RESELLER CHANNEL: Z-Tel Contractor to MCI's Neighborhood

Posted: 06/2002

Z-Tel Contractor to MCI’s Neighborhood

By Josh Long

The MCI Group has introduced The Neighborhood, an any-distance calling plan in 32 states that incorporates unlimited local and long-distance services for a flat fee. It is possibly the first serious threat to the Bells in the residential market. In a competitive twist, all four Bells are providing network facilities for the offer.

The RBOCs are selling their UNE-Ps to Z-Tel Technologies Inc., the provider furnishing MCI’s local service, including enhanced features such as voice mail and follow-me capabilities. Z-Tel is the first telecom provider to purchase the Bell’s unbundled network elements and then sell local services, including its own back office, voice and Web capabilities, to a telecom titan with the marketing muscle and brand name of MCI. The agreement, particularly since it involves the UNE platform, is “definitely unprecedented,” said Robert Saunders, research director of the Eastern Management Group.

MCI’s flagship offer, Neighborhood Complete, provides unlimited calling along with a package of features, for $49.99 to $59.99.

Z-Tel, based in Tampa, Fla., said MCI will pay $50 million over four years for software license fees related to the company’s sophisticated back-office systems. Plus Z-Tel will earn undisclosed revenue for every new line MCI uses to offer local services and per-minute usage fees based on proprietary capabilities, such as Z-Tel’s custom-built voice mail, that U.S. households access. The Z-Tel name will be transparent to American households buying MCI’s Neighborhood plan.

The wholesale agreement with MCI is not exclusive and Z-Tel is in talks with other carriers to provide local exchange services, says Sarah Bialk, director of investor relations. Z-Tel can offer local services in 38 states.

In April, Z-Tel announced it would let go approximately 350 employees, about a quarter of its workforce, to consolidate its residential customer care operations and focus more on its wholesale unit. Z-Tel had 254,000 residential customers at the end of last year, but subscriber growth had been flat during the past six months as customers jumped from provider to provider without paying their bills, Bialk says. The company expects to reduce its monthly capital expenditures by $2 million per month by focusing less on expanding its residential customer base. One new measure includes increasing credit requirements.

Z-Tel also will concentrate in the small business market, where the company has been selling services in a trial to an undisclosed number of customers in Illinois. Due to regulatory rulings that make UNE-P resale more economically feasible in several states, including Illinois, Michigan, New York and Texas, Z-Tel says it would mass market its small business service, Z-LineBUSINESS, by this month. The company plans to market the service through independent agents and wholesale agreements.

MCI spokeswoman Audrey Waters says the company chose Z-Tel because the company had the best OSS and technology platform to support the Neighborhood plan. Waters declines to discuss why MCI is paying Z-Tel for local service rather than going directly to the Bell companies and reselling their local network through the UNE platform.

AT&T Corp., the No. 1 long distance phone provider, first started in 1997 to provide local service through UNE-P in Texas. The company also provides local service through UNE-P in Georgia, Michigan and New York and expected to enter the local market this month through UNE-P in Illinois. AT&T spokeswoman Valerie Hasselbach declined comment on whether AT&T would consider partnering with a UNE-P provider such as Z-Tel to garner a ubiquitous footprint. “I can’t speculate on what we would or wouldn’t do,” she said.

Sprint Corp., the No. 3 long-distance provider, is a licensed incumbent local exchange carrier in 18 states, but it mostly provides local service in rural areas such as Mansfield, Ohio. The most populated areas where Sprint provides local service include Las Vegas and an outer ring of Orlando, Fla. Sprint spokeswoman Laura Tigges said the company serves 5.8 million local phone lines in its consumer division, but it has no plans to be a CLEC. She added the company does have a calling plan similar to MCI’s. “We do have a bundle including local service, long distance for a flat rate on one phone bill, and our most popular calling features.”

David Yedwab, executive vice president of the Eastern Management Group, said AT&T and Sprint have made it clear that they believe in facilities-based competition. UNE-P may be an interim solution, he said, but “I don’t think UNE-P would be the end point for them.”