ISPs See Telcos as Strategic Partners, ResaleDistribution Channel

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:

• What level of access does the company provide? (Note: There are several tiers of providers although the industry has yet to agree on what they are. Just because a provider says it is Tier One does not mean it actually is. Find out what its definition is. PHONE+ defines Tier One as a provider that has peering agreements with other Tier One providers, connections in at least three NAPS and a minimum of DS-3 capacity from coast to coast without purchasing transit from another provider.)
• What access services (e.g. dial-up or dedicated) are offered and at what speeds?
• What is the throughput assumption (e.g. 100 percent, 60 percent, etc.)? (Note: Some of the less expensive DS-1s are being oversold.)
• Is collocation of servers an option?
• What other content or information services (e.g. web hosting and design, news groups, e-mail hosting, etc.) are available?
• What support (e.g. customer care, billing, etc.) is offered directly to the reseller's customers? (Note: Internet users require a lot of hand-holding that voice customers don't.)
• What support (e.g. training, billing, sales and marketing, tech support) is offered to the reseller?
• To what extent are services available under a private label?
• What requirements/commitments are asked of the reseller?

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 marcommail@aol.com .

* 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.