Wooing SMBs with IntegratedServices

Posted: 2/2003

Wooing SMBs with Integrated Services

By Khali Henderson and Tara Seals

THERE'S NO SUCH THING as a sure thing. But CLECs and their channel partners are having increasing luck wooing the country's more than 5 million small and medium-sized businesses with this pickup line: Voice and data can make beautiful music together over one, high-speed circuit.

Integrated services over a T1 isn't new. Channel partners like VAR-turned-agent Herb Levitin, president of Powercom, have been offering it for a decade. What makes it so attractive now, say practitioners and researchers, is declining T1 pricing and data-ready CPE (low-cost, fixed-port integrated access devices, or IADs) that enable the service at the premise.

"When you integrate voice and data in one span, you save the loop cost. I've been doing that since the beginning of 1990, and we're using the same technologies today," says Levitin. "The only difference is that more and more low-end key systems are digital-ready, and it makes it less expensive to drop it out, because we don't need a channel bank anymore, we just need a CSU/DSU with an extra port."

Levitin says the savings are tremendous: "When you do the cost analysis, there's a fixed charge, say $200 per loop, and that's 24 lines, so that's pretty inexpensive. And the long-distance rate is at least 30 percent lower, because you don't have switching fees or a termination fee for inbound 800."

In a December 2002 executive briefing, analysts Farooq Hussein and Phil Jacobson, principals with Network Conceptions LLC (NetCon), assert: "Integrated access services with an improved overall package, additional revenue per customer, a lower cost structure and less churn, we believe is the financial model that will allow carriers that have survived the telecom industry's 'Nuclear Winter' to prosper in 2003."

The analysts point to XO Communications Inc., which despite bankruptcy reported its integrated access services revenue has doubled year over year, while both its standalone voice and data services revenue declined. They also cite gains at Allegiance Telecom Inc., which has been shifting its model to focus on integrated access over the past 18 months. In third quarter 2002, approximately 70 percent of Allegiance's installs were integrated access products, NetCon notes.

"The steadily declining wholesale price of T1s will fuel future availability of (and demand for) integrated services, acting as an important catalyst in attracting price-sensitive SMB customers away from nonintegrated voice and DSL service bundles," add Hussein and Jacobson in their briefing.

The average price for a T1 line was $350 in 2001, according to Yankee Group, which estimates the price will decrease to $130 by 2006. Such price declines would put T1s in reach of even very small businesses with only four to six lines.

For the time being, Yankee Group research shows companies with eight to 18 lines -- about 684,000 companies or 11 percent of the SMBs -- are prime targets for an integrated access solution. The sweet spot for integrated services is companies with 50 to 249 employees, since the value proposition for DSL weakens for businesses in this size range, the research firm reports.

Joel Sam, president of Broadband.com, says his portal-based agency has success selling integrated T1s to companies requiring six to 12 lines. "A customer that has DSL or is thinking about DSL in addition to separate phone lines is a good candidate," he says, noting the integrated services over T1 saves about 20 percent over DSL plus voice. The savings from integrated service shoot up to 50 percent when compared to a T1 and separate voice lines.

Pricing for integrated services in general range from $330 to $1,000, depending on configuration and provider, according to Sam, whose company reps integrated T1s from Allegiance Telecom, Focal Communications Corp. and XO.

Dave Thornton, CEO for agency and consultancy Pri-Fly Inc., agrees an integrated access product is "great for small business, which needs a few phone lines and decent Internet access."

He says businesses really can rack up savings, but still should compare offers. For example, he says Allegiance Telecom has a plan where calling between three distributed office locations is free. "With Focal, it's less than a penny a minute. XO doesn't offer either one of those options, so you really have to compare these plans out when you're buying," he says.

Savings aren't always in the bag, however. The same price pressure that is moving integrated T1s down market also is compressing fixed costs that businesses traditionally had avoided in order to justify combining voice and data over a single circuit.

"The cost of [local] loops has gone down dramatically -- you can pretty much get a loop in Los Angeles for $250," says independent agent Sean Maxwell, president of Maxim Datatel. "In addition to that, the cost of your long distance has dropped dramatically. You can get switched long distance in the 4.5 cents a minute range pretty much from anyone you want. So [to enable integrated services], you have to purchase the integrated access device, and you have to manage a complex solution now because you've got two systems riding on the same T1, but you don't have that high overhead anymore that really drove that business model."

Maxwell says before recommending integrated access services, a provider has to look at businesses' Internet and long-distance volumes and analyze the breakeven point for an integrated T1.

Sometimes the savings are negligible and, thus, not the primary motivation for the buyer. Broadband.com's Sam cites the specific example of an Allegiance Telecom integrated access package that includes 512kbps Internet plus six voice lines, and retails for $330 to $500 depending on the market. In comparison, a 512kbps DSL is approximately $200 to $225 per month, while six voice lines run about $120 to $180 per month, he says. "The pricing [for the Allegiance Telecom package] would be about the same [as DSL plus voice lines], but the customer would get performance and reliability of a T1 connection," he says.

Levitin says quality goes up with the use of a T1 circuit. "What you're doing is moving the channel bank to your premise," he explains. "The advantage is that there's no loss. [Normally,] as you go out from the central office, the call loses some amplitude and you get some noise from crosstalk and so on, but when you have it digitally at your facility, the analog piece is only a couple feet long. The rings are louder, the calls clearer and the most important thing is [shorter] post-dial delay."

Performance and reliability inherent in T1s to date have made them preferential to integrated offers using voice over DSL (VoDSL) and voice over IP (VoIP).

"The challenge is that DSL isn't as stable as a plain T1 historically, and I'm not real comfortable with it," says agent Maxwell. "You know, if your Internet connectivity goes down, you're inconvenienced. You can't get your e-mail, but you're not dead in the water. If your phones go down, you're dead. I tend to shy away from putting a client's phones on anything other than the most stable circuits."

CLEC Mpower Communications Corp. has customers for a VoDSL service, but no longer sells it. "We now use T1 as the delivery platform for our integrated services," says vice president Michele Sadwick, noting the company still offers voice and DSL services as a bundle called DSL Advantage, but they are not combined over the same line.

In December 2002, DLEC Covad Communications Co. announced it would begin combining voice with its core SDSL offer (integrated versions of its T1 and ADSL services will come later this year). Voice calls are routed over separate high-quality permanent virtual circuits (PVCs) through Covad's ATM switch, and handed off to Focal via a VoDSL gateway for connection to the PSTN (click here).

"The small business voice market is $53 billion -- 40 percent is addressable in our footprint," says Todd Kiehn, Covad's group product manager for voice services, explaining the company's launch. He says it is expected to be available for sale through agents by second quarter.

VoIP also is gaining some ground among DSL and cable modem users in the small office/home office (SOHO) set. For example, two companies, Vonage DigitalVoice and WebTel Wireless Inc., are offering integrated voice and data services over their proprietary networks through cable, Bell and ISP resellers as well as VARs, system integrators and agent partner sales organizations (click here).

"Packet-based IADs are necessary for delivering the enhanced services required to drive revenue streams," notes Yankee Group analyst Danny Klein. "Still, service providers are primarily using TDM-based IADs." He says this will begin to change by the end of the year, or once technologies like VoIP mature and quality of service (QoS) issues are resolved.

Yankee Group expects this shift to packets to drive the IAD market. It also sees increased deployments of IADs generally by Bell companies and IXCs beginning in 2004, as they experience competitive pressure from cablecos offering voice and data services to SMBs.

The reason for this competitive move is clear: Integrated access services can reduce churn. "It is common for companies that experience 2.5 percent churn per month in SMB voice lines to see that figure reduced to 1.5 percent or less with integrated access," according to NetCon.

Agent Levitin concurs: "The nice thing about T1s is that people don't leave the carrier. It's a pain. So they get a T1 in and they stay for years."

Previously, integrated services primarily have been the province of CLECs and their distribution partners.

"[Integrated access] gives the competitor a chance to beat the RBOC at its own game, by allowing the new entrant to lock in local, long-distance and voice revenue over a single integrated product, while saving both its customer and itself a great deal of money," note Hussein and Jacobson. "The [integrated access] challenge appears harder for the RBOCs and IXCs to embrace because they are faced with complex internal conflicts, such as T1 cannibalization, and too much focus on each product."

Another obstacle they report is that integrated services require a consultative sales process. "This is simply not done for the SMB market by the RBOCs and large IXCs. When addressing the SMB market, RBOCs and IXCs do not use site visits, multiple meetings and they certainly do not offer individualized services," reports NetCon.

So much for conventional wisdom: SBC Communications Inc. in October 2002 introduced an integrated access service wherein the Bell manages every aspect of its installation, CPE and ongoing maintenance. SBC launched the service in its Pacific Bell and Southwestern Bell regions, and expected it to be available in its Ameritech and SNET regions in January 2002.

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Source: Yankee Group