Falling Phone Rates Squash Global Fax Service
THE BUSINESS: Internet-based international fax service
OPENED: April 1995
CLOSED: July 1998
CAUSE OF DEATH: Precipitous drop in international telephone rates
The Intergram Corp. and The Centennial Funds--a natural fit. So it seemed to Adam Goldman, a general partner in the Centennial Funds, a venture-capital company based in Denver, when he plowed $250,000 into Intergram in March 1996. Centennial Funds was then emerging as a backer of telecommunications and Internet start-ups.
Fortunately, as Goldman saw it, Intergram combined elements of both dynamic industries. The company expected to establish itself swiftly as a top brand in global telecommunications. With countries like Germany and Argentina charging hefty phone rates, Intergram spotted a chance to undercut international rivals by providing an alternative, Internet-based fax service. Over the next 23 months, Centennial Funds and three other venture-capital firms kept the faith, investing more than $25 million in Intergram.
But even that sum was not enough.
Intergram's strategy, as it turned out, resulted from a flawed calculation of how long the high rates in Europe would hold. "We were trying to squeeze through a closing window," explains George Schad, 48, who had run his own CD-ROM publishing and software companies before becoming Intergram's CEO, in 1996.
Schad recruited Philip Varley, a British-chartered accountant, who added international expertise. When Schad and Varley evaluated global telephone rates, the logic behind the Intergram plan seemed ironclad. For example, a three-minute fax transmitted from Paris to Denver cost as much as $2.70, but Intergram's service could slash the price down to 90¢. And the arithmetic worked for service in many countries in Europe, Asia, and Latin America.
From April through August 1997, Intergram opened nine overseas outposts stretching from London to Hong Kong, as well as offices in New York, Miami, and San Francisco. (Operations had already begun in Denver.) By November its workforce had swelled to more than 200, including 50 salespeople. Meanwhile, engineers from Denver scurried around the world, hooking global communicators like Lufthansa and Disney Argentina into Intergram's system.
But as Intergram prepared to open for business in Europe, telephone rates were plummeting on the continent. And even though Varley had factored as much as a 30% drop in European rates into his calculations, the picture quickly looked much darker because of an extraordinary thaw in Europe's strictly regulated telephone industry. In the Netherlands, PTT Telecom Netherlands cut rates by as much as 54% in October 1997, according to Phillips Tarifica, a telecommunications consulting firm in London.
Intergram plunged ahead anyway, spending an average of $650,000 on up-front rent, equipment, and other expenses to open each of its European offices, according to Varley. While the company was burning through more than $2.5 million a month in operating expenses, its revenues peaked near $240,000 in December 1997. "We had not done a good-enough job policing" how well the local managers were sticking to the financial plan, concedes Varley.
Over the next six months Schad had no alternative but to shut down all his foreign offices, except the one in Buenos Aires, where phone rates were still high. The end came on July 1 of last year, when Intergram filed for bankruptcy with $6.8 million in liabilities and less than $500,000 in assets.
Left hanging over the rubble was the question of whether anyone could have foreseen the magnitude of the European rate decreases. "Everyone knew prices were going to come down," says Keith Mallinson, managing director of the Yankee Group Europe, a telecommunications consulting firm. "But it would have been hard to know by just how much. Companies like Intergram were taking a gamble." -- Joshua Macht
PRINT THIS ARTICLE