No Glitz or Gimmicks, Just Cheaper Long Distance

Telco Communications does not offer alluring sales gimmicks that promise a better quality of life if you switch to its long distance calling plan.

Instead, the small telecom reseller depends on the historically slow U.S. Postal Service to deliver its low-key message: Telco's rates are 25 percent less than Big Three prices and you don't have to switch phone carriers to see the savings. Just dial a five-digit code before the phone number and the charges will automatically appear on your regular monthly phone bill.

This subtle marketing strategy has attracted more than one million customers so far and now Telco is unrolling its service nationwide. The two-year-old firm has grown from four employees in a Chantilly warehouse to 200 employees in 24,000 square feet of office space. The company expects to earn revenues of approximately $250 million this year by reselling excess phone line capacity that it buys at wholesale prices.

"We've taken the glitz out of telephone service and boiled it back to what it is, a commodity," said Telco President Donald Burns. Telco is one of the 800 to 1,000 telecommunications resellers that are popping up around the U.S. to compete with AT&ampT, Sprint and MCI. Most resellers concentrate on the commercial market, selling cheap long distance services to businesses that aren't big enough to earn discounts from the three phone giants. But resellers are increasingly reaching out to the residential market, where they've found a customer base eager for cheaper rates without the hype and gimmicks that now flood the marketplace. These residential consumers who want cheaper rates without a hassle are the customers that Burns and his associate Henry Luken went after when they founded Telco in July 1993. Telco was launched in southern Florida as a "very large and expensive experiment," recalls Burns.

Before it had any customers, Telco established a long distance network to carry customer calls, set up its first telecommunications switch in Ft. Lauderdale, Fla., and installed a 24-hour, toll-free customer service line. In November 1993, Telco sent out 3.5 million pieces of direct mail advertising and waited to see what would happen. "Florida proved to be successful the first day," Burns said. The calls came in to customer service so fast that Telco scrambled to get more people to meet the demand, he said. After about 90 days, Telco was doing so well the company's executives decided to expand the business nationally.

But to go national, the company needed outside investment, and who was going to invest in a seven-month-old firm? Telco was told by about eight banks and venture capital companies that it was too young, said Bryan Rachlin, general counsel for Telco Communications Group, but then it approached Signet Bank. After asking the Richmond, Va.-based bank for $3.5 million, Rachlin said he wasn't shocked when Signet said no. But he was pleasantly surprised when the bank said it would give Telco $8 million instead. "We knew that $3.5 million wasn't enough for Telco to provide its service nationwide," said Brian Mitchell, Signet vice president. The bank has continued to support the growing company, providing an additional $25 million and most recently another $60 million, Mitchell said.

The bank's investments have been instrumental in Telco's moves toward offering nationwide service, Burns said. "We would have expanded the company anyway, but it would have been much slower without the bank." Telco expects to be nationwide by the end of 1995. Telco now offers its long distance services in New York, Massachusetts, the Mid-Atlantic states, Florida, Washington, D.C., in the Southwest, including Texas and Arkansas, and it will be starting service in the Southeast later this month. Other telecom resellers are already national service providers, including LDDS Communications Inc. of Jackson, Miss., which is actually now the fourth-largest U.S. long distance company, and Texas-based Excel, which expects to earn $400 million in revenues this year.

But as Telco moves into new markets, it will encounter the same problems that all resellers face, public skepticism and a lack of name recognition. "People sometimes have doubts about the type of service that resellers can provide, because the public's never heard of them before," said Amy McCarthy of Washington, D.C.-based Telecommunications Resellers Association.

Many of the resellers that start up die very quickly, said Frank Canty, an associate of Boston research firm Atlantic ACM. Many others are bought by larger resellers, he said.

All resellers, including Telco, would be in trouble if AT&ampT and the other large phone concerns suddenly lowered their prices to compete with the cheaper providers. But the phone giants aren't likely to feel threatened, considering the Big Three U.S. phone companies still made up 87 percent of the $65 billion domestic long distance market last year.

Telco, however, isn't limiting itself to just taking its piece of the long distance market. It is well on its way to completing its first three-year plan so the company's executives are trying to plan its next move. According to Burns, possibilities include providing local phone service, building its own fiber optics and getting into personal communications services, or PCS.

"By the end of 1995, we'll have selected the road Telco will travel," Burns said.