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| BusinessNorth Article, October 21, 2003 |
CP Internet Recasts Itself as Local Phone Provider
by Don Jacobson
Flexibility is a good thing for an entrepreneur, especially in the Internet business in today’s unforgiving economic climate. Consider the case of Chad Braafladt who is reinventing his company to better fit in a roiling telecommunications industry.
Braafladt and his wife, Mary McClernon, are well known as the 1994 founders of CP Internet, which quickly grew into the largest locally-owned Internet services provider (ISP) in Minnesota. By 2002, through a series of acquisitions that Braafladt engineered, the company claimed 25,000 dial-up Internet customers in three states.
In October 2000, the company made Inc. Magazine’s 100 fastest-growing list. Revenues rose from $6.7 million in 2001 to $10 million last year. Braafladt said he’s posted a profit every year since its startup. But the acquisitions also forced layoffs in May of 18 "redundant" employees, most at the firm’s Duluth headquarters.
In real terms, the dial-up Internet business had become flat. Competition for new customers was intense. Margins were slipping. Braafladt said it was time for the ISP side of the business to yield the spotlight to a new sibling: CP Telcom, the local telephone service provider.
"Two years ago I started an initiative to begin diversifying from an ISP into a full service telecommunications provider," he said. "To fund the plan, we raised $2.8 million in a debt financing in October 2002, and we starting building out our Duluth central office."
That financing marked the turning point in which the familiar CP Internet began the transition to something different. From its founding in 1994 until 2002, Braafladt’s strategy was break-neck expansion through acquisition. In addition to Inc. Magazine, CP Internet made several other “fastest-growing” lists compiled by local and national publications.
Five acquisitions along the way built the base of dial-up Internet access customers. The first two were small, adding only a few hundred customers to its base. But with the third in May 2000, CP Internet gained some heft. It bought the dial-up Internet division of Hibbing-based Befera Interactive Cablenet, doing business as The Bridge, added 4,000 homes in Ely, Grand Rapids, Hibbing and Virginia.
A year later brought CP Internet’s first major move out of the region with its acquisition of Twin Cities-based ISD.Net. The purchase added some 10,000 subscribers to CP Internet’s customer base in the Twin Cities metro and Hudson, WI areas.
Its last and biggest acquisition was Mankato, MN-based Prairie Lakes Internet in February 2002. The deal added 13,000 southern Minnesota customers in Mankato, Albert Lea, Northfield, Faribault and Owatonna.
Along with new customers, CP Internet picked up new employees. By early 2002, the company had a payroll of about 120. Since then Braafladt said he’s trimmed his workforce to eliminate redundancies that result when companies merge.
In May CP Internet laid off 18 people, most at its Duluth headquarters.
In mid-summer Braafladt also engineered a management shuffle that eliminated Todd Torvinen, the company’s chief financial officer. "Our company is really focusing on telephone service, so I did a reorganization there to more closely reflect that," Braafladt said. "I did make some changes to make sure we can execute that the best we can."
He offered no further details. Torvinen, who came to CP Internet in 2002 from the city of Duluth where he was finance director, did not respond to a request for an interview.
The key element in the company’s transition to "competitive local exchange carrier," or CLEC in telecom industry jargon, and to go head-to-head with incumbent phone utilities was its purchase and installation of a next-generation software-based call switching machine made by Telica Inc. Called a softswitch, it enables CP Telcom to completely bypass the switches of local utilities, such as Qwest, eliminating the fees that local service resellers have to pay.
The softswitch box is so small that it easily fits on a kitchen table. Yet is has the capacity to handle calls "from everyone in Minnesota," Braafladt said. "If I bought the kind of traditional Lucent or Nortel equipment that incumbent carriers have to do the same job, I’d need 7,000 square feet of space to house it."
In addition to using only a fraction of the physical space, the greatest advantage of the softswitch technology is the operating cost savings. Braafladt said he spends only 10 percent of what other phone companies pay to run their "legacy" switching equipment. He said he’s passing along these savings to customers. So far, that list includes only wholesalers, like cable television companies that want to provide "voice-over-cable" telephone service.
But he’s ready for the next step in the CP Internet/CP Telcom evolution: offering packages to Duluth area business end-users. The packages, called T1 lines, include local calling, long distance calling and high-speed Internet services for small- to mid-size businesses with three and 24 phone lines.
"The price points will be significantly lower than what you can get now," he said, refusing to disclose rates.
T1 line prices from incumbent carriers range from $500 and $1,300 per month, depending on the number of lines, bandwidth required and hardware costs.
The down side to softswitching, according industry observers, is the reliability factor. One of the reasons Qwest, CenturyTel and other utilities aren’t rushing to embrace the technology on a large scale is that they aren’t convinced software can ever be as reliable as copper switches. Another is the huge one-time costs to replace their legacy equipment and retrain or replace technical staffs.
Some experts believe it will be another 10 to 15 years before the former regional Bell carriers replace their most important switches.
Meanwhile, Braafladt is convinced his Telica equipment is completely reliable.
"I think the toughest reliability standards are met here," he said. "It’s 99.9999 percent reliable, and meets all the international standards. And, just in case, we have two duplicate switches, one to act as a backup."
Executives at Superior-based Telephone Associates, the largest independent local service reseller in Duluth/Superior, didn’t respond to a request for an assessment of how CP Telcom’s entry will shake things up.
How the Duluth market will respond is anyone’s guess. It’s hard to predict because phone service offered with softswitches never has been attempted in the state, according to the Minnesota Telecom Alliance, a non-profit professional group of telecommunications providers.
"As far as we know, (CP Telcom) is one of the early adopters of using this softswitch technology," said alliance spokesman Terry Kucera. "A lot of our local exchange carriers are looking at this as a future technology to replace current switches, but (CP Telcom is) the first that’s going to offer this as stand-alone equipment."
Kucera said the new call switching technology eventually will change the competitive telecom landscape, offering "new avenues for smaller competitors to get into the business of providing local phone service."
Softswitching also is helping ISPs make the transition to CLECs, a necessity for their survival, according to makers of such equipment. One such vendor, CopperCom Inc. of Boca Raton, FL, offers softswitches along with consulting services to take an ISP through regulatory processes that come with offering local phone services in each state.
The main hook CopperCom offers is reduced costs. A major cost for an ISP is leasing high-traffic lines from the local utility to deliver its Internet dial-up traffic to its servers. This can be eliminated by using its own switches, which provides a platform for additional services and new revenues.
Generating new revenue is critical for emerging Internet companies if they expect to attract investors, Braafladt said.
"We want to go out and raise some equity within the next six months, and we think we’re going to get it," he said. The money will be used to grow, not to keep the company afloat, he said.
If it finds such backers, CP Telcom will be one of a very few telecommunications firms attracting investment dollars in an industry that’s fallen from favor with deep-pocketed risk-takers. It also will be testament to the wisdom of flexibility in an unstable marketplace. |
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