Diversify and Prosper

A strategically situated local phone company parlays its incumbency advantage into brisk growth—thanks to a well-thought-out expansion plan featuring a varied mix of services and delivery platforms.

by Ted Stevenson ISP-Planet Executive Editor [January 16, 2003]

SureWest Communications (NASDAQ: SURW) started life as the Roseville Telephone Company nearly 90 years ago (in 1914, to be exact), decades before the term ILEC first graced our business lexicon.

Located not far from California's state capital, Sacramento, Roseville metamorphosed from rural to "urban outskirts" as that city grew, said Brian Strom, president and CEO of SureWest in a recent ISP-Planet interview. Moreover, said Strom, "in the 1980s and 90s, the natural growth of the area was accelerated by the population overflow from Silicon Valley" and its legendary housing shortage.

These conditions created an easy and natural growth path for Roseville Telephone. But, says Strom, in the mid-90s, it "hit the point where we weren't going to continue growing just by being the local phone company," and the diversified telecommunications company SureWest Communications was born.

As part of the Roseville heritage, according to Strom, the expanding company retained a "conservative business sense," embodied in a strategy of incremental local growth that they now call "layer-and-leverage." The plan was simple: Begin competing in territory immediately adjacent to Roseville's home turf, by adding "synergistic business units." These have come to include long distance, cable TV, directories, PCS wireless voice, and, more recently, broadband Internet service.

(The local competition outside Roseville's home turf, by the way, is Pacific Bell (SBC) in the voice and Internet access business lines and Comcast in cable TV.)

Getting to ISP
Internet service was, in theory, a natural direction for the carrier to expand said Stromt. But in the dialup market, he observed, SureWest would have been "jumping into a crowded field, without much leverage." It wasn't until SureWest deployed DSL late in 2000 that the ISP piece of the puzzle came into its own.

"SureWest's entire local area was DSL capable from the get-go," said Strom. This was due in large part to the compact architecture of its network—two central offices (COs) plus 30 remote terminals (also known as "controlled environment vaults"). Moreover, a significant portion of the network consisted of fiber, which the company began deploying in the mid-80s—not so much because they had a crystal ball, commented Strom, but simply because it looked like an efficient network architecture.

The company's DSL business (which includes both residential and business customers) has grown about 5 percent per year in the three years of its existence, and has achieved what SureWest believes is the deepest penetration of any vendor: 16 percent. Strom anticipates continuing DSL growth approaching 5 percent per year for some time to come.

Asked whether he sees price sensitivity in the DSL growth equation, Strom said "not at all; this is a demand-driven market. There's an inherent pent-up demand in the Sacramento area." SureWest is pricing its DSL at the same $49 per month as the competition, and, as mentioned, growth is strong and steady.

Fiber-to-the-home
In 2001, in another major expansion move, SureWest acquired cable- and fiber-services vendor WINfirst, which served the community immediately adjacent to Roseville's ILEC territory, offering video, broadband Internet, and voice.

WINfirst's original territory (the area surrounding Roseville's home stomping grounds) has some 5,000 homes "wired" with fiber. In its new encarnation as SureWest Broadband Residential Services, it has so far wired—or fibered—another 500 to 1,000 homes within the corporate home territory.

With a total of some 6,000 customers, SureWest Broadband's is, the company claims, the largest fiber-to-the-home (FTTH) deployment in the United States.

SureWest offers fiber customers a "triple play" package consisting of 10 Mbps Internet access, 250 channels of video programming, plus voice (including 100 minutes of long distance), with PCS wireless a recent addition.

According to Strom, "about 50 percent of these customers buy the full triple play at about $120 per month. This represents a significant savings over the same services purchased separately. An additional 30 percent buy two of the three services." Average revenue per customer (ARPC) is about $105 per month, since not all customers take all services, Strom reports.

Is the new product line expanding? "For the first few months after we acquired WINfirst [in July of 2002]," said Strom, "we just held those customers in a big bear hug. But since October, we've started adding new customers." SureWest Broadband is looking to double its current customer base by the end of 2003, to about 13,000.

—End