Resale Channel: Resale's Future Told

Posted: 09/1999

Resale’s Future Told
By Dr. Judy Reed Smith and Wona Park

The changing complexion of the market is making it harder and harder for resellers to
know which way to turn. Mergers and marriages between providers are a daily occurrence.
The bandwidth meter is wavering from too much one day to not enough the next. New
competitors with a backlog of venture capital become major players overnight. This
uncertainty could force any fortuneteller to scratch her head. But before resellers resort
to their Magic Eight Ball for answers to strategic questions, they should take a look at
some of the trends identified in a new study, "U.S. Long Distance Telecom Resale
Services: Trends & Opportunities 1999-2003," published in August by Boston-based
ATLANTIC-ACM Inc.

In the report, ATLANTIC-ACM repeats the primary research it has done since 1991 on the
competitive telecom markets. It analyzes the market by facilities-based carriers vs.
switchless resellers, and compares company results by gross annual revenue tier (see chart
below). For this year’s research, ATLANTIC-ACM contacted almost 500 service providers from
its list compiled and refined each year since 1991. With a very detailed survey filled out
by 17.5 percent of the long distance population, the response rate is considered
significant. Data from ATLANTIC-ACM’s database of eight years of similar surveys offers
important trend analysis.

Churn Concerns

The study found that resellers, like most telecom providers, are worried about
increased competition, as well as the customer’s awareness of available alternatives. Even
with the skyrocket-like growth of telecom services, prices are down and customer churn is
up. In fact, the percentage of switchless resellers surveyed with a residential churn rate
of more than 5 percent of their customers per month increased from 15 percent of the 1997
service providers to 28 percent of the 1998 service providers. For business customers, the
number of switchless resellers surveyed that saw a 3 percent to 4 percent monthly churn
rate rose from 5 percent of providers in 1997 to 32 percent of providers in 1998.
Facilities-based respondents fared slightly better, but saw an increase in churn
nonetheless.

This increase in customer churn is the result of a variety of drivers, including
falling prices with heavy competition and more emphasis on service. With margins shrinking
for traditional long distance services, many carriers are expanding into new value-added
areas where competition is less fierce and margins are more substantial, including data
services. Other factors that influenced customer churn during 1998 include:

* Bundling of Services. The growing trend of bundling traditional services
together with enhanced services has helped increase customer retention and lower churn.
Bundled services are attractive to customers because of the convenient, one-stop shopping
and integrated billing opportunity.

* Sales and Marketing Dynamics. Long distance providers have increased
aggressive marketing efforts and direct sales. Direct sales, coupled with stronger
promotional efforts, have built brand-name recognition and relationships, thereby
improving customer retention levels. Affinity programs, partnerships and niche marketing
have helped cultivate customer loyalty, thus helping reduce churn.

* Industry Dynamics–Consolidation and Competition. In 1998, carriers with
weaker financials and management sold off their customer base or were acquired. Because
they lacked a sound business plan or loyal customer base, these companies typically
experienced higher churn. Companies that had weaker fundamentals experienced the inability
to prevent or to respond to high levels of churn.

* Rate Dynamics. The rise of flat-rate pricing and the convergence of long
distance rates will stabilize churn. As rates become more uniform, the potential for
customers to save money by switching carriers will be minimized. However, when regional
Bell operating companies (RBOCs) enter the long distance game, a whole new set of dynamics
will begin, especially in residential services. RBOCs will pull customers with their brand
names, customer contact and strong marketing. If they enter with low prices, the churn
will accelerate and the hooks of enhanced services, customer attention and strong
relationships will be crucial to smaller companies.

Data Services to the Rescue

Heightened customer demand for a variety of data and enhanced services has prompted
many carriers to diversify their offerings beyond the traditional 1+ service. Data
services, by far, offer the most room for growth. In fact, nine of the top 10 services to
be added by carriers surveyed are data-centric. While only 11 percent of respondents
currently offer digital subscriber line (DSL) services, 40 percent plan to add them to
their mix by next year to meet customer demand for faster access to the Internet. Internet
protocol (IP) telephony is another big seller with 35 percent of respondents planning to
incorporate it into their mix by 2000. Other services include virtual private network
(VPN), dedicated Internet, asynchronous transfer mode (ATM) and frame relay.

Graph: Overall Service Revenue Composition–Tier 2 – Tier 5 (1993-1998*)

Understanding and listening to the end-user customer can help to fight the onslaught of
increased competition, as well as reduce churn. Although business and residential
customers have different needs, a few factors generally will guide purchasing decisions
for all types of end users. For example:

* Once rates converge, price no longer will be the principle factor guiding purchasing
decisions. The rate difference from one provider to another will be small.

* Consumers also will consider the reputation and culture of the provider. Business
customers will consider the location and size of the carrier.

* The ability to bundle services also will be a critical factor for residential and
business customers. One-stop shopping will cut costs and increase efficiency of providers
and end users.

* As global markets and transitional corporations expand, commercial customers will
place a new emphasis on the ability of the carrier to offer private-line services,
extensive service support and full customer care in foreign markets.

* The continued development of new enhanced products will make a provider’s product mix
an important variable. Business customers also will demand customization of products and
services.

* End users will view customer service for billing as an important factor to
differentiate carriers. Customers will want detailed billing with the option of online
access. Personalized customer service through an account representative and 24-hour
support will be crucial variables for commercial accounts.

Other Revenue Streams

Overall service revenue composition for Tier 2 through Tier 5 combats the rumor that
wholesale services are dead. Since 1993, ATLANTIC-ACM has reported that wholesale services
have consistently increased as a percentage of revenues. In fact, over the past five
years, wholesale revenues as a portion of total revenue increased by almost 15 percent for
small companies. This trend continues as more carriers have emerged over the past four
years and as smaller companies use wholesale services to lower transmission costs.

On average, smaller long distance providers receive a greater percentage of their
revenue from residential services than in the past. For most companies, the results are
polarized: companies either focus on residential or business traffic. Few small players
have a balance of residential and business revenue. Although smaller long distance players
typically focus on business more than on residential service and have a greater percentage
of revenue from business traffic than AT&T Corp. or MCI WorldCom Inc., the percentage
of revenue from residential services has steadily increased since 1993.

Graph: Percentage of Respondents Expecting to Offer Data Services by 2000

In 1998, private-line revenues jumped as more small business customers required faster
access to data and the Internet. In addition, the top nine new services resellers and
carriers plan to enter in 1999 to 2000 are data services, so revenues are expected to
continue to shift from voice to data.

To compete in today’s telecommunications marketplace, pro-viders must understand the
trends, their customers and their competitors. This requires more than luck and a look
into a crystal ball. With more competitors offering communications services, providers now
must offer lower rates and spend more money on retaining customers, especially since newer
entrants will attempt to gain share by underpricing others. Many of the more mature
providers will merge with or acquire other companies, allowing them to realize profits
through economies of scale.

The ATLANTIC-ACM crystal ball shows the following trends: growth in data; more
dial-around offerings; demand for improved customer care operations; migration to
flat-rate pricing and detailed, clear billing; increasing marketing costs; decreasing
international rates; stagnating wholesale rates; and death of resellers with inefficient
operations.

Judy Reed Smith is CEO and Wona Park is long distance services analyst at
ATLANTIC-ACM, Boston, an international strategy consulting and research firm serving the
telecommunication industry worldwide. They can be contacted at +1 800 771 6226 or e-mail [email protected].