Consumer Services: The Z-Tel Way

Software, Partners and Bundles

In an environment of extremely constrained capital spending, a push to retain customers by offering "sticky" stuff and the expectation by some for increased verticalization by service providers, Z-Tel Communications Inc. could be the wave of the future.

This Tampa, Fla.-based competitive telecom company delivers local, long distance and enhanced voice services primarily to residential customers.

However, Z-Tel may be best known for the high-profile wholesale deal it announced last year with WorldCom Inc.'s MCI division to support MCI's The Neighborhood local initiative. That deal was amended after WorldCom filed for Chapter 11 bankruptcy protection and might not mean significant business for Z-Tel after all. Z-Tel recently struck a similar deal with Sprint Corp. It will provide Sprint Z-Tel's Web-integrated, enhanced communications platform and operational support systems related to providing local residential telephone service. Financial terms of the agreement were not disclosed.

The Sprint deal gets to the heart of Z-Tel's network strategy, which is about expending its resources primarily on high-level functionality rather than on physical infrastructure like switches, wires and glass. That strategy has allowed Z-Tel to spend its time and money to deliver new and "sticky" end user services like Personal Voice Assistant, which includes voice mail, a voice dialer feature, the ability to send voice files to e-mail, an address book, follow-me functionality, the ability to tie in with 1+ service and a personal Web space where individual subscribers can manage their messages to both wholesale and retail customers.

That same strategy, however, almost put the kibosh on Z-Tel. That's because Z-Tel relies on UNE-P for its switching. However, an eleventh-hour deal at the FCC in late February to preserve UNE-P pulled Z-Tel and other UNE-P-reliant companies from the brink of disaster.

To support Personal Voice Assistant under Z-Tel's Intelligent Dial Tone strategy, the company has invested in a Sonus Networks Inc. softswitch, SpeechWorks International Inc. text-to-speech technology, and has written 1.5 million lines of Java code. "We're sort of a software vendor at heart," says Gregg Smith, CEO and chairman.

Nonetheless, the UNE-P fight is not over. The FCC also granted state regulators the authority to determine whether CLECs are impaired in competition without access to the incumbent networks based on economic and operational criteria. And the FCC UNE-P decision is expected to be appealed by the RBOCs and even apparent winner Z-Tel, among others. "We'll probably appeal the FCC ruling even though it's favorable," says Smith. "Our position is switching is required."

While other UNE-P companies like AT&T Corp. and WorldCom concede UNE-P is a temporary fix and are publicly mulling the feasibility of competing with the Bells via their own switches, Smith says it simply doesn't make sense to invest in switches -- at least in Z-Tel's case.

That's because if the company did invest in switches it would have to pay for the switch and -- here's the killer -- about $180 per hot cut charged by the Bells to turn customers over to Z-Tel. Smith says that's a big expense, especially considering that once Z-Tel makes the hot cut investment it quickly could lose it again because customers no longer are willing to commit to service contracts.

"The average Bell bill I pay is $26 a month per line," says Smith. "[The Bells] say they're selling it under cost. How the hell is that?" What's more, Smith thinks the Bells will seek rate increases on UNE-P.

In light of potentially dwindling voice margins and the fact that "the future is broadband," Z-Tel may be partnering in the future with broadband providers to deliver customers a broader bundle of services including both voice and data, says Smith, who explains Z-Tel makes money but is currently "cash flow neutral."

The FCC's other important ruling in late February relieving RBOCs from line-sharing requirements that had allowed broadband service providers to lease the Bells' high-speed portions of the loop could help expedite Z-Tel's strategy on that front. The commission's decision is expected to be particularly troublesome for companies like Covad Communications Co. that have relied heavily on line sharing to deliver DSL service.

"Covad now gets line sharing with the Bells," says Smith. "What they could do is line split, move the customer first to UNE-P, then share the line with Z-Tel. We're trialing that with Covad."

Smith sees this kind of an arrangement -- which has different companies with various parts of the network or service bundle coming together to deliver an integrated package -- as the wave of the future.

He notes 53 percent of residential customers in New York now are buying bundles. Z-Tel's relationship with Sprint also could be extended so Z-Tel could add wireless to its service mix, he adds.

More About Z-Tel

• Offers a $49.99 package of unlimited long distance, local and enhanced voice services

• Has approximately 230,000 active subscriber lines, up from approximately 195,000 active subscriber lines on Sept. 30, 2002

• Resumed retail line growth for the first time since 2001, primarily attributable to new advertising initiatives, contributions from a growing number of success-based affiliate marketing relationships and increased efficiencies implemented throughout its sales organization

• Had revenue of $235.3 million in fiscal year 2002

• Received a Nasdaq staff determination on Feb. 4, which indicated the company failed to comply with $35 million market cap requirement for listing on the Nasdaq SmallCap Market and is subject to delisting

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines