Hale of a company

Eleven years ago, Robert Hale Jr. was working in Boston as a salesman of MCI's long-distance service. His customers were calling to ask about a bundled service that competitor AT&T was offering. Rob asked his customers to forward him the information and said he'd figure it out. AT&T was offering aggregation, or wholesaling of its long-distance service. After reviewing the documents, an idea had taken root. Rob decided there was money to be made as an aggregator of long-distance voice services for small and medium-sized businesses.

Rob called his father, who lived about 120 miles down the Massachusetts Turnpike. "I am quite certain that I can do this," Rob said.

Prophetic words. The two Hales met later that week at a restaurant in Sturbridge, Mass., between their homes. Over dinner, Rob explained his concept. "I was certain at the time that there was a great opportunity, and if we plowed into it quickly, we could take full advantage of it," he recalls.

After a 45-minute conversation, Robert "Bob" Hale Sr. agreed to back his sonÕs venture. "I was an entrepreneur myself--since I was 27--so it's not unusual that he'd want to [start a company] coming from the Hale household," says the senior Hale.

With $300,000 in seed money and no formal business plan, 23-year-old Rob Hale founded Network Plus in Quincy, Mass.

The company opened for business in April 1990. "I screwed everything up for nine months and lost all the money," Rob Hale acknowledges. During that time, Network Plus dropped from five employees to three, and Rob remembers thinking that he was pretty young for such a venture. To cap it off, a Business Week article at the time quoted a senior AT&T executive as saying that aggregation was a loophole the company would close.

"Of course the [Network Plus] salespeople brought that to a meeting and said, 'Gee, isn't this what we do?'" Rob recalls. "I remember trying to explain how we would manage to succeed. It took some convincing, and in the long run, thankfully, it worked out. Two of those guys are still with us today."

In January 1991 the company registered a profit for the month. And after 18 months of business, Network Plus had paid off all debts.

It was a 'pretty harrowing' experience, Rob says. "The first nine months were terrible, and nothing worked. Once we figured out what we were doing, it started going quite well."

Evolution of a business

Network Plus has been steadily growing since its crippled beginning. Being a new company in the game meant Network Plus had to educate customers.

"It sounds crazy," Rob says, "but we would explain what we do and people would say 'This sounds too good to be true--is it legal?'" Since the Telecom Act of 1996, that's no longer a problem. Customers are much more informed and aware of competition, he adds.

Network Plus has adapted with the times and changing communication needs. "We've transitioned from a predominantly long-distance company into a full-service company," says John Kelley, senior vice president of network services for Network Plus. "Our vision is to be the premier provider of services on the East Coast by the end of the year 2001."

Its dossier of customers includes the Boston Symphony Orchestra, the Boston Ballet, the Boston Stock Exchange and the Museum of Science, plus several Boston sports teams--the Patriots, the Celtics and the Bruins.

The company has a facilities-based network that spans the Northeast and the Southeast and is building out the mid-Atlantic region. Today, Network Plus offers local, long-distance, high-speed Internet access and Web-hosting services.

"We have DSL access, ISP facilities and e-commerce and Web-hosting centers. We are one of the few facilities-based CLECs that has every piece of the network under their control," says James Crowley, the company's executive vice president and chief operating officer.

The network is built with Class 5 switches from Lucent Technologies and Nortel Networks. The local switches--5ESSes--sit in Atlanta, Boston, Chicago, Miami and New York. In 2001, more switches--perhaps softswitches--will be added in New Jersey, Philadelphia and Washington, and in 2002 Raleigh, N.C., will come online, Crowley says.

These are Network Plus' "super nodes," and they double as e-commerce hosting sites. Each has ISP and DSL network infrastructure; at the edge of the co-location, Network Plus places remote terminals and DSL access multiplexers (DSLAMs).

Behind the local switches are Nortel's DMS Class 5 switches, which are used for long-haul transport. They sit in Boston, Chicago, Los Angeles and Orlando. The long-distance network addresses 70% to 80% of its customers' traffic, Crowley says. The fiber backbone stretches 28,000 fiber miles throughout the Northeast and Southeast and will grow as the company brings the mid-Atlantic region on-net next year.

The provider's penetration rates range from 2% in newer markets to 7% in established markets. "The competitor here is Bell," Crowley says, and the Bell companies aren't bringing integrated services to the small and medium-sized business market.

That's where DSL comes into play. In 1999, Network Plus rolled out DSL service. Of its more than 50,000 customers, about 1000 use DSL. "We're doing limited [voice-over-DSL] deployments in New York and Boston, but the network is fully configured for it," Crowley says.

The flexibility of bringing new services online is crucial to Network Plus' success, Rob says. "The fundamental value of our company is customer first, network second," he says. "Aggregation in 1990 was only good for a customer that wasn't big enough to get its own AT&T deal. Our version of voice over DSL is good for a customer that is not big enough to get either a T-1 or support from the RBOC directly."

The customer touch

DSL is well-suited for Network Plus, which services small and medium-sized businesses. The sale is one of simple economics, Kelley points out. A small business with eight voice lines and 56 kb/s dial-up access will pay about $300 per month for those services. "We give them the same package but with voice over DSL, which is up all the time, for less than $300 a month--and the service is more reliable," he says.

AccessLan Communications provides the DSLAMs and Jetstream Communications supplies the voice gateways for Network Plus' DSL services. Network Plus was Jetstream's first customer and has deployed multiple CPX-1000 gateways in key markets, including Atlanta, Boston, Miami and New York, says Jeff Liebl, market development manager for Jetstream.

In 15 months of working together, Network Plus has deployed AccessLan's PL-2000 intelligent DSLAMs, or iSLAMs, in about 300 central offices, says Kumar Shah, vice president of marketing for AccessLan.

"They were the very first CLEC in the entire industry to do voice over DSL," Shah says. "They had been selling voice service to the small and medium-sized business market for more than five years. They know where the customers are."

Still, he admits, "the DSL rollout did not go as they or we had planned." Network Plus faced provisioning issues and had trouble getting access to unbundled local loops. Then the Verizon Communications strike hit, further crippling its ability to turn up the service.

AccessLan's customers account for about 50% of the 40,000 to 50,000 DSL links supporting voice and data, Shah says. Though the market is about half as large as AccessLan expected, by third quarter 2001, Shah expects the number of lines to climb as high as 180,000. "Once we figure out all the issues and [providers] are able to provision new customers in a matter of a day or two, it will kick in and have a snowballing effect," he says.

Network Plus isn't alone in its slow deployment; DSL projections are off across the board, and companies homed in on the technology have taken a hit.

Covad Communications and NorthPoint Communications earlier this year received massive investments from SBC Communications and Verizon, respectively. Their stocks, along with that of Rhythms NetConnections, have nose-dived into the single digits.

Those hits focus more attention on voice over DSL, Liebl says. "The business case for vanilla Internet access over DSL pales in comparison to the business case for multiline local telephony and Internet access over the same DSL line."

While some tumbling can be attributed to a stock market correction, the fall of those DSL-only companies is no accident, Kelley says.

"DSL is distance-sensitive, and that makes it difficult to provision," he says. "Covad and NorthPoint--they are one-trick ponies. It gets bundled into the offer the ISP or the ILEC has. If you donÕt have anything else to offer the customer, it becomes a negative. I still have the same issues in terms of provisioning DSL, but in the meantime, I can offer alternatives--like a T-1--to the customer."

Rob agrees. "I don't believe DSL as a stand-alone product is perhaps the right strategy for a company, but as an ancillary product, I think it's a dynamite product." Simply stated: Don't build a business on one service. For that reason, Network Plus also offers high-speed access via T-1 links and, in some markets, fixed wireless.

Kelley conceded that voice over DSL has taken a long time to take off, and Network Plus has worked through technical issues such as ATM switch handoffs. Still, he's bullish on the future of DSL.

"We're opening the faucets to start selling that," he says. "It benefits both parties. On the network side, we donÕt have to maintain different boxes and the customer has one pipe for both of its [voice and data] needs."

Liebl is confident that its first customer will continue to rise. "They really are an innovator in the space in terms of adopting the technology," he says. "Next year, as volumes begin to ramp up, they will really reap the rewards of being first [with voice over DSL]."

The balance sheet

Network Plus, along with other high-tech companies, has watched its stock sink. In March, the stock was trading at its 52-week high at $62.63 per share, but in October it dropped to a low of $5 per share. In November each share was in the $5 to $7 range.

"We caught the telecom flu," Rob says.

Even though the stock is down, Network Plus' financials are pretty strong. The company's third quarter revenues increased 14% over the previous quarter to $62.1 million, and EBITDA loss decreased to $13.9 million from $14.6 million in the second quarter. For the nine months ended in September, total revenues increased 53% to $166.8 million.

Credit Suisse First Boston analyst Dan Reingold notes that a year ago, 90% of Network Plus' revenues came from long-distance and 10% from local voice. But Network Plus has been growing its data offerings, and in the third quarter, data grew 70% to $6.7 million, comprising 11% of the company's revenues. Long-distance and local voice account for 60% and 29% of revenues, respectively. The data growth will continue and, Rob projects, next year's revenues will be evenly split across the three sectors.

The third quarter showing is somewhat surprising considering the effect of the Verizon strike. According to Kelley, 65% of Network Plus' network is in Verizon territory. For about six weeks during the strike, Network Plus--like many competitive providers--could not roll out lines on its network, though it still could resell services. With planning and a few well-placed phone calls, Network Plus caught up quickly, he says. Despite losing about half of the third quarter, its third quarter financials were solid.

Network Plus' financial position lures customers, Rob says. The company is fully funded--top institutional investors include the TCW Group, Brinson Partners, Putnam Investment Management and Dresdner RCM Global Investors.

"We have 2% churn monthly where the industry average is 4% to 5%," Rob says. "Clearly, we have figured out the operational component of our business. Our second strength is a pristine balance sheet. Many competitors are leveraged to the hilt."

Like father, like son

Investing in his young son's venture was perhaps a bold move for Bob Hale, but his confidence in Rob guided his decision. With a background in importing women's apparel, the senior Hale brings to Network Plus "common sense business knowledge." He has invested "a hair under a million dollars" in his son's venture, he says.

Bob Hale has been involved with Network Plus since its inception and is chairman of the board. In the early days, Bob helped his son seal a contract with AT&T, pledging that Network Plus wouldn't default on the deal. "AT&T was our first vendor," Bob recalls. He also helped select the five original employees.

He shifted from clothing to communications with gusto. He is a founding member of the Telecommunications Resellers Association and has sat on the advisory boards of WorldCom and Sprint.

Rob considers his "pop" a mentor as well as a business partner. "He's a risk-taker," Rob says. "He used to run a sales company that was a manufacturer and distributor of women's apparel. They would have sales meetings in my father's living room and [as a kid] I would sit on the floor in those meetings and think, 'this is what I want to do.'" I was raised in a sales/entrepreneurial environment, and from the time I was 12, there was no doubt in my mind of what I hoped to do."

Despite Rob's youth, Network Plus is not "a dot-com culture," Bob Hale says. "In our business, you have to be customer-focused. If you lose sight of that, youÕre in big trouble. You have to keep up with what they expect of you, and that demands a certain level of professional."

Bob Hale has enjoyed watching the business grow from a three-man operation to a company with more than 900 employees. He realized the business turned a corner in 1996 when Network Plus decided to buy its own switches. "When we made the decision to be a facilities-based carrier, that was a really significant turning point for us in the evolution of our growth," he said.

Rob and his father seem to have successfully carried the father/son relationship into the business world. Rob says he appreciates working with his father and seeing him every day--a fact that became clearer to him when he had his own children.

And Bob Hale is a proud father and chairman of the board. "It's been lots of fun--an interesting balance between father and mentor--watching the thing grow," he says. "Rob was 23 when he started. His growth has been spectacular; it's been nice to watch him grow as an individual and as an executive."

The combination of Hale talents has earned the pair a solid fan base, in and out of the company. The top managers are effusive in their praise of Team Hale.

"These guys do it better than anybody I've ever seen," Kelley says. "Rob is one of the most charismatic people I've had the privilege of working for--and that's not smoke. He knows were he wants to go and to lead this company. And Bob Hale Sr. has the wisdom of years. His strategy is to be thinking forward a bit."

The senior Hale also is well-connected, Kelley adds. "I think his Rolodex is sandstone and a chisel. I don't think he's ever thrown away a business card."

Forging ahead

The drive and determination of Network Plus will lead it to its long-term goal, Crowley says. "We are trying very hard to do to Bell Atlantic and BellSouth what MCI and Sprint did to AT&T, and we're doing that," he declares.

The sales force is key to that effort. Of its 900 employees, Network Plus has 375 sales people split among 14 offices. The sales organization is highly regimented, Crowley says. All reps go through a three-month training period and learn to sell the same way. They also follow the same schedule: Monday and Thursday they stay in the office to set up appointments for the week. The other three days they don a suit and tie and call on their customers.

Crowley characterizes the sales approach as "kill and care." Reps balance caring for their existing customers with generating new business. Pay is earned on a residual basis, making it hard for people to leave.

"Those who stick it out for more than six or seven months tend to stay for the long haul," Crowley says. "The esprit de corps in the office is reminiscent of an athletic team. We play this game to win it, and there is a lot of healthy competition among the account teams for who gets to have bragging rights in the organization."

To continue its path, Network Plus must calculate its expansion strategy in the mid-Atlantic region, which will link the upper and lower parts of the eastern seaboard, AccessLan's Shah says.

"They are expanding into metro markets where they have no prior presence or Class 5 switches deployed," Shah says. "They need to figure out if: 1) they are going to deploy a Class 5 switch, which is not the most cost-effective option; 2) if they want to backhaul traffic to where they have a Class 5 switch; or 3) if they can take advantage of softswitch technology as a way to reduce the cost of ownership."

They also may have to think about marketing differently. Network Plus' weakness, Rob notes, is that the company doesn't advertise. Its customers come solely through word-of-mouth. Considering its client roster, that approach has worked pretty well, but as Network Plus enters new markets, it could become lost in the competitive crowd.

It's a challenge the company seems eager to tackle. The competitive determination trickles down from the top. Employees have fun but work doggedly to please their customers and compete with each other, Crowley says.

Above all, stay focused on the customer--that, in fact, is Network Plus' modus operandi.

"We have 50,000 business customers, and we believe the value is the customer and supporting the customer with a great product and making a fair margin off that product," Rob says. "For 11 years the fundamental strength and strategy of the company has not changed: service the middle-sized customer to whom there is no support from an RBOC or large carrier. We've just moved up the value chain in terms of what we support them with."