Posted 02/2001
Business and Finance
Jury's Still Out on Total Service Resale
Delays Plague U.S. Dial Tone's Launch of Its Prepaid TSR
By Becky Bracken
Better late than never. At least that's what U.S. Dial Tone L.P. (www.usdialtone.com) is hoping.
Just a few months ago, the Texas-based company, which planned to base its business on the total service resale (TSR) model, seemed poised to change the way the industry looked at TSR. But things haven't exactly gone according to plan.
Slated to launch prepaid residential service in Dallas, San Antonio, Houston and Austin, Texas in August, with service in 10 other states to follow, U.S. Dial Tone hit two big snags, causing months of delay.
"The main reason for the delay was our e-commerce vendor took longer than anticipated to deliver the [back-office system] product to us," says Robert Mahler, who is U.S. Dial Tone's CEO, chairman of the board and director. "Second to that, with the market downturn, our sources for capital dried up; as a result, we are currently looking for additional capital to enable us to launch in the 19 markets that we originally anticipated to launch in in August."
While Mahler was trying to drum up investors for expansion capital, U.S. Dial Tone launched service during the second week of December in the Texas markets with its new back-office systems in place.
Mahler says that once the company gets a few months of experience under its belt, he'll be more prepared to discuss the success of the TSR model.
Analysts, though, remain pessimistic about the chances of TSR's long-term survival. But they are curious to see how U.S. Dial Tone will fare with prepaid residential service using highly automated systems.
Taher Bouzayen, senior analyst for CLEC/resale for Atlantic-ACM Inc. (www.atlantic-acm.com), says that while he isn't too optimistic about the viability of TSR overall, there are aspects of U.S. Dial Tone's business that are encouraging.
"I see a slightly different variation with U.S. Dial Tone because it's prepaid," Bouzayen says. "The only thing they will have to make sure of is that they get [those] prepaid [revenues] to at least cover the operational costs. And since they're going to be resellers, it's not going to be capital-intensive because they don't have to acquire equipment and other things. Therefore, there will be a chance for such a model to be viable."
Another aspect of U.S. Dial Tone's advantage is the back-office system, which automates transactions with both customers and the ILECs, cutting down on backlogs. Mahler is betting that the automated e-commerce system coupled with the prepaid plan will cut costs, and keep customers.
"Other than lost potential revenue and increased debt that resulted, the delay should have very little effect on the consumer response to our product and our overall success," Mahler says.
But Bouzayen does disagree with Mahler's quest for capital to extend U.S. Dial Tone's reach into different markets.
"If capital is really scarce right now, why don't you just want to focus on specific markets rather than expanding all over?" Bouzayen says.
What Mahler should do instead, he says, is penetrate those specific markets extremely well and build a solid brand with credibility. Capturing more capital for breakneck expansion may ultimately work against the reseller.
"We should not forget the lesson we are getting right now from the CLECs," Bouzayen says. Many traditional CLECs "raised billions in venture capital, and they used all that capital to go nationwide in less than 18 months. When you do that, you aren't focused. When you aren't focused, you don't execute well. When you don't execute well, you don't provision on time. When you don't provision on time, you get pissed-off customers. And when you get pissed-off customers, you lose your credibility."
And credibility is crucial when attracting and keeping customers and, in turn, courting investors. With TSR in particular, customer service is crucial.
"We've been reluctant to endorse this resale notion," says Craig Clausen, senior vice president and chief operating officer of New Paradigm Resources Group Inc. (www.nprg.com). "It's a very customer care-intensive industry. There are tremendous customer service issues involved."
With U.S. Dial Tone, customers can predetermine the amount of service they want, which should be attractive to residential customers seeking to control household expenses and stick to a budget. The other benefit of the prepaid service, according to Bouzayen, is that, at least in the short term, customers will be inclined to stay with a carrier whom they have already paid for service. This will keep them from jumping to another competitor at a moment's notice, lured by lower prices.
Also, customers can log on to U.S. Dial Tone's website, sign up for the plan they want and activate the service themselves. While some analysts feel such self-provitioning may undermine customer loyalty in the long run, the strategy could aid U.S. Dial Tone in the short term by cutting down on costly customer interaction.
While there may be room for qualitifed optimism in U.S. Dial Tone's case, the problems related to complicated customer-care issues and a lack of available capital in the market are why analysts say TSR is a difficult thing to pull off. Other factors working against TSR are intense competition, high costs and slim profit margins. And with unprecedented price erosions in the long-distance market, it may get worse.
Based on the early troubles for U.S. Dial Tone, there are still questions about the viability of resale. In the future, offering a wide variety of services and adapting to changes in the market will make the difference between success and failure--not only for U.S. Dial Tone, but for TSRs in general.
"I think there will be a chance for such a model to be viable as long as they keep themselves scalable and flexible," Bouzayen says. "And when I say scalable and flexible, I don't just mean in their operations, I mean in their minds. [They need to be able to] shift with the market dynamics, shift with consumer preferences, and shift with consumer behaviors."
Now, months after its original launch, the jury is still out as to whether U.S. Dial Tone can make TSR pay.
As Clausen puts it, "The proof is in the pudding. We'll just have to wait and see."
