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."