Add Tel-Save Holdings
(TALK) to the list of bold, next-generation telecommunications
companies hoping to make a killing off of the Net.
A year ago, the New Hope, Pennsylvania, company bet the farm on an
exclusive, multiyear deal to provide long distance and other types of phone
services to users of America Online. With less than $250 million
in cash, Tel-Save paid AOL $100 million in the deal, which AOL guaranteed
through June of 2000.
Tel-Save sweetened its offer to Netizens yesterday by announcing it was
lowering the price of long distance calls to just 5 cents per minute
through the end of May for new customers, and through the end of April for
existing customers. The price had been 9 cents per minute.
Tel-Save announced that it could repurchase up to 8 million of its outstanding shares. That boosted the stock to 24-3/8, up about 10 percent from yesterday's close of 22-3/16. Under the board's authorization, shares may be repurchased from time to time in the open market or in privately negotiated transactions.
Since the February 1997 announcement, Tel-Save's stock has surged, moving
from below 15 to hover now around 25. Last week AOL and Tel-Save said they
expected to generate some 500,000 telephone lines by the end of the month,
up from about 200,000 in January.
"The whole idea in our industry is that, by using AOL as a distributor
platform, [we] significantly lower our costs of customer
acquisition," said Tel-Save spokesman Ed Meyercord, who estimated that the
company spends about 50 percent less to sign up new customers through AOL
than it would through more traditional marketing channels, such as
television ads and direct mail solicitations. He added that operational
costs associated with the AOL deal also are significantly lower, since
customers access bills online and pay using their credit cards.
But Tel-Save faces some major challenges. Last month, chairman and chief
executive Dan Borislow put out the word that he was looking to sell the
company and that he had hired Solomon
Smith Barney for advice. Last week, Borislow retreated after failing to
find a company willing to pay an asking price of $30 a share.
David Simons, a managing director at Digital Video Investments in New York,
said Tel-Save's inability to find a suitor points up some major concerns
that investors have about the company.
"It's still too early to tell what Tel-Save's long-term success is going to
be with its AOL deal," he said.
For one thing, he noted, after the deal expires, AOL may, at its sole
discretion, renew or walk away from the pact, giving Tel-Save competitors
with deeper pockets a chance of moving in. For another thing, while AOL and
Tel-Save talk about the increase in phone lines generated through their
deal, neither will discuss how many actual customers they are serving at
the moment.
Yet another challenge will come in the form of companies such as Level 3 Communications, and Qwest Communications, who are using an
Internet technology known as IP, or
Internet protocol, to deliver long distance, fax, and other telephony
services. According to an analyst from Frost & Sullivan, IP based telephony will
account for 10 percent of the market by 2002.
Finally, Simons said that the attractiveness of the deal is likely to decay
over time, as more and more of the market is tapped and as competitors
begin to offer similar services.
"There's a lot of short sellers on this stock, and, of course, some active
boosters," Simons added. "When you have such extreme polarization of the
stock, it can lead to some pretty wide swings."
Despite the doubt, however, Tel-Save has a lot going for it. CEO Borislow,
whose strong negotiating ability helped make the company a leader, gained a
reputation as a shrewd businessman from his experience reselling long
distance services from AT&T during the
early 1990s. AT&T was among the first to embrace the Net as a way to
attract residential phone customers, a move that was validated when MCI Communications and Sprint announced a similar plan.
Right now, the company provides only long distance services to AOL
subscribers, but the deal between the two also gives Tel-Save exclusive
rights to provide local and wireless services as well. Tel-Save hopes to
begin offering more services later this year.
Additionally, with a number of fundamental shifts in the telecommunications
market putting pressure on companies to offer bundled services in one
package, Tel-Save spokesman says
its deal with AOL, the No. 1 online provider, is the only model that will
make such service profitable.
"It's a huge challenge for anyone to enter into the local service market"
or provide bundled services, spokesman Meyercord said. "The AOL model is
the only way to make local, bundled resale services profitable."