PAETEC Plans to Offer More With Upcoming McLeod Merger

As this T-1 specialist expands its product line, it provides a textbook example of an ISP expanding its portfolio as legacy markets become commoditized.

by Alex Goldman ISP-Planet Managing Editor [December 20, 2007]

ISPs need to add services to increase ARPU. It's not a path to easy street, as we wrote earlier this year (see Editorial: State of the ISP Industry). It's a survival strategy.

Rochester, N.Y.-based PAETEC has made several acquisitions over the past two years. The acquisition of US LEC, owners of StarNet, caught the attention of ISP-Planet readers in 2006.

Earlier this year, the company acquired a PBX manufacturer called Allworx, which is also based in Rochester (we continue to recommend local acquisitions, like Tucows buying Critical Path in Toronto).

PAETEC produces its own anti-virus software and has several other proprietary network components.

But it's the acquisition of McLeod, approved by the FCC late last month and expected to be completed in the first quarter of 2008, that really got our attention. The combination of a skilled VoIP provider and a respected backbone provider could offer interesting opportunities for small ISPs, but the company is still in the planning stages for both its commercial VoIP offering and its wholesale VoIP offering.

So we're talking strategy with John Chapman, PAETEC vice president of product development.

Breadth and depth
The merger adds breadth to the company by giving it a larger geographical coverage area. Chapman says the merger grows the company 52 metro markets (after the US LEC acquisition) to over 80 markets. "US LEC gave us the Southeast corridor, such as Florida and the Carolinas," he says. "McLeod filled out the rest of the nation, especially the Northwest and Texas. Chicago was the only overlap."

Separately, PAETEC has been adding depth by growing its portfolio of services. Along the way, the average of customer has grown from a single site small business with two T-1 lines, or a few sites, to business with 10, 20, or 30 sites, says Chapman. "And there are some outliers with 50 sites, 100 sites, or more. We're moving beyond internet access."

"Our solution set is growing beyond the traditional integrated T-1 offering to include: MPLS w/ QOS, dynamic IP (trunk, lines with features and hosted), broad security suite, audio and web conferencing, data backup and recovery, dedicated server, webhosting, IP contact centers and traditional 800 numbers, as well as long dstance and local VoIP services."

PAETEC's security portfolio inludes: network based firewall services, CPE based firewall services, e-mail scanning (anti-spam, anti-virus, image filtering, and content filtering) and web protect services (web anti-virus, web anti-Spyware, and webmail protector).

That package wasn't built in a day.

"We've spent the last 24 to 36 months shoring up our solution set," explains Chapman. The driver for change is a process that should be occurring at every ISP: listening to customers.

Listening to customers
Chapman says PAETEC has an advisory board in 33 of its markets, each with 10 or 15 key customers. "They talk to us about process issues and products," says Chapman. "These customers have exposure to our senior leadership."

Had PAETEC not changed, it would not be nearly as successful. "If we stayed just where we were, without these other solutions [just offering T-1 lines], we'd be in a commodity business, although pricing has stabilized to a certain degree," enthuses Chapman.

In addition to offering basic services to all customers, PAETEC offers some applications tailored to specific vertical markets. Chapman cites health care, hospitality, and finance as some of the verticals where PAETEC has been successful. One example of a vertical app, he says, is the company's Trader Voice service for financial firms, which provide the absolutely-cannot-fail connectivity that you need if you're doing real time trades by voice.

So that's where the company is now. How will McLeod fit into the picture? We'll check back in a few months' time.

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