It was one of the more eye-opening telecom M&A deals in a year full of them: a three-way merger, completed in early September, of MegaPath, Speakeasy and Covad into a single company. What it means is that MegaPath, the new company, can offer a full portfolio of voice, access, private networking, managed security and services solutions focused on large enterprise, SMB and wholesale accounts alike, and to hear Bruce Chatterley tell it, more and more of that business is going to flow through the channel.
Chatterley, formerly Speakeasy's CEO and now President of Business Markets at MegaPath, sat down with CRN Networking Editor Chad Berndtson at this week's Channel Partners Conference & Expo in Washington DC, to talk about MegaPath's embrace of the channel and how he sees MegaPath getting to 50 percent indirect business in the next few years.
Let's talk about the merger: mutually beneficial for all three companies, why so for your individual channels?
At the 50,000-foot-level it's very complementary. We have complementary customer segments: Speakeasy historically SMB, MegaPath historically focused on very large, distributed, geographically dispersed enterprises, and Covad focused on wholesale. So when you combine those businesses, you get synergistic customer bases, and also some key synergies of technology.
What we're trying to do is create what we call a managed services local exchange carrier: lead with applications and value-added services and use the underlying network to differentiate the delivery of those. That means that things like VoIP, for example, get delivered in a tightly integrated way with quality of service, and our broadband connections providing access to things like cloud computing services through MPLS VPN and other secure network-based solutions, so that you can be certain your access to your data is secure and not available to the public internet.
And so, there are various application synergies and through the combination of three companies, we can leverage two things from a reach standpoint: through Covad, we have one of the largest facilities-based national networks in the country, with 4,500 colos (colocation centers) nationwide. Through MegaPath, historically focused on geographically dispersed enterprises, we can, through a series of partnerships with other carriers, reach every nook and cranny in the U.S. The three businesses together have much more profit-generating capability as well as revenue-growth potential.
The other thing is that each of these three companies come from a history of customer- and partner-centricity. When you look at Speakeasy and MegaPath, about 30 percent of our total new orders on a monthly basis are derived from partners. We're going to take that base and leverage it from an effort over the next six months to reach out to partners and build out the interface for the company. How do you want to interface with the company? What are best practices in terms of tools? We're going to build that out. One of the upsides of integration is that you take three partner programs and do new development versus companies that have an established program they can't afford to hit 'reset' on. We have the opportunity to create a unique interface.
Next: MegaPath's Channel Outreach
You're fortunate in that this is formerly three companies that had a strong history in the channel. We've seen a few instances in mergers like these where one or more of the companies have limited to no channel strength. Safe to call that a key driver of this merger?
I would say that's true. Covad's mainly been focused on wholesale but speaking from MegaPath and Speakeasy, both have had a philosophy of being channel neutral. That means, if you're a channel partner and call in to one of our direct sales people, they will help you close the deal. There's an incentive to help partners close business, and no conflict at all. We don't care which channel satisfies the customer, we want to make sure the customer is satisfied.
We want the channel strategy to fit where the customer wants to buy, when they want to buy and from whom they want to buy. It's not our place to define how the customer answers those questions. It's the customer's place. The other thing I would say is that as the economy struggles, customers are looking for advice from people they trust on how to be more productive and how to leverage technology to scale your business. It's not a big telecom company they look to for that, it's an IT consultant or a master agent or a technology provider they have a trusted relationship with, to construct a solution.
Are you looking to grow your channel business?
Absolutely. Again, it's about 30 percent of the combined entity. Speakeasy was 35 to 40 percent and now we wouldn't be averse to having it get to 45 to 50 percent. Customers clearly have told us that they're looking for advisors to help them purchase technology. We're not going to change our mind.
What kinds of partners are coming to you? From where we sit at CRN, we see quite a few traditional networking resellers starting to get on board with, say, hosted VoIP and really trying to align their practices for these models. Is it that base of potential partners you're after?
I would say yes, to all comers. I want to find out from the customer who they want to buy from and partner with those businesses. Both Speakeasy and MegaPath have developed a number of training programs, and in Speakeasy's case, we have a set of VoIP certification training programs, moving to a Webinar series. We're merging all of these programs into modular training that's easily accessible, to allow partners to get certified and get to a higher level of certification.
The other thing to work on is the business model, and we have 4,500 independent IT consultants, many of whom are the exact definition of your readers: historically computer and LAN resellers, networking gear resellers, struggling with how to move their business. They see what's happening, and that things are moving to the cloud. I tell you, I always looked at the phone guy and said, 'How do I get his business,' and the phone guy's always looked me and said 'how do I get your business.' And frankly, we've bet on the data guy. I don't mean that as a negative to the phone guy because we have a lot of relationships there, but between the two, when you come from an IP-centric background, you're going to have an easier time migrating to host applications. We're trying to help both though: the phone guy get into data by leveraging MPLS VPN and hosted VoIP, and the data guy get into phones by basically not requiring a phone system.
From a business standpoint, we've worked a lot on on compensation strategy. If you're an independent IT consultant, you're making money with termed customers to be their outsourced IT provider, you're not just selling hardware and software. We've tried to work with those guys to allow them an augmentation to their revenue stream. We've worked on a model to help them do the business case that says what's the difference between selling a phone system one time and selling the maintenance, versus selling a hosted phone system and getting a percentage of the recurring revenue stream? We think we have a compelling value proposition for all sides.
Another thing I'll say is that the phone system is really a proxy for the business process. You can't sell a phone system to a business without understanding the call flows, how the receptionist, in a simple example, interfaces with the president, how the call centers interface with each other, how the 800 numbers work and what's advertised and what isn't. You really have to be a consultant, understand holistically what business they're in, then understand the LAN design, then design a system appropriate for them.
Next: Service Provider Consolidation Takes HoldI want to back up that notion of a managed services local exchange carrier you mentioned earlier. Is that person or that company also an integrator?
Absolutely. That's where you get your hourly consulting. It's the special sauce. A customer looks to that person because they're generally a trusted adviser. Even in the large enterprise, there tends to be a person the decision maker has worked with for years and has trusted. And a lot of the [integrators] tend to be small businesses themselves. That role allows the channel partners to really prove their worth and continue to extract revenue.
Coming from the Speakeasy side, you've had a front row seat for watching the pickup in VoIP and the solution provider and service provider opportunity here in the SMB. How fast is that growing?
It's the fastest growing. I don't care what the analysts say. Three years ago we were struggling, mainly because it wasn't well understood. It was actually a needle-in-a-haystack: you usually needed some compelling event, like "My PBX is off-lease' or 'I'm opening a new location,' and that made it hard for a marketing solution. Plus, you present it as hosted, and there's not a lot of real education around it. But in the last 18 to 24 months, we've seen a sea change. Businesses are avoiding hiring that next person a lot of the time by making their systems work harder and getting more productive.
The consolidation happening in this piece of the industry: will it continue and, based on what you're seeing, is it just the space sorting itself out?
I think consolidation will be inevitable and will continue. We're an economies of scale business from a capital resource standpoint, and it's always been that way. On the VoIP side, the shakeout has been pretty dramatic: there were over 100 VoIP companies not long ago and now there's probably fewer than 20 that mater. I think that's a good thing for customers, and what I mean by that is, they want stability and they want to know they're working with partners who'll be around for the long haul. It's one thing to give your software business to someone who might be gone tomorrow, but it's another entirely to give them one of your front doors -- meaning your physical front door, your phone, your e-mail or your Website. You have to make sure they have the right customer support and resources, and consolidation will help that if done for the right reasons.
Will we continue to see companies in the space merging together, or will we see big IT vendors pluck companies for acquisition?
Well, a lot of the big guys have their VoIP play already, but it's not a play of customer-centricity. You may see it, but I'm not sure it matters. In the voice space, you'll see a last shakeout of financially unstable and not-well-capitalized companies. Then you'll see it evolve all over again with this concept of cloud computing, particularly on the applications side. The barriers to entry aren't big -- just like VoIP wasn't at the beginning -- but the requirements of the customer to stay are very significant. Cloud, in my mind, is an evolution, not a revolution. It's application by application by application: first you're outsourcing your payroll, then your expense management, and then further and further until you're talking about phone systems, and your ERP. One day maybe you'll wake up and you won't have any hardware or software on site.
And hopefully you won't be scared that it's not secure.
You won't because you're using MegaPath MPLS-VPN to access all of your services, and never traversing the public internet!