Wholesalers Lure Level 3 Hosted PBX Resellers

New Global Telecom Inc. is among the wholesale carriers seeking to pick up resale agreements with about 100 phone companies, long-distance resellers and other customers of Level 3 Communications Inc., which announced it is phasing out (3)Tone, its wholesale hosted PBX service. Resellers, including traditional phone companies like SBC Communications Inc. and others, have until June 15 to transition off the service.

Richard Grange, president and CEO of New Global Telecom, told PHONE+ Feb. 2 the wholesaler has secured contracts or was in negotiations with 20 Level 3 customers.

Just one day after Level 3 made its announcement, Volo Communications Inc. tendered an offer targeting all of Level 3ms (3)Tone customers: switch to our VoiceOne hosted IP service and get the same terms and conditions you had with Level 3, plus a monthms free service. Shawn Lewis, president and CEO of Volo, told PHONE+ Jan. 31, the company had spoken with 20 Level 3 customers and reached agreements with two customers.

Nuvio Corp. also is offering a package that lets Level 3ms partners switch to the NuvioCentrex hosted IP PBX service, according to the same terms and conditions Level 3 offered, as well as one monthms free service. Nuvio says it can convert the partner companies of Level 3 to its VoIP network overnight.

In addition, Covad Communications Group Inc. says resellers who become its authorized VoIP dealers by March 15 are eligible for special one-time bonuses and other financial incentives. The company also notes it will waive the setup fees and router charges for Level 3 resellers who sign up for Covad VoIP by April 1.

Why is Level 3 discontinuing (3)Tone?

Level 3 representatives say the decision is consistent with a strategy to focus on what they characterized as more “modular” and “componentized” services, such as the network provider’s connectivity services as well as a range of wholesale services geared for the consumer market.

Level 3 has been zeroing in on the biggest U.S. cable companies, particularly as they move to deliver phone service to tens of millions of subscribers in competition with Verizon Communications Inc. and the other regional phone companies.

Grange, whose company uses the Level 3 network, says Level 3 also may have discovered that expanding beyond the network connectivity business is more complicated than it figured. “We think that Level 3 has historically [been] a leading provider of connectivity and of plumbing … and that is what Level 3 … continues to be excellent at today. I think that Level 3 is making a strategic decision to focus on products and services that are more closely aligned with [its] core competency rather than the content of the plumbing,” Grange says. “They maybe realized that what’s in the plumbing turned out to be a bit more complex, have a bit slower ramp and perhaps not be of a scale that is going to help Level 3 propel itself forward.”

A Level 3 spokesman says the decision to discontinue (3)Tone will not have a material effect on the company’s revenue. Through the first nine months of 2004, Level 3 reported revenue of $2.66 billion and a net loss of $381 million.

Discontinuing (3)Tone “probably means a more concentrated group of partners,” says Glenn Russo, a senior vice president with Level 3. “I would say for our more successful partners and our larger partners we’ll continue to do business.”

McGraw Communications Inc. is one Level 3 customer that expressed disappointment in the carrier’s decision to discontinue (3)Tone. “It’s a shame,” says McGraw Communications President John Cunningham. “The technology was good. We would have sold a boatload of it.”

Cunningham says Level 3 had ‘outages’ with the initial ‘node’ setup to deliver the service. “If you were in the newer node, the service was good. They had issues in the old node,” he says. “I think it was just a matter of time before it would work, but they have chosen not to allocate the amount of money necessary to deploy it in a fashion that they think the business market needs.”

Level 3 representatives say the PBX offer was a “closed” service that did not allow for customization of features by its resellers, but Cunningham says businesses upgrading their phone systems are not immediately seeking all the bells and whistles. “What people are really looking for is a basic solution,” says Cunningham, which he characterizes as one that lets them set up a phone system with minimal hardware, link multiple locations at low cost and manage the entire system through a Web portal. “That is the product that companies want, and over time you can layer on services.”

Level 3’s decision to discontinue (3)Tone also may be related to the realities of the hosted PBX market. Although the moniker VoIP is as common today in telecom circles as the acronym PSTN, persuading businesses to adopt a hosted phone system can be a tough sell. NGT’s Grange says most businesses adopting a hosted PBX either have obsolete phone systems, are moving locations or expanding the company. Otherwise, it is hard to convince a business with a functioning phone system to adopt a new one, he says.

Additional reporting by Charlotte Wolter.