communications on Sept. 8 .
The three-way deal is a grand follow-up to the much publicized
acquisition of UUNET by MFS WorldCom in August 1996. On a lower
profile, in July 1997. More recently, in July 1997, Intermedia
Communications merged with DIGEX, and IXC Communications acquired
a 20 percent stake in PSINet. The rest are eyeing the closing
window of opportunity–one to two years by most analyst
accounts–with trepidation or denial, perhaps. For all their
wishful thinking, they can’t make it go away.

Internet use is growing exponentially–one estimate from
Forrester Research Inc., Cambridge, Mass., puts the market for
access and hosting at $10 billion by 2000. The possibility for
market entry via merger/acquisition remains (CompuServe,
anyone?), but the better route for many, especially the smaller
providers, may be resale.

"Resale is their only option. It sounds arrogant to say
it, but I’ve seen a number of companies try to do it themselves,
and they spend millions of dollars to get an education in what
they don’t know they don’t know," says Scott Purcell, Epoch
Networks Inc., Irvine, Calif.

Epoch Networks operates a national Internet backbone and
targets telecommunications providers as its resale customers.
Among its recent recruits are Telco Communications Group, Phoenix
Network and USN. Epoch offers resellers an eight-week program to
Internet-readiness from dedicated and dial-up access to web
hosting and collocation–all private labeled.

EPOCH is not the only ISP to offer a wholesale Internet
product geared toward telephone companies. San Francisco-based
CRL Networks Services launched in July 1997 a resale program
focused on regional telcos; its first takers are Tel America and
sister company Express Tel, two Salt Lake City-based long
distance carriers. Cable & Wireless Internet Exchange,
Vienna, Va., has been courting competitive local exchange
carriers (CLECs) since spring and expects to have a few on line
by the end of the year. Through its relationship with PSI Net,
IXC plans to introduce a wholesale Internet access product to its
telecom reseller base in fourth quarter.

LCI International added Internet access to its wholesale
lineup in January by dangling the carrot of cross-product volume
discounts for its existing voice/data resellers. Sprint’s
Wholesale Services Group, which sells to telephony providers,
debuted a non-branded dial-up service in April 1997 and plans to
release a branded dial-up product as well as a dedicated
wholesale product by 1998. Even Big Blue has telephony companies
in its cross-hairs, having bagged in the past year and a half
four Bell customers for its OEM-styled program.

PHONE+ looked at more than a dozen programs that target
telephony providers as a resale channel. While there are a basic
set of potential service and support elements that comprise a
wholesale Internet product offering, there is a wide variance in
the composition and structure of each company’s offering. The
programs range from EPOCH’s step-by-step turnkey plan to IDT’s a
la carte system to CRL Network’s tailor-made Internet Alliance
Program. More importantly, there is a difference in the level of
service and support offered and the commitment to the telephony
provider.

Service. Most ISPs allow for the resale of
dedicated access; fewer offer dial-up. CompuServe, PSI Net and
IDT Corp. are among the few that specialize in nationwide dial-up
capability. Some providers offer additional services, such as web
hosting or design services; others confine their offerings to
transport/connectivity. Even there, the options vary from
full-service end-to-end product to a bare-bones port-and-access
service.

Support. As most IPs are used to reselling to
pure ISPs, the level of support can be limited to technical
support. Those that are targeting telcos have or are developing a
more comprehensive set of support options that include Level 1
customer care and billing, training and sales and marketing
assistance. "Certain customers just want access points. They
don’t want us to interface with the customer. On the other side,
there are those that want us to do it all under a private
label," says Jonathan Reich, vice president of marketing for
IDT Corp., regarding his company’s experience serving resellers
over the past year. "By and large, they prefer that IDT
handle the customer service, but billing is a toss-up."

Why Sell Internet Access?

Before considering reselling, a telephone company must decide
whether to sell Internet access at all. Opinions vary from those
who say it’s a decision based like any other product introduction
on the needs of the customer base to those who view it as a
crucial step in maintaining a competitive posture in the
communications business. "It’s an imperative, important and
absolutely right step for telephone companies. Internet access is
part of what all customers are coming to expect in a
communications package," says Jim Goetz, director of
telecommunications and media for IBM Global Services.
"Beyond that all the computer companies are experimenting
with voice over the ‘Net. In the long run, telephone companies
stand to lose their market share in voice."

The "if you can’t beat ’em, join ’em" philosophy is
echoed by other network providers such as David Suttle, director
of channel sales for CompuServe, and Kent Dallas, pricing manager
for GridNet International, who expect the Internet to alter the
way people communicate both through traditional electronic mail
and, as it is perfected, through Internet telephony. "Telcos
are not in the phone business, they are in the communications
business. They need to be where communications is going,"
Dallas says.

Others caution telephony providers not to get too caught up in
predicting the future. "New communications methods don’t
usually displace others. They become a layer on top. Only the
proportions of use change," says Christopher Mines, senior
analyst, Forrester Research. "The real question, is where do
we find growth? There’s 125 percent growth in access. Don’t try
to decide the future of communications. Instead, go where are
people spending their time and dollars."

Right now people are spending their time and dollars on the
Internet. At the low-end, the economics are not what they once
were, with the $19.95 per month access price point proffered by
America Online now prevalent, but for a telephony provider
serving residential and small business customers, even a dial-up
product is at its worst a great retention tool. On the dedicated
side, the margins are all across the board–depending on what
price you buy for and what price you sell for–but hefty, to say
the least.

Either way– philosophical or practical–selling Internet
access has a good business case. Furthermore, if you take your
cue from the Big Boys, then getting into the Internet business
must be a good idea. Most of the large telephone companies have
already found partners to bridge their knowledge gap to the
Internet World.

So, if it’s not a question of "if?," then it’s a
question of "when?" Analysts say time is running out
for new market entrants. Unlike the voice market telephony
providers are used to, Internet customers–particularly dedicated
access users–are choosing up sides. "The window is still
open, but it is closing. In a year or two the business will have
gone elsewhere," says Rebecca Wetzel, director of Internet
consulting for Telechoice, Verona, N.J.

Why Resell Internet Access?

Slimming margins and accelerating time-to-market pressures
make building an IP network a less viable way to enter the
market. That’s why so many new entrants are entertaining
strategic alliances. "If you are not in the Internet
business today, you are not going to break into it by providing a
backbone and connectivity. The margins are not what they were two
or three years ago and the competition in very intense,"
IDT’s Reich says. "Partnerships, joint ventures provide the
ability to leverage or capitalize on what you have and minimize
the cost. The last thing you want to do is commit to a new
technology without knowing where it’s going. This way you can
spread the risk."

The resale arrangement is a form of partnership that can offer
a level of comfort that might not come from a fourth-tier
acquisition. "Buyer Beware. Acquirer Beware. With would-be
ISPs, there’s not a lot under the hood in expertise and
infrastructure," TeleChoice’s Wetzel says.

By reselling, a telephony company can tap into the technology
and the people power of a proven national provider without having
to develop the network and skillsets from scratch. At the same
time, they can leverage some or all of their existing
infrastructure–sales channels, billing systems, customer care,
etc.–to enjoy economies of scale achieved with an in-house
operation. Margins on resold dial-up accounts are about 5 percent
to 10 percent; resold dedicated accounts typically range from 30
percent to 40 percent.

Choosing a Wholesale Internet Program

Selecting an underlying Internet network provider can be
confusing at best. Each provider says something different. The
advice is not contradictory, just different depending on each
company’s emphasis. For example, an IBM or CompuServe will stress
it total information technology package and, thus, its ability to
offer a full managed network. Others just want to sell ports and
access. Some are focusing on the particular needs of CLECs like
CWIX and GETNET or long distance companies like IDT and Sprint,
while still others like CRL want to hand-pick their resale
partners.

Among the things to ask a potential provider are:

Resellers should also find out if their provider also offers
the same services at retail. Some providers such as GridNet are
wholesale focused; others offer private labeling so resellers
don’t have the meet them in the market.

Khali Henderson is a principal with Marcom Support
Services, a marketing communications firm specializing in the
telecommunications industry. She can be reached at [email protected]
.

* Future **Tier One = Must have peering
agreements with other Tier One providers, connections in at least
three NAPs and a minimum of DS-3 capacity coast to coast. A
first-tier provider does not purchase transit from another
provider. Tier Two= May have connections at one or more exchanges
and even a DS-3 network nationwide, but still require transit
from another provider. Tier Three = Same as Tier two but on a
regional, rather than national basis. Tier Four = Bandwidth
Reseller buys DS-1 to DS-3 capacity and resells it to other
providers.

This information was reported
prior to the announcement that WorldCom Inc. and America OnLine
have agreed to purchase CompuServe.