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When Furst Group founder John Streep saw how deregulation remade the way long-distance phone service was sold, he saw a huge opportunity. Now if only he can stay friends with AT&T
In John Streep you're looking at a middle-aged man from South Jersey who is mostly bald, has brown puppy's eyes, wears loud braces under his suit coat, drives a fast car, races a fast boat, dreams of one day bagging a seven-by-seven bull elk, and, if he were an actor (like his distant cousin, Meryl), would be Danny DeVito. As for his vocation -- or his avocation, for that matter -- if you guessed sales, that would tickle Streep. "I'm just a dumb salesman," he says, grinning.
Right. Dumb enough to have built the Furst Group, number 4 on last year's Inc. 500 list and number 1 this year, with sales of $92.2 million, an increase of 42,389% over sales in 1990. His bottom line does OK, too: $12 million in 1994. So, dumb he is not. But the part about his being "just a . . . salesman" speaks to a plain truth about Streep and the company he created.
The Furst Group is sort of a long-distance telephone company. It mails phone bills every month, issues calling cards (credit and prepaid), assigns 800 numbers, and otherwise competes with AT&T, MCI, and Sprint. However, the Furst Group lacks certain capital assets that its larger competitors possess -- namely, poles, lines, and switches. It doesn't need them because it's not a carrier; it's a distributor, known in the industry as a "switchless reseller." It buys long-distance minutes in bulk from the carriers and resells them at a discount, mainly to small- and medium-size businesses. Very simple, very clean. "If you take our entire corporation," Streep says, "and you throw us into a big old paper bag and shake it up and dump it out, we're a sales organization. That's it."
Hundreds of long-distance resellers -- some with switches and some without -- have entered the market in recent years. Today there are at least 1,000, according to the Telephone Resellers Association, and 13 besides the Furst Group made this year's Inc. 500 list. Intense competition in an immature market has led to abuses by some companies, tainting the industry's reputation. Most complaints -- including some directed against the Furst Group -- have to do with "slamming," signing up customers without their permission. "I can't think of a company that doesn't have a slamming problem or complaints against it," says an official at the Common Carrier Bureau of the Federal Communications Commission.
Switchless resellers like the Furst Group didn't exist until recently. Then, almost overnight, through a confluence of technological change, partial deregulation, and competitive turbulence, a market vacuum developed that Streep and others rushed to fill. In hindsight it was a "screaming" opportunity, too good to be true, the experts thought. "When I first heard about it, I dismissed it," says Robert V. Bolen, a telecommunications analyst with J.C. Bradford & Co., in Nashville. "I went, 'Oh, man, here's another get-rich-quick scheme that's going to blow away in the wind."
What's happened since then? Well, a lot of resellers have blown away. Some never accumulated enough cash to sustain operations. Others evolved into independent sales contractors -- in effect, reselling for the resellers. Still others were absorbed by competitors as the industry consolidated. What's interesting, though, is that so many have survived. Some, like Corporate Telemanagement Group (#128), in Greenville, S.C., invested in switching equipment and built their own regional networks, heading down a path pioneered in the 1970s by MCI and Sprint. Others, like ADNET Telemanagement, in La Mirada, Calif. (a three-time Inc. 500 company, #92 this year), have repositioned themselves as telecommunications consultants, offering technical expertise and referral services to clients paralyzed by too many choices.
A handful of switchless resellers -- including the Furst Group and EqualNet, a $120-million Houston company that went public in March -- have focused purely on sales and are prospering. But margins in the industry have begun to erode, and that's before any competition from the cash-rich Baby Bells, whose eventual entry into the long-distance market is a foregone conclusion. Consequently, despite its astronomical sales growth, the Furst Group today still faces questions that have dogged resellers since the beginning: Can a company that sells only products that others create and sell themselves sustain itself as a business? Can a sales organization -- a telemarketing sales organization -- compete in a high-tech industry that's driven by product innovation? Is Streep an entrepreneurial businessman or just a lucky opportunist?* * *
When the reselling opportunity knocked, Streep was in Shamong, N.J., deep in the pine barrens east of Philadelphia, running a little consulting company called Furst Energy, which he had founded in 1980 with his former partner, Rick Furlano. Earlier, back in the days of rotary phones, Streep had been a telecommunications consultant. It was through old phone-industry contacts that in the late 1980s Streep first heard about aggregation. An aggregator rounded up enough small-business phone users to qualify for an AT&T volume discount on 800 service. It turned its customers' names over to AT&T, which provided the service. Customers would get two bills: one from AT&T for the discounted service, the other from the aggregator. In short order the (newly renamed) Furst Group joined the aggregation movement. "It was found money," says Streep.
But it was a lousy business. Fools rushed in, and margins faded to practically nothing in a matter of months. Worse, collection was a problem: very few customers bothered to pay the aggregator after about the third bill. Still, it was a valuable learning experience for Streep. While he was selling, he kept coming across potential customers that didn't need his services because they already were on something called a "software-defined network" (SDN).
SDNs had been developed by AT&T for large companies with lots of small, far-flung outposts, such as car-rental agencies. But when people like Streep studied the tariff and considered the possibilities, they saw a whole new market for SDNs. That market resembled aggregation, only it was better because it gave resellers more services to sell, simplified their billing, and promised a margin to die for.
The concept was simple. For about $2 million a month anyone could buy 18 million long-distance minutes from AT&T at 45% off list. Potential resale customers included any company that didn't have the volume to command that kind of discount. Even small-business customers savvy enough to be on AT&T's Pro WATS plan had never seen a discount larger than 12%. Bolen, the analyst, describes what swept through the industry during the late summer of 1989 as a collective "Aha!" According to Bolen, once companies realized that they were paying just 12¢ a minute for stuff they could sell for a quarter -- and on the AT&T network -- the idea spread like wildfire.
What amazes Streep most, thinking back, is how much AT&T loved him in those days. Account executives in Philadelphia were pushing SDNs hard, playing for new-product bonus money. Along came Streep, handing over fistfuls of multimillion-minute orders and waving the AT&T flag. (Eight out of 10 early customers were win-backs from MCI and Sprint.) He was a hero. Executives were buying him dinner at expensive restaurants, taking him to the Academy of Music to hear the Philadelphia Orchestra ("I was in the super box!"), even hosting a seminar -- Streep was the featured speaker -- to introduce the reselling concept to independent sales contractors from around the country.
Oh, the opportunity. In the fall of 1989 Streep went hunting in northern Michigan with his old college roommate, Jamie Kaylor. Just days after they emerged from the woods, Kaylor quit his job selling heavy farm equipment, opened a Midwest sales office for the Furst Group, and matched Streep's initial investment with half a million dollars of his own. "It wasn't a question of whether we were going to get 'em," says Streep. "It was 'What color will our Lear jets be?' We had the world by the cojones."* * *
Alas, it really was too good to be true. First, AT&T stopped treating Streep like royalty. That happened about the time Streep figured out that his best prospects -- the ones most likely to bite at a discount offer -- were the ones currently paying the highest prices: AT&T's existing retail customers. AT&T couldn't stop Streep from pitching to those accounts, but it later would win back the most valuable among them with its own aggressive discount plan. So Streep had to reevaluate the dimensions of his market. Early in the game, he wouldn't bother selling an account that generated less than $1,000 a month. Today his average customer gets a monthly long-distance bill for $46.
Then, for nearly a year and despite healthy sales, the Furst Group had to operate with almost no revenues. After a sale, AT&T was supposed to "provision" the Furst Group's customer -- that is, put the customer on the network, mail the bill, and send the Furst Group its share of the payment. The system worked fine with the first handful of orders, but as volume surged, the provisioning process broke down. By 1990 the Furst Group was doing about $200,000 worth of business each month with AT&T, divided among thousands of accounts, most of which, says Streep, wound up in "never-never land." Some never were added to the network; some never got billed; and some heard nothing from the Furst Group or AT&T for more than a year and then received a bill for all those months of service. "Man, you want to talk about a collection problem," says Streep, who eventually hired a third party to bill customers directly. He also withheld payments from AT&T until he had recovered some of what the Furst Group was owed -- about $2.2 million.
Similar battles with the phone giant have since driven all but well capitalized resellers out of the business. Today an uneasy accord prevails. Accusations still fly occasionally, however. AT&T and its customers regularly chide resellers for "slamming." "We have never, ever slammed a customer," Streep insists, citing strict procedures -- including taped third-party verification of each new customer -- that have been in place since early 1994. Resellers, meanwhile, still bemoan AT&T's slow-motion provisioning cycle, which they say costs them business.
That the Furst Group has made it this far when so many others have fallen away is due to two factors. First, abundant capital -- enough in the early days to survive without income and enough later on to meet AT&T's stepped-up deposit requirements, a prodigious barrier to entry. (To secure its latest contract, the Furst Group had to make a $9.9-million down payment.) Second, flexibility. When AT&T pushed the Furst Group out of the big-spenders market, the reseller found a way to downscale profitably.
The Furst Group has more than 200,000 customers. And every week, according to Streep, it adds 10,000 more. Those statements are accurate, but they fail to mention the churning just below the surface. Of the 10,000 new customers the Furst Group captures weekly, it keeps about 7,000. AT&T rejects the others, usually because they're already part of another AT&T SDN. While the Furst Group is adding 7,000 new customers weekly, about 1,000 customers leave the company each week through normal attrition. The average net gain: 6,000 customers worth $46 a month, half of whom will desert the Furst Group for one of its competitors within a year.
Just treading water requires a massive sales effort. In the past the Furst Group relied on independent telemarketing contractors, whose procedures, Streep admits, were difficult to police. Today 90% of the Furst Group's sales are made by its own employees, an army of 750 telemarketers, deployed in low-rent places, among them Freemont and North Platte, Neb. Each telemarketer aims to make 200 calls during a shift. "That's 150,000 businesses we contact every day," says Streep, "750,000 businesses we contact every week, 3 million a month. We're a machine."* * *
When Amar Bhidé, an associate professor at Harvard Business School, looks at companies like the Furst Group, he sees a textbook example of what might be called a temporary industry -- one that develops rapidly to correct an imbalance in the marketplace and vaporizes once its job is done. Bhidé does not belittle those companies. "I think they play a tremendously important role," he says, "to the same extent that I think speculators play an important role. They attack imbalances between supply and demand."
One of Bhidé's favorite examples is the unofficial distribution network that developed in response to IBM's decision to allocate its limited supply of first- generation PCs. "Product was not being moved in an economically rational way," Bhidé says. "It was being moved where IBM said it should be moved. These people [unofficial distributors] jump in and figure out that the price in Geographic Region B is less than the price in Geographic Region A and eventually force IBM to rationalize its pricing policies." Such industries, Bhidé says, "help bring markets into proper equilibrium."
Is this, then, the fate of the Furst Group -- to play a role in rationalizing the long-distance telephone industry and then to exit the stage? Maybe not. Here are several reasons:
The major carriers are in no hurry to cut prices. If AT&T, MCI, and Sprint wanted to make the resellers disappear tomorrow, all they would have to do is begin offering all their customers the same price they already give the resellers. They won't do that, though, because resellers still control only a fraction of the $65-billion long-distance telephone market -- about 16% if you count those with switching equipment; 3% if you're talking about switchless resellers like the Furst Group. The vast majority of the 11 million businesses in America still buy their long-distance service directly from the major carriers and pay retail for it.
Besides, the resellers have become the major carriers' allies. Once upon a time, AT&T had all the customers. With deregulation it began losing market share to MCI and Sprint. But according to analyst Bolen, "AT&T's market erosion essentially stopped when it started playing the reseller game." Reselling gave AT&T a channel through which to retain its price-sensitive customers. These days, all the major carriers necessarily regard resellers the same way -- as frontline warriors in the battle for market share.
Who said there's an imbalance in the marketplace? By focusing on the smallest of small-business clients, the resellers have found a market niche that is otherwise inaccessible to the major carriers, with their huge equipment costs and overhead expenses. "The cost structure is such that you can't take a $50,000 a year AT&T marketing executive, add on overhead, and expect to sell a $100 account," says Jeffrey Villwock, an analyst with Johnson Rice & Co., in New Orleans. For that you need an outfit like the Furst Group, whose expenses practically begin and end with sales and general and administrative costs.
There will be more products and more selling. The world of telecommunications is about to get a whole lot more complicated. The federal government is about to pass legislation that will give the Baby Bells access to the long-distance market, putting them in direct competition with the resellers. "The good news," says Charlie Houser, chairman and CEO of Corporate Telemanagement Group, "is that the Bells are so poor at servicing customers that we're not afraid of them at all." Moreover, when the Baby Bells lose their monopolies on local service, the resellers can enter a market that at $90 billion is larger by half than the long-distance market they're already in.
The implications of that expanded opportunity excite Streep. He thinks about the Furst Group five years from now, transformed from a niche player into a one-stop telecommunications retailer that can offer long-distance service from a full range of carriers, plus discounts on local service, cellular service, paging systems, personal communication devices, and any other dream products the industry might create. He doesn't care what those products are, as long as he can sell them.
"Ours is a real business," he says, somewhat defensively. "It's run by a bunch of professionals, and they're good, and they do the job. It's not hype; there's no rainbow; there's no pot of gold. It's a business that's built on structure and finance and economics."
And? "And sales. Hah!"
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