Ethnic CLECs Find Their Calling

Ethnic minorities not only command half of the U.S. telecom expenditures but also are supporting a new class of carriers that cater to increasingly specialized ethnic groups in their mother tongue.

by Max Smetannikov [October 24, 2003]

A recent report by New York-based consulting firm Global Advertising Strategies, "Surviving the Telecom Meltdown: Competition in the Eastern European American Long Distance Market and How It Affects the Industry Establishment," found there is a vibrant telecom industry serving recent Eastern European immigrants, a category that the firm defines broadly to include the Russian Federation in addition to such traditional Eastern European nations as Poland.

Eastern European Americans, as the report calls the newly found ethnic minority, are the second largest growing ethnic minority in the U.S. after Hispanic Americans.

The firm's principal, Givi Topchishvili, believes large telcos like AT&T, MCI, and Sprint have largely missed the boat, so to say, with this latest Ellis Island crowd, as traditional long distance marketing and services failed to register significant competition from newly minted ethnic-specific telcos serving sub-sectors of the Eastern European Americans market. AT&T is the only large telco besides Verizon (listed as a local dial provider) making an appearance in the firm's top 10 list of most popular ethnic telcos.

"We expected to find boutique firms taking share from large long distance providers," Topchishvili said. "What was surprising to us was the speed with which these startups were taking business and the volume of business they appear to be taking."

Most of these new competitors are CLECs, their principals insisting the business of developing ethnic-minority specific networks was not possible before U.S. telecom degerulation was completed in 1996.

On the surface, the competition appears to be purely on price. Using deregulated access to incumbent's telecom networks, CLECs like New York-based Mastercall can develop networks that route calls cheaper than their larger rivals. It also helps to run a telecom provider employing dozens of people as Mastercall does, not tens of thousands as it is with AT&T. Other expenses are kept low as well.

"I don't sit down and write myself a $50 million bonus, or go an buy some farm in Canada," said Roman Talis, president of WDT, a CLEC servicing Polish-, Ukrainian-, and Russian-Americans, obviously taking a dig at former WorldCom chief Bernie Ebbers.

Another ingredient of maintaining low international pricing is maintaining deftly negotiated direct interconnection agreements with national carriers in the destination countries. WDT terminates three E-1s into Ukraine, 63 E-1s into Poland, and 22 into Russia, which gives it a say as to how much the company pays in termination fees.

The bottom line is this: where Mastercall and WDT charge 4.5 cent a minute to place a call to Moscow, Russia, AT&T charges 15 cents.

"How someone can do it so inexpensively I have to scratch my head," said Robert Cruz, an AT&T spokesman responsible for ethnic marketing.

The wizardry is part smart marketing, part good business. Mastercall targets Americans with Russian as their native language as opposed to invest in customer support in a myriad of eastern European languages, such as Ukrainian and Moldavian. The rationale here is that even folks who are not ethnically Russian who immigrated during the last 15 years are probably more used to buying services in Russian than in their language, a byproduct of Russian having been the official language of the Soviet state.

Mastercall has registered as a CLEC only in states where there is a significant Russian language minority, a total of 13 states in all. Besides the visible communities in New York and California there are territories that may not come to mind immdiately, like Alaska, where Russians are plentiful because of direct economic ties with Siberia.

The network, purpose built to serve this population, is optimized for international traffic as discounted international calling is the core service sold. Mastercall buys access to international channels in volume, emphasizing the cities where it terminates the most calls. It also has access to its own switching equipment which lets it control the cost of calls as they get routed from domestic voice networks onto international switches.

"If I were to pay 50 cents a minute at the network handoff it's clear I wouldn't be able to build a viable international business using such a tariff structure," said Larisa Mazo, a Mastercall vice president, formerly with Russian national carrier Rostelecom.

The least of Mazo's concerns is competition AT&T, or Mastercall's network architecture, or even demand from Eastern European Americans which consultancies like Global Advertising Strategies believe will only increase in the immediate future. The thorn in Mazo's side is competition from like-minded telecom startups that have driven the prices for international connectivity for popular destinations to all times lows and now are looking to differentiate from each other.

"This is a situation where someone is going to get eaten, whether through a bankruptcy or through an acquisition," Mazo said.

Beyond price, ethnic startups have little room for differentiation left. One big reason why startups were able to tap ethnic markets was that most new arrivals from the Eastern Europe and former Soviet Union lacked a credit history.

However, each telco can set its own risk limits, which means some may start selling to customers making hundreds of dollars worth of phone calls, which is not a safe policy. Nevertheless, competition purely on price will drive startups like Mastercall into more and more risky customer accounts.

Making new avenues for differentiation, industry watchers like Topchishvili say, entails adding more services to the bundle and improving customer service. Customer service marks for all leading ethnic telcos were actually rather low, and there is definite room for improvement here, Global Advertising Strategies' research found.

Such improvements, however, come at a price. Customer acquisition costs already jumped almost one order of magnitude with ethnic telcos, according to the report, a result of CLECs investing more in better customer support, new services and incentives. Some Mastercall competitors like International Plus already sell local and long distance bundles using UNE-P mechanisms, and some, like Startec Global Communications, offer discounted international calling over mobile phones—billed to users' home telephone accounts. Some offer free minutes to new customers. All these perks drive up carriers' costs, eroding the ability to charge low international rates while keeping up the profit margins. The fact remains that these carriers have to get used to cutthroat competition.

Cutthroat competition is here to stay, Topchishvili believes, because most ethnic telcos are aggressively taking market share, hoping large competitors like AT&T will notice and acquire them. The top five competitors in the niche, WDT and Mastercall included, spend upwards of $1 million a year on advertising and marketing, a hefty budget for most telecom startups.

"Based on our research and having talked to many owners of these firms, I believe an acquisition is the ultimate end game," Topchishvili said.

Players agree, with the caveat that their niche has to consolidate first if these CLECs want to make a dent in long distance sales of the big three long distance carriers.

"If we keep going our separate ways I don't believe we will represent either a threat to incumbents or a meaningful value to a potential acquirer," said Talis.

— End