Wooing SMBs with Integrated
By Khali Henderson and Tara Seals
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
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
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
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
Click Here for Chart
Source: Yankee Group
|Allegiance Telecom Inc. www.algx.com
Covad Communications Co. www.covad.com
Focal Communications Corp. www.focal.com
Maxim Datatel www.maximdatatel.com
Mpower Communications Inc. www.mpower.com
Network Conceptions LLC www.netconllc.com
Pri-Fly Inc. www.prifly.com
SBC Communications Inc. www.sbc.com
Vonage DigitalVoice www.vonage.com
WebTel Wireless Inc. www.webtelwireless.com
XO Communications Inc. www.xo.com
The Yankee Group www.yankeegroup.com