Connecting the dots

I first heard the phrase "connecting the dots" in the context of the telecom industry in 1998. I expect to hear it a lot more in 1999.

Connecting the dots is the motivating force behind a wide range of business plans-from MCI's pan-Atlantic On-Net service to AboveNet's one-hop Internet strategy (see story on page 14) to e.spire's Baltimore-to-Washington calling plan. What all three offerings have in common is the recognition that the distance-sensitive cost component of connecting two points is becoming increasingly unimportant.

In the monopoly days, each carrier ruled its domain, collecting fees for letting traffic in and out. In a deregulated telecom industry, the carrier that controls both ends of a call or permanent connection is likely to emerge as a winner. The way to make money is to target end-points that exchange a lot of traffic.

By letting a strategy of connecting the dots drive their infrastructure investment, carriers can maximize the return on that investment. They can spend advertising dollars more efficiently and tailor service offerings to end users who make a lot of calls, or send a lot of traffic, between city pairs. Such a strategy also can minimize a carrier's variable costs by enabling it to avoid certain access or settlement fees.

One of the most interesting examples of connecting the dots I've run across involves competitive international carrier Star Telecommunications and competitive local exchange carrier PaeTec Communications. Along with its own facilities in several European countries, Star owns a little less than 20% of PaeTec.

PaeTec plans to turn up service in eight markets in 1999 and 27 more in 2000. Not surprisingly, the company is targeting metropolitan areas that make a high volume of international calls and plans to co-locate in facilities where Star already has installed international gateway switches.

Plans include a prepaid international calling card offering, says Dick Ottalagana, PaeTec's executive vice president. The local access number customers will dial to place their calls will belong to PaeTec. That means any access charges Star pays will go to its affiliate. It's the same approach AT&T is using via its Teleport acquisition, except that Star is focusing on the international long-distance market.

The logic of a "connecting the dots" strategy has various implications. Anyone who knows how to mine a wealth of public and proprietary data to uncover attractive opportunities will be in great demand. Calling patterns are not static and ultimately carriers will seek to develop predictive traffic models. These models will have a high number of variables, including migration patterns, industrial growth and countless others.

We may also see increased competition among service providers wanting to put their own dots on the map. AboveNet, for example, hopes to act as a magnet for Internet service providers by offering them a single place where they can put their content and peer with other ISPs.

Because deregulation is a new and increasingly global phenomenon, there should be plenty of near-term opportunities. I'll be surprised if we don't see more partnerships along the lines of PaeTec/Star pursuing similar business models.

PaeTec also has a unique strategy for addressing what many CLECs have said is their biggest challenge-attracting and retaining talent.

"You and I could both go to the store and buy an easel and paint," says Ottalagana. "One of us might paint a stick figure, and another might create a masterpiece. It all comes down to execution and people. Our goal is to be the most employee- and customer-oriented [telecom carrier]."

Every PaeTec employee receives stock options and is vested from Day One. Any year-end bonuses will go to everyone, at the same percentage of their salary. The company even buys employees lunch every day. To ensure that the founders' vision remains intact, the company insists that any new investors agree to a hands-off approach-they don't get board membership. Because PaeTec has the kind of managers investors like to see, some of them are willing to agree to those terms, says Ottalagana.

Many of us would like to believe that this kind of strategy can pay off. I'm sure I won't be the only one watching this company closely.