From ISP to CLEC

Making the transition from Internet service provider to CLEC, a strategy more and more ISPs are contemplating, is a tricky business. And the marketing side of it may be the trickiest aspect of all.

So when Aeneas Internet Services LLC, a regional ISP with 10,000 dial-up and business customers in Tennessee, decided to launch CLEC operations last year, one of the first things president and CEO Jonathan Harlan did was snap up a handful of employees recently laid off by Bell South.

Although Harlan says the four-year-old ISP had already developed a keen "telco sense" as a result of working with Bell South, the local incumbent, he knew that operating a CLEC was going to take him into entirely new territory.

"Picking up those former Bell employees has been vital for us," he says. "It's not just the telecom experience. You've got to have people who are experienced working with your incumbent."

Aeneas began its CLEC transformation project 18 months ago when Harlan first applied for CLEC status in Tennessee. The company decided to go the CLEC route for many of the usual economic reasons.

Being a CLEC reduces line charges for the ISP. The new CLEC, nominally separate, provisions the ISP with capacity bought from the incumbent at much better rates than the ISP can command.

It also gives an ISP better control of infrastructure, making network troubleshooting easier on lines out from its switch, for example. Aeneas already has one switch in place in its base in Jackson southwest of Memphis - though it isn't interconnected with Bell South quite yet.

Being a CLEC also gets ISPs around other artificial, tariff-driven restrictions. CLECs, for instance, can unbundle telco elements and provision partial T1s to customers, which ISPs cannot.

But Harlan was also motivated by purely entrepreneurial marketing reasons. While there are other CLECs operating in Tennessee, they are exclusively focused on the major urban centers, he says. There's lots of room for more.

Aeneas will go after urban markets too, but its primary focus will be semi-rural areas where there is a surprising density of prospective medium-size business customers, he says. Many are major corporations that have located in the region to take advantage of lower costs.

And many are looking for alternatives to the ILEC. In particular, many can't get partial T1 service from Bell South and can't justify full T1 for data. Aeneas will provision these customers by channelizing T1s, using half the capacity for data, half for voice.

"One big reason we decided to go this route," Harlan says, "is that we knew the market was badly under-served." If Aeneas can even capture one per cent of the universe, he says, it will meet its targets - "and we're expecting to do better than that."

Not that hiring some old telco hands and identifying a viable target market makes being a successful CLEC a slam dunk. Understanding the crucial differences between the telecom and ISP market psychology is another prerequisite.

"The telephone is a lifeline service," Harlan notes. "People's perceptions of that and the quality of service they expect when they pick up a phone are quite different. They expect they will get dial tone every time and that it will work. They demand it in fact."

Customers demanding that kind of quality of service in the Internet world is something fairly recent, he notes.

"In this [CLEC] business," Harlan says, "if you promise something you can't deliver, if you have a service that doesn't work, you're not going to be in business. Period."

Reputation, in other words, is even more important than in the ISP world. Harlan says the Aeneas ISP operation gives the new CLEC something to build on. The company has a solid reputation in the region and has certainly been successful, growing from nothing to 10,000 subscribers - 60 per cent of them business customers - in a little over four years.

Aeneas believes it can enhance that reputation by offering more personalized service than the incumbent - a warm body for customers to talk to instead of a computer when they call in with billing or technical issues, for example.

"In less urban areas, in particular here in the South, people want personalized service," Harlan says. "It's still very important."

He also believes his company, because of its regional focus, will be able to respond "more thoughtfully" to customers. He sites the example of another CLEC's ads showing a foolish-looking Elvis impersonator standing against a backdrop of a California hotel with palm trees in front.

"There are no palm trees here in Tennessee," Harlan notes dryly. "And Elvis is still well loved here. Let's just say these ads are not something that would make people run out and buy the service. I'm not saying that we're super smart about this sort of thing, but I think we can avoid mistakes like that."

Aeneas's marketing plan for the CLEC is designed to exploit synergies with the ISP business. The company will start slowly and make sure it has the quality of service issues under control before beginning a major state-wide marketing campaign.

In this first phase, which will probably take it into the second quarter of 2001, Aeneas will market exclusively to ISP customers. The company has already been communicating with its top business customers, and the response has been "80-percent positive," Harlan says.

Once the interconnect issues are resolved - in December for sure, Harlan says - Aeneas will begin a more aggressive campaign, sending e-mails to customers and following up first with calls from inside sales people, then in-person sales visits to business customers.

In the next phase, in six months or so, Harlan expects to begin processing customers that come in by word of mouth - something that is actually already beginning to happen. And finally, late next year, the company will begin advertising to non-ISP customers through radio and daily and weekly newspapers.

Harlan figures he has as much chance as anyone of being successful in this game. Everybody is learning as they go, he points out. "I don't care if you're talking about a Covad or an XO, these guys are all on a pretty steep learning curve."

And Harlan figures there are some innovative things he can do in marketing, such as offering Web-based billing. It should work especially well with the initial clientele. Being ISP customers, they're already Web-oriented, he notes. It will also keep costs down. Aeneas will give customers a choice, but they will pay a service fee for non-Web billing.

Harlan is that rare ISP [and CLEC] operator who isn't talking about being a major national player in a few years. Aeneas is content to stay in Tennessee.

"We want to be about a $30-million-billing company," he says of the CLEC business unit. "I think we can accomplish that on a reasonable time frame and with a very good return on investment, while making this a great place to work for our employees."

"I have a feeling the CLEC will eclipse our ISP," Harlan adds. "It's certainly not our intention to put the ISP to bed. But there is just such a hunger out there for an alternative network provider."

We'll check in on Aeneas next year when it should be up and running and see how the marketing effort is working.