Moving Beyond Access
By Mark Evans and Mark Taber

Access providers are actively pursuing opportunities to include value-add services that satisfy customers'complete telecommunications needs while helping to bring in additional revenue streams. While some are trying to reposition themselves as BSPs (Broadband Service Providers), there are still a good number who question the overhead cost and the ultimate ROI. Bundled product offerings may be the rope used to pull competitive providers from the hole dug by the mass exit of the capital markets from the telecom industry. Bundled services increases average revenue per customer ("ARPU"), which leverages the large investments in back office systems and customer acquisition costs, while cementing your relationship with the customer. Additionally, there are multiple opportunities to partner with other firms, such as Managed Service Providers ("MSPs"), that have invested large sums in infrastructure, but desperately need additional scale, thereby allowing access providers to avoid large capital expenditures themselves.

Hostile market environment

Competitive service providers are facing a hostile environment today. With limited access to capital markets, companies must prove the viability of their business plans with strong revenue traction and a clear path to profitability in order to even meet with potential investors.

Yet competition remains heavy in most markets. Over 300 competitive telecommunications companies have been funded since 1996, with many fighting for the same customers. Some companies have already fallen by the wayside, but there remains significant competition in many markets. Currently, there are at least 15 CLECs actively pursuing business customers in Atlanta. Yet a recent study by JPMorgan and McKinsey & Co. estimated that the market opportunity for business customers in Tier I cities leaves room for a maximum of only four financially viable CLECs1. (The same study concluded that there is room for only two or three CLECs in smaller markets.)

Service offerings from these companies are highly similar. Frequently, the only differentiator from other start-ups is price, which could be forced lower as competitive providers are forced to battle each other in addition to the ILEC. All of this is compounded by the fact that customers, newly skeptical of the viability of competitive providers, are asking salespeople for balance sheets and other forms of proof of financial stability. Closing new customers has become more challenging than ever.

The result is that the shakeout in the competitive telecom space will continue and the list of survivors will continue to shrink.

Bundled services offer differentiation

Despite the challenges faced by telecom upstarts, there is light at the end of the tunnel for smart operators. Demand for telecommunications services continue to grow at healthy rates. RBOCs continue to ignore the needs of small to medium enterprises, offering little or no customer service and legacy products. Bundling value-added services and multiple telecom products will allow emerging service providers to differentiate themselves, both to customers and to potential investors.

The Yankee Group recently completed a survey of US households regarding their telecommunications needs. A summary of these results is seen on the charts below:

Percent of U.S. Households

Service Offering
Single Provider Today
Very/Somewhat Interested
Local/Long Distance
24%
40%
Local/LD/Cable
3%
39%
Local/LD/Cable/Access
1%
39%

Source: The Yankee Group (The Daily Deal, May 31, 2001)

The first chart shows the broad gap between the percentage of households that strongly desire bundled service offerings and those who are purchasing the bundle today. This presents a huge opportunity for service providers to capture a greater share of household telecom spending by evolving their product lines.

What is perhaps more interesting and relevant to service providers selling outside the residential market is the second chart, which highlights the top reasons cited for desiring the bundled product. Four of the top five reasons (single billing, single point of contact, convenience and receiving better service) revolve around better customer service and convenience. What this translates to is lower churn rates from more satisfied customers. Imagine the difference in churn rates for two similar companies: the first, a private cable operator who experiences a four-hour primetime outage in service to video-only customers; the second, a bundled service company offering local voice, long distance, video and high-speed data who experiences the same outage in video service. Customers are far more likely to stay with the second company if the situation is managed professionally, versus the first company, where the DBS companies may have install dates before the outage is even ended.

Bundled products improve economics

Bundled products also greatly improve the economics of CLECs and other service providers. Compare the following illustrative examples of customer acquisition costs for a CLEC offering voice-only service to one that has evolved its product offerings to include data, LD, storage and shared web hosting:

Voice-only
Bundled provider
Monthly recurring

Local voice revenue
$ 300
$ 300
Long Distance revenue
--
100
Internet Access
--
200
Hosting
--
50
Storage
--
100
Total Recurring Revenue
$ 300
$ 750
Operating Expenses
(200)
(550)
Monthly Contribution (less cost of acquisition)
$ 100
$ 200
Contribution %
33%
27%

One-time costs

Customer Acquisition Costs
$(500)
$ (700)
Customer Premise Equipment
(700)
(700)
Installation Cost
(500)
(750)
Non-Recurring Revenue
250
250
Total Cost of Acquisition
$(1450)
$ (1900)

Months payback
14.5
9.5

Although adding re-sold services such as hosting and storage has lowered the bundled CLEC's contribution margin, the gross contribution dollars has doubled in this scenario, from $100 to $200 per month. Additionally, selling into your existing customer base is by far the most effective form of distribution, with higher percentage of closed sales and shorter purchasing decision cycles, so one-time total customer acquisition costs increase by only $450. Therefore, the increased margin dollars far exceed the incremental sales, marketing and provisioning costs, allowing the company to pay back its "investment" in that customer more quickly, i.e. in less than 10 months versus 15.

As mentioned earlier, one of the largest benefits of the bundled product is reduced churn rates, meaning that the average customer will be with you for longer periods, allowing you to collect the monthly contribution longer and increase the "lifetime value" of that customer and the return on your customer acquisition investment.

Multiple Opportunities to Partner Today

While CLECs and other access providers have been seeking additional revenue sources, Managed Service Providers ("MSPs"), which offer services such as hosting, storage, security and managed software services, have been seeking customers to leverage the infrastructure that they have built. Companies such as Managed Storage International in storage, Server Vault in hosting, and ManagedOps in mid-market enterprise software services are actively seeking partners as sales channels to extend their services to small-to-medium enterprise customers.

This is a win/win situation in a capital-constrained environment. CLECs who extend their product bundle into managed service offerings get incremental contribution dollars, lower churn rates and maintain control of the customer without being forced to make large capital expenditures. MSPs get additional scale to leverage their existing fixed infrastructure and can cost-effectively manage their sales channel by utilizing a limited number of partners to resell their products.

Time to Act

Access providers must act quickly to evolve their product sets. There are too many product lines masquerading as companies today. Those that evolve their product offerings to increase ARPUs and gain larger percentages of their customers' telecommunications and IT spending will be the winners left standing at the end of the shakeout.