If telecommunications were the fashion industry, megabandwidth Internet protocol (IP) networks and advanced data services would be the latest dazzling sequined collection featured on the Versace runway. In contrast, Centrex services would be the standard blue suit and starched white shirt.
Even though the almost 40-year-old service may be a dinosaur in technology terms, there seems to be a renewed interest in Centrex over the last several years. Incumbent telcos and, more recently, competitive local exchange carriers (CLECs) have branched out beyond only offering Centrex to giant corporations and have begun to focus on the small and mid-sized business markets and telecommuters.
Since its inception, Centrex has been the major challenger to private branch exchange (PBX) equipment that businesses purchase outright and install on their premises to provide calling features such as forwarding, voice mail and conferencing. In the past, PBXs had more functions than the telcos' central office (CO)-based service, but today Centrex offers essentially the same capabilities. Because Centrex resides at the service providers' CO, it doesn't require users to spend money up front to purchase special equipment or continually upgrade the software to handle new area codes.
Smaller Sizes
When it was introduced, Centrex was mainly in the domain of large businesses with several hundred telephone lines. But at last count, businesses with one to 40 lines have purchased the lion's share of Centrex. These small companies accounted for almost 3.7 million Centrex lines as of the second quarter of 1998, according to The Monitor, a publication tracking Centrex that is published by The Eastern Management Group, a Bedminster, N.J.-based consultancy (see chart, "Centrex Installed Base Lines by Vendor," page 66). The second-largest segment of Centrex users were businesses with more than 4,000 lines, which accounted for almost 3.2 million of the 14.6 million Centrex lines in the United States.
Centrex services for the one-to-40 line group has experienced a 34 percent compound annual growth rate (CAGR) between 1995 and 1998, according to Eastern Management calculations. This is almost triple the CAGR of any other segment (see chart, "Centrex Growth Rates").
Image: Centrex Growth Rates, Segmented by Line Size
Small businesses are attracted to Centrex services because they generally don't have the financial resources to purchase and maintain premises equipment or the luxury of hiring employees whose sole concern is the company's telecommunications system.
"Most of the small businessmen want to focus on business, not the technology of doing business," says Warren Williams, vice president of Eastern Management Group.
The Bell operating companies (BOCs) are, by far, the largest providers of Centrex service. Several Bells have introduced competitively priced Centrex packages that are specifically marketed to small business owners.
"The service has been around forever. But now there are things about how it's marketed and packaged to make it more attractive to another market. Carriers have added a lot of features and bundled and priced it so it's more attractive," says Frank Stinson, senior product manager at Parsippany, N.J.-based consultancy Phillips InfoTech.
US WEST Inc., for one, says that Centrex's acceptance by small business customers took it by surprise. When US WEST began offering Centrex services to end users with three to 50 lines about 18 months ago, it anticipated having only about 50,000 customers. "Now we have four times that amount," says Colleen Kennedy, group product manager for small business Centrex at US WEST.
The acceptance of Centrex service by the small and mid-sized businesses is a huge opportunity for CLECs, since they count these end users as their prime markets. And the good news is that Centrex users may welcome alternatives. About 53 percent of Centrex users say they would be willing to switch providers, according to a study conducted at the end of 1997 by the Neenah, Wis.-based National Centrex Users Group (NCUG), an association for Centrex customers. High on the list of what would convince them to change providers includes lower prices, improved customer care, new features and better performance of repair and installation services.
Creating a Buzz
For CLECs, resale of Centrex service has been an ideal way to gauge customer interest and create brand awareness prior to building a network. And for those that offer Centrex on their own switches, it can be a way to gain extra income from a piece of existing equipment in which they've already invested a lot of money.
"A lot of CLECs are reselling to get the base. Then they're taking fiber into the building," says Ron Ziesemer, principal at The CFIE Group, a Rochester, Ind.-based consulting and training firm.
A classic example of what Ziesemer is referring to is Cedar Rapids, Iowa-based McLeodUSA Inc. In 1994, McLeod became a reseller of Centrex in 10 states.
"First we gain customers through resale of Centrex, then we build networks, then we transition resale customers over to the network," says Bryce Nemitz, spokesman for McLeod.
Nemitz says McLeod will begin the transition phase in 1999, putting customers on its network first in Iowa and Illinois, then throughout the rest of its territory as it completes network buildouts in 2000. McLeod mainly markets its Centrex service to businesses with about five lines, Nemitz adds.
McLeod focuses on Centrex resale rather than total service resale (TSR) because Centrex margins are larger, Nemitz says. However, no numbers comparing TSR and Centrex are readily available. "Centrex affords you the ability to provide a customer additional services for basically the same price as a business line," he says.
However, McLeod only offers a few of the possible Centrex features. These include call transfer, hold and three-way conferencing. But McLeod also offers long distance bundled with the Centrex service, something its Bell competitors are not yet legally allowed to do. As it becomes a facilities-based provider in the future, McLeod also is toying with the idea of bundling a variety of other services, such as data and wireless, with Centrex. McLeod holds personal communications services (PCS) licenses in the Midwest.
Vancouver, Wash.-based GST Telecommunications Inc. entered the business in a similar fashion. The company began its Centrex offering when it acquired Call America Business Communications in July 1996. Call America was reselling Centrex service at the time. GST began facilities-based Centrex services in June 1997 when it turned up its first switch in Hawaii. Currently, the company has about 102,000 Centrex lines.
GST's price for Centrex is typically 10 percent less than the incumbent telco, says Clint Warta, vice president of product management at GST. GST provides Centrex over T1 lines, and includes features such as call waiting, call forwarding, transfer, conferencing, speed dial and station-to-station calling. Warta says that Centrex users tend to be more loyal customers, signing three-year to five-year contracts. Customers also tend to purchase additional services from GST, including long distance and high-speed data, he adds.
Image: Centrex Installed Base Lines by Vendor/Size Segments: 2Q98
One of the CLECs that is a longtime provider of facilities-based Centrex is AT&T Local Services, formerly New York-based Teleport Communications Group Inc. (TCG). TCG started offering Centrex to large-business customers more than five years ago in Manhattan. Then it rolled out the offering across its own networks in markets nationwide. Prior to its acquisition by AT&T Corp., TCG was trying to bring Centrex to customers with as few as 10 lines, says Bob Gulbin, senior product manager with AT&T Local Services. Gulbin notes that the Telecommunications Act of 1996 gave competitors the ability to use incumbent telcos' unbundled local loops to reach customers, making it more cost-effective to bring Centrex and other services to smaller businesses. Prior to the Telecom Act, TCG only could use the costlier T1 lines to provide Centrex. Now, after the merger, AT&T Local Services will continue its plan to bring small business customers Centrex service, and will bundle its parent company's long distance service into the package.
Ready to Wear?
It may seem that Centrex is a simple service to offer if a company already has its own switch. While technically preparing the offering may only require upgrades of some switching software, there are other potentially costly factors that have to be considered. There's a need for additional technicians to administer the switch, as well as technicians in the field to do installation and maintenance. Providers also must have trained representatives to staff customer care centers, and a sales force that understands how to sell this more complicated service to small and large businesses alike.
For these reasons, entry into the Centrex business can be somewhat expensive, especially for CLECs who may be strapped for cash after building fiber networks and beefing up their sales and marketing organizations. "If you're not seeing a lot of Centrex from CLECs, it's because they don't have enough dollars in their pockets," says Pete Contostavlos, a product manager with AT&T Local Services.
Industry analysts say that once CLECs' offerings become more widespread and mature, these alternative providers pose a major threat to the incumbent telcos. CLECs tend to be more aggressive and agile, according to Eastern Management's Williams. Cost also will be a factor. CLECs will get customers' attention if their prices are competitive. CLECs will be able to seal the deal, say some analysts, if they focus on excellent customer care and differentiate their service packages.
"If they're going to win anywhere, it's in customer care," says CFIE's Ziesemer. Because CLECs tend to have fewer customers, by nature of being the new kids on the block, they tend to give more personal attention to end users than the Bell behemoths do, Ziesemer adds. Also, CLECs have already started offering new Centrex services, such as station message detail record (SMDR), for minimal fees. Ziesemer says that while the Bells can provide SMDR, they view it as an enhanced service and tend to charge higher fees to end users.
Other CLEC advantages include having a national footprint, as AT&T Local Services does, compared to the Bell companies, which operate regionally. The CLECs' nationwide coverage allows them to provide the same Centrex features to a single company's offices around the country, given that those offices are located in markets where the competitors have networks.
In the short term, the CLECs' biggest advantage is that they can package Centrex with long distance services. In the NCUG's customer satisfaction survey, 62 percent said they wanted their Centrex service integrated with usage or long distance. Bell companies, however, are forbidden to do that until the Federal Communications Commission (FCC) rules that they've met the checklist requirements set forth by the Telecom Act.
Offering a one-stop shop and one bill for all telecom services is the end goal, say service providers. "The first one to come to that will have a short-term advantage, all other things being equal," Contostavlos says.
New upgrades from switch vendors, such as Murray Hill, N.J.-based Lucent Technologies Inc. and Nortel Networks, may soon be adding more new services to the service providers' Centrex bundle. Nortel's DMS switch has more than 350 Centrex features that have been developed over the years. Now the company has announced Extreme Centrex, which includes new offerings of voice attendant, a 1 megabit (mb) modem for Internet access, integrated landline and wireless Centrex and Centrex IP services. Centrex IP, which Nortel plans to make available by December 1999, will allow end users to use the IP backbone to access their Centrex services. The service is ideal for telecommuters, says Janet Smith, senior manager of Centrex IP marketing at Nortel.
Vendors continually have been incorporating wireless services into their Centrex products. Lucent's Centrex allows wireline and wireless phones to ring simultaneously, forward calls to the phone the customer is using at a given time and creates one voice mailbox for both phones. Nortel's wireless solution has similarly "twinning" functions for landline and wireless phones, as well as unified messages. It also supports in-building wireless use and hands calls off to the public PCS or cellular network outside the campus environment.
With Centrex IP, telecommuters or business travelers can dial into their company's managed IP network from anywhere and gain access to local area network (LAN) data connectivity as well as voice services--including voice mail, corporate dialing plans and productivity features such as conference calling and caller identification (ID)--that follow them everywhere they go, according to Nortel.
These fashionable new wireless and IP services may be part of the latest trend, but end users don't want to pay designer prices. NCUG's survey revealed that the majority of businesses said they had no plans to use wireless Centrex or voice over asynchronous transfer mode (ATM) or IP.
"The end users simply aren't willing to pay for it," concludes Rae Peppler, NCUG's president.
What Centrex Customers WantWould You Consider Switching Centrex Providers?
What Would Make You Consider Switching Centrex Service Providers?
Would You Ever Desire to Integrate Centrex Services with Usage or Long Distance Packages?
Source: National Centrex Users Group 1997 Customer Satisfaction Survey |
