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Telecom Income 101 – by Jack Spirko

How Telecommunications Agents have made money from 1990- Present and how they will make money tomorrow.

This article focuses on the typical phone services (local and long distance) used by the residential and small business customer and the agent’s role in that market.

Many other technologies sold by telecom agents have experienced similar changes (dedicated services, DSL, Cell Phones, etc.) here I have focused on standard dial tone services to give the reader a basic understanding of that world.

Phase One – The Distant Past (1990 - 1996)

The Baby Bells have just been created six years prior from the AT&T break up and now you have a choice for long distance communications.

Most of America is under the assumption that this choice is MCI, AT&T or Sprint but already there are numerous telecom companies selling long distance.

Some are facilities based, meaning that they produce their own traffic and deliver long distance over the local phone lines provided by the Local Phone Companies and others are non facilities based resellers that buy time from a company like Sprint for a discount and resell it to the consumer.

At first this was a small market as most American’s tended to believe the lie that with out AT&T your phone would explode.

MCI and Sprint realized that this was going to be a tough nut to crack and that they needed help so along with tremendous advertising efforts they saw the future to become major providers of service to non facilities based resellers long before they were forced to do so under the coming Telecom Act of 1996.

As more and more competitors sprang up and the word got out that your phone would work with out AT&T it would even work with out Sprint or MCI and you could save money too, competition grew from a handful of competitors to a fair number of quality providers both facilities and non facilities based.

All this before the Government made providers resell their service you may ask? Yes indeed, because MCI figured out that by selling at a discount to a middleman they could tap an un reached market and make a profit. No one forced the Long Distance providers to start reselling service they were happy to take fixed margins and offer a discount to customers who paid their bills all the time and bought in time blocks measured by millions of minutes.

As this occurred the industry quickly turned to sales agents to resell their products and in time a lot of agents started to do fairly well. It is important to understand where this money came from. As competition began to open and agents started selling Telecom Services they were not creating new customers they were assisting clients who where redirecting their spending. Every time they did so they earned a stake in future business that client produced. It is very important to understand the opportunity was created by a redirection in spending. It is the redirection of spending that has created every opportunity for Telecom Agents along the way and it is that redirection of spending that will continue to create opportunities in the years to come. It is also important to understand that everyone for the most part got along during this time because the Baby Bells (Bell South, South West Bell, Bell Atlantic (now Verizon), Pac Bell, etc) still had a lock on the local phone lines.

Phase Two – 1996-1999 U-NEP (Unbundled Network Element Platform) the Early Years

Now we enter the hay day of long distance sales. In 1996 Congress passed the Telecommunications Act of 1996 this required the Facilities Based Providers to resell service to non-facilities based competitors. As noted above this was already going on in the long distance market but with the requirement a far larger number of competitors sprang up reselling service. As this occurred the unseen competition grew. This was the competition from the big providers to win the business of the new competitors. You see at the same time AT&T was saying that service from XYZ Telco was not as reliable as their service they were competing with MCI and Sprint to provide the backbone service to XYZ Telco. Now the public was ready to try new providers and they were tired of paying MCI or AT&T an average of 25 cents a minute for long distance.

What followed from 1996-1999 was the largest redirection of spending in the U.S. Telecom market. This was the time when internet based long distance agents with effective marketing techniques were gathering 15-25 new customers a day. It was also a time when many outside of telecom insisted there was no opportunity in telecom because pricing was dropping so fast. It was true that prices were dropping faster then a brick tied to an anchor but that very drop was the opportunity. As prices fell smart Telcom agents again sat in the middle and helped to redirect that spending.

Phase 3 UNE-P Effects the Local Service Market

The far carrying effects of UNE-P were more about the local phone service market then standard per minute long distance service. UNE-P and subsequent rulings and amendments led to true competition in the Local Market for the first time in U.S. history. Now everyone was not happy because it was no longer Quest Communications selling one million minutes to PNG Telecom at a discount and making a fixed and healthy margin. Now South West Bell and Verizon were being forced not to resell traffic but to lease actual copper lines to their competitors.

You have to understand a little history to know why the RBOCs (Regional Bell Operational Carriers, IE, South West Bell, Verizon, Pac Bell also known as the “Baby Bells” which were created by the AT&T break up in 1984) were so hacked off about this. To them this was not just fair competition but theft of their infrastructure (infrastructure is the cables that deliver service to customers, the copper lines that run up to your house). The RBOCs felt they owned those lines and should be able to do whatever they wanted with them with some justification.

Understand that in the beginning of U.S. telecommunications there was only AT&T and a few smaller companies. The smaller companies became known as ILECs (Incumbent Local Exchange Carrier). Basically the ILECs put in phone lines and delivered telephone service to all the tiny markets that AT&T ignored and AT&T made a HUGE investment and absorbed the expense to install every copper phone line to every house in America and with recent construction this responsibility was assumed by the RBOCs after the break up. Now comes UNE-P and tells the Bells not only will you lease the right to deliver service on those lines you installed but you will also charge the price the government dictates to you.

One could easily see the RBOCs reason for anger and how they might feel they were being abused by new regulations but to understand the reality we need to see the other side’s view of the situation. The government who wanted to extend competition to the entire communications market felt this way. While it was true that the RBOCs and AT&T built the cable network to almost every house in America they had also enjoyed a government approved monopoly for more then 50 years! In other words the government said, “AT&T built the system but we protected them for half a century while they did so. We have learned that you are charging way to much for service as evidenced by the drop in long distance rates and we are still letting you charge for the lines”. The government simply set the line rates (in most markets) where the new competitors could offer service in the same price range as the RBOC.

So just who where these new competitors you ask? These were companies like Talk America and Z-Tel and others, who were at this point had only been in the long distance business. Even AT&T started selling Local Phone Service under U-NEP. Yep Ma Bell came back to her children and leased lines as well. These new providers quickly became known as CLECs (competitive local exchange carriers). One must also understand that in the beginning the RBOCs could not sell long distance so while this battle raged to allow the CLECs to lease lines the RBOCs were fighting to be allowed to sell long distance as well. In the end both sides won their individual fights. What we ended up with was “bundled phone service” (local and long distance on one bill) and at first the CLECs had only a minor impact. They took some customers away from the RBOCs, mostly the ones so hacked off at Verizon or South West Bell, etc that they did not even care if the bill went up they just wanted to dump their RBOC with the most common reasons named being, terrible customer service, billing discrepancies or both.

Then as the new millennium approached a new tactic began to form in the CLEC world first with AT&T’s CLEC Group then Talk America and others followed suit and offered unlimited calling between plan members. What this meant is if you had AT&T as your local and long distance provider in California and your sister in Georgia had them as well you could call each other with no long distance charges. While this won some customers it was really a stepping-stone to the real redirection of spending that defines the opportunity in Phase 3.

Along the way companies like Z-Tel put the math wizards to work and calculated the average long distance usage when you measured residential users in blocks of 10,000 or more users. In the end they came up with a composite pricing model allowing them to offer unlimited local and long distance and by and large still make money on the overall business. More to the horror of the RBOC’s Z-Tel, MCI Neighborhood, Talk America and the numerous other CLECs were not content to just compete on price they added features in fact they gave away all the high priced features like call waiting, voice mail, caller ID, three way calling and more. Now the flood started when people who were spending 100-150 dollars on local and long distance combined found out they could get all the features and unlimited calling for a price point of about 50 dollars in most markets. That got their attention! Again the Telecom Agents profited as people began looking for that best plan agents using the internet and direct sales techniques again grabbed a large stake by acting as the middleman and helping consumers to understand their options and redirect their spending. Again those outside the Telecom Industry cried, “Telecommunications is a dying opportunity, rates can only go so low”. The cry was sounded because again those on the outside did not comprehend that these very changes were the opportunity and that as long as change occurred new opportunities would be forth coming.

Phase 3.5 The Broadband Genie Is Unleashed

I choose to call this phase 3.5 because it is not another redirection of spending but an occurrence that is going to be the main factor in Phase 4 and it in fact began at the end of Phase 2 and will continue far into the future. When I mention Broadband here in Phase 3.5 I don’t mean VoIP service as that is Phase 4 no I am talking about plain old DSL or Cable Modem service. I want you to simply realize here what occurred in the late 90s when DSL and soon after Cable Modem came on the scene. I still remember back in 96 how people were talking about how much faster a 56 K modem was then a 28 K modem but at the same time more and more companies started relying on email and internet research in their day to day operations.

The effect of the growth of the internet in the work place had was it sped up the at home acceptance and desire for DSL or other High Speed internet access. What I mean is Joe Consumer trudged off to work at ABC Company who had a T1 line for data access. He did his job and part of it became internet research and responding to emails some with sizable attachments. Then Joe went home and did a little after hours work and found quickly the performance was simply not that same. Hence when the big DSL boom hit from 98-2000 the public already understood the difference and high speed internet became a hot commodity and got about 60% penetration in just a few years in areas where it was available.

The Cable TV companies quickly learned that they could reach customers beyond the distance limitation of the DSL providers and not only grabbed a large client base they charged more then the DSL providers by doing two things. One, they provided faster speed and two, provided service to customers that had only two choices either get cable modem service or get nothing. With the expanded foot print of cable modem service and to a minor degree high speed internet over satellite more Americans then ever and in fact more people in the world are getting high speed internet every day. In fact the high-speed internet market grew right through the recent economic recession.

Right now it is important to understand that broadband internet is still in its’ infancy and that new technologies are going to continue to drive it. Understand that in many places it is still the RBOCs dictating who can provide DSL on their cables and where they can provide it. The two biggest new technologies to affect the market in the future (certainly the next 2-3 years) are going to be fixed wireless (mostly by the investment and energy of smaller entrepreneurs bringing service to areas with no other option) and broadband over power.

It is broadband over power that is going to make the biggest impact because not only will a lot of consumers use this service but as becomes available it will also spur competition and reduced rates and the extension of distance limitations by the current providers. In short the current providers will be forced to adapt to remain competitive with the new technologies.

Before we conclude Phase 3.5 let’s take a look at what broadband over power lines means to consumers and the industry at its’ most basic level. When this technology is fully developed an entire new path will exist to bring voice and data services to the consumer. Those are the electric lines in place to almost every home in the modern world. Instead of a phone line for DSL or Cable TV line for a cable modem you will be able to order high speed internet from your power company or a reseller they lease the line to. You will get a little gadget plug it into any electrical outlet in your house, plug your PC into that little gadget and like magic you get DSL speed and more! Want to have more then one PC online no big deal if you have a power outlet then you have access.

So Phase 3.5 is an ongoing trend where both existing and new technologies will continue to draw more and more consumers from the dial up world into the new reality of high speed access and this sets the stage for Phase 4 which has just begun and will be the largest redirection of spending on telecommunications services in the history of the world. In short now that the broadband genie is out of the bottle nothing will quell the publics desire for faster, better and cheaper broadband access.

Phase 4 VoIP (Broadband Phone Service) Enters the Fray

First as we move into Phase 4 let us answer the two most common questions about VoIP in the general consumer market. Those questions are, What are broadband phone services? and Why are they so inexpensive?

The simplest explanation is that broadband phone service is a way to make phone calls across an internet connection. This greatly reduces the cost to the phone provider so they can charge you less money to provide you service.

To understand this let’s look at the cost to provide a phone call from New York City to Dallas for the provider of the service. Let’s say you are in New York and you pick up your phone and make the call first the call goes to your local phone office and creates an “origination charge” and there may be other charges as the call is forwarded out of the state of New York it is also best to think of these as “origination charges” to keep it simple.

Then the call travels across the U.S. to Dallas to the person you want to call when it gets to Dallas it goes through the local phone company there. At that point there is another charge called the “termination charge”. So your telephone provider is charged on both ends and must add to those charges to make a profit when they provide you with service.

Now let’s look at the same situation with a broadband phone call. Now you are in New York with a broadband phone connected to your DSL connection. You pick up the phone and make the call the same way but what happens now is your call never goes to the New York phone offices. It goes across the internet strait to Dallas and the provider only pays the termination charge to the local Dallas provider. As you can see the provider cut the cost to complete your call in half so they can charge you a lot less. Further is you are calling another VoIP provider on the same network there is not even a termination charge (this is basically real time verbal email) and hence a VoIP provider can focus on two major marketing messages (both you should recognize from the CLEC approach as they came into the Local Service Market)

1. They can greatly reduce the cost to provide service to any caller by paying only the termination charges when you call anyone, anywhere in the world. In doing so they can charge less then a conventional provider and still have a better profit margin.

2. They can provide service between two clients on their network and totally circumvent the standard telephone network. In this way they can sell unlimited calling from a location in Japan to a location in the US and still make a great profit.

There are a ton more selling points to VoIP beyond pricing such as having local numbers for inbound calls all over the world and enhanced calling features that are not available from conventional providers at any price but this summary should be enough to give you an basic understanding of why VoIP is the next big telecommunications technology.

So what does all this mean to the Telecom Agent as we look ahead over the next 5 – 10 years. First you have to remember that Phase 3.5 is still going and more and more people every single day will be getting high speed internet access and more methods to deliver it for lower expense will continue to evolve. You also need to understand that the UNE-P platform described in Phase 3 is under severe attack and it sooner or later going to fall and leave almost every non-facilities based CLEC with not real product in the local service market. This is most likely going to lead to many customers ending up back with the RBOCs and not by choice but out of necessity. These customers have had the taste of freedom and will not want to loose it. Of course being the dinosaurs that they are once UNE-P dies off the RBOCs will raise rates and further alienate their customers. Are you seeing the full picture of this yet?

Remember again high-speed internet access will become cheaper and available from more sources during this time. So what you will have in the near future is the convergence of several events that have never occurred before.

1. Consumers who have had access to true competitive local providers will loose that or at least loose some of their options

2. RBOCs will raise local and long distance charges for the first time in recent history and further anger what they perceive to be captive customers as they will feel they have reclaimed their monopoly

3. The Broadband Internet Industry will continue to grow and reach more and more customers and be able to measure its’ growth almost daily

4. Hundreds of new VoIP providers will come on the scene and the market will reach a fairly standard pricing model for dial tone service (rates can only go so low) and will then need to compete on features.

When this all converges there will be another huge redirection of spending but this time the U.S. based agent won’t be working with a domestic population of 300 million that is redirecting their spending but a global redirection of spending with a growing global population that already numbers 5 Billion. The coming opportunity in telecommunication in the VoIP market alone eclipses the other three phases combined and multiplied to a factor of 10.

Again the agent has the opportunity because he is in the middle as the educator and marketer. In VoIP this is magnified because the technology is different then anyone has used before. In the past you switched to PNG to AT&T over to Sprint and then to Z-Tel and you did not have to actually do anything. The bill that came was a different color and asked for less money and that was it. Still during Phases 1, 2 and 3 there was resistance from the market because it was a change and it was the telecom agents that acted as the education force to explain that change was good and there was nothing to fear. By being the educators agents profited in those phases and now in Phase 4 they have a tremendous opportunity to profit more then ever before because the market is much larger and the learning curve a little steeper.

The good news is VoIP has already had great press and been featured on major networks in many news features. This gave the industry the creditability it needed to begin to grow and grow it has. The good news is most people still think Broadband Phone is some complicated “techy thing” and that is the opportunity today. The truth is installing an IP phone at your home or small business amounts to

1. Plug an adapter into your DSL Router / Cable Modem etc. 2. Plug the adapters power supply into an electrical outlet 3. Plug your telephone into the adapter 4. Pick up your telephone handset and dial any phone number 5. Follow the voice instructions and enter an activation code 6. From that day forward you just make phone calls the same old way you always have

Basically if you can open a box, plug in three cords and make a phone call you are technically savvy enough to use this service. It will be the agents that do the best job of conveying that message that will make the most money and build the largest account bases in the height of what I call Phase 4. If you need any additional assurance that VoIP is the future of telecommunications in the coming years just know that every major U.S. Telecommunications company either has or is breaking their neck to roll out a VoIP Service product. That alone shows the direction of the industry. Phase 5?

So what will be the next opportunity after Phase 4? I have to admit that I don’t know, just as I did not know what Phase 4 was going to be during the height of Phase 2 and or even during the beginning of Phase 3. The fact that Phase 5 is an unknown at this time is the entire point of this article. What history has taught us about telecommunications is three things will always be in demand in the telecom arena.

1. Better Service 2. Better Features and Flexibility, and 3. Better Prices for Services Delivered

For the experienced Telecom agent knowing what Phase 5 will be is unimportant what is important today is to continue to harvest the remaining opportunities created in Phases 2 and 3 and begin a strong and sustained focus on Phase 4. It is simply the knowledge that Phase 5 will come along some day that keeps agents excited and looking into the future with a spirit of assistance, education and anticipation.

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