Trouble in telecom land: where do we go from here.

Rose, Mary L. ; Flores, Oscar

SITUATION

YourTel is a company that promotes longevity. Most of the executive board has been with the company for at least fifteen years. The company tends to prefer employees from Arkansas who would tend to share the same corporate cultural values. Jordan Ashe has been with YourTel since 1972 having started as director of accounting. He was promoted to his current position of President and Chief Executive Officer in 1989. He is responsible for the continued growth that the company has sustained. Growth has been phenomenal; starting with several small rural telephone companies and growing into one of the top fifty telecommunications companies. Under Jordan's tutelage, the company has experienced ten years of record earnings until last year. Toward the end of 1999, stock prices have begun to slip and stockholders are unhappy with the decrease in earnings per share.

CEO Ashe has called an executive meeting to address the stockholder concerns. The first to arrive is Joshua Townsend who joined YourTel in 1989 as Vice President of Operations. His responsibilities include operation and management of billing and revenues, government relations, and customer service areas. He is also in charge of the company's wireless operations. He has a bachelor's degree in accounting and a master's degree in business administration from Arkansas State University. He has expressed concern in past meetings for what he terms YourTel's timid approach to wireless communications expansion.

Townsend's arrival is closely followed by Aaron Johnson, Chief Administrative Officer, joined YourTel in 1987 as General Counsel. His duties include responsibility for Human Resources. Johnson has a degree in law and is a member of the Arkansas State Bar Association. He has a tendency to stay outside the discussions until they affect his area of responsibility.

Blaine Blumgren, Executive Vice President and Chief Financial Officer, arrives for the meeting. Blumgren was employed at YourTel in 1985 as Vice President of Finance. He responsibilities include the negotiation of purchase agreements. He manages YourTel's accounting, treasury, financial planning and analysis, and corporate development. He has taken a lot of the heat for the slight decline in sales by the company. He believes that the new information system has had an impact of profits.

John Allenby is the newest member of YourTel's board. He joined the company in 1998 as Vice President and Chief Information Officer. He is charged with maintaining the company's entire information systems. He is not new to the telecommunications area, having previously worked for Bell and Lucent Technologies. As the newest member of the executive committee, he is still finding his way into the group. Some of the board members has shown a inclination toward caution in respect to company strategy and resist anything new which they feel is unproven. He is still defending his overhaul of the information system used by the company which, in his opinion, was badly needed. He has seen the results starting to turn around and has the figures to prove it with him. He doesn't like to be broad-sighted so he has come prepared, as he usually does.

The company has been doing rather well. Even with the recent dip in the price/earnings ratio, the company has maintained a respectable posture. Stock prices have leveled but there is concern with the lack of exponential growth that the stockholders are accustomed to seeing, especially when other telecommunications companies are doing so well. Just wrapping up the fourth quarter of 1999, Jordan Ashe said, "YourTel finished 1999 with excellent customer growth. For the quarter, YourTel added 16,600 wireless subscribers, 38,200 long distance customers and 2,700 Internet customers." With the whole world going "cellular," the company has decisions to be made about future growth. Ashe ponders whether past strategies will result in a continuation of YourTel's stellar growth or if bolder approaches are needed.

BACKGROUND

YourTel started in 1947 as a group of three local telephone companies that were scattered throughout Arkansas. They faced competition from larger companies and upgrading the equipment was a critical issue. They decided to pool their resources and offer combined services to a limited area of customers in rural Arkansas. The company soon realized that the decision to combine resources was a good one and began to look for other rural opportunities. This act turned out to be a profitable venture and YourTel continued to acquire small, mostly rural, telephone companies providing service to areas that were not profitable enough for development by larger telephone companies. YourTel now has one million customers.

The company lists the following total of telephone lines as of December, 1999:

States Number of Lines States Number of Lines

Minnesota 230,250 Oklahoma 39,722
South Dakota 180,512 North Carolina 32,906
Arkansas 98,551 Idaho 4,811
Louisiana 97,772 New Mexico 3,656
Colorado 85,149 Indiana 3,435
Iowa 84,305 Wyoming 3,021
Oregon 70,118 Louisiana 1,954
Montana 60,988 Arizona 1,652
Tennessee 50,134 Nevada 1,011
 Total 1,049,947

KEY COMPETITION

Until the last few years, when YourTel operated in rural America, competition was nearly non-existent. With it's entrance into the Internet and wireless world, the list of rivals contains some heady names: ALLTEL, AT&T, America Online, American Cellular, BellSouth, CFW Communications, Centennial Cellular, CenturyTel, ICG Communications, Intermedia, Communications, MCI WorldCom, Nextel, Powertel, SBC Communications, Sprint PCS Telephone & Data Systems,U S WEST, United States Cellular, and Verizon.

GROWTH STRATEGIES

YourTel has turned itself into a giant largely by buying telephone lines in areas where few other competitors had an interest. This practice has served them well in the past. The question that is foremost on the mind of Jordan Ashe is whether the company could expect continued growth for the future using the strategies currently in place:

** Continue to concentrate on smaller markets with excellent growth
potential* Develop additional telephone operations in rural and
suburban markets* Offer one-stop shopping to customers for
communications services

** Offer wireless operations in urban and suburban markets

** Develop networks to deliver communications services

RECENT ACQUISITIONS AND DIVESTITURES

The company's largest acquisition was the 1997 purchase of California Telecom for $3.5 billion. In 1999, YourTel found itself needing to venture into other types of communications media and sold its interest in California Telecom Cable Inc. and Arizona Telecom Wireless Services Inc., part of the original purchase, $73.6 million. The sale was conducted, in large part, to relieve some of the debt from the original purchase and to provide a means for further expansion of cellular and wireless service. In the same vein, YourTel sold off holdings in smaller remote areas to purchase additional 150,000 telephone lines in areas where YourTel was already prominent. In the 4th Quarter 1999 Earnings Report for the company, Ashe told the world "YourTel generated cash flow of $175 million, demonstrating our ability to reduce debt and emphasizing our financial strength. We reduced long-term debt by $450 million during 1999."

FINANCIAL STATUS

YourTel's position in the telecommunications arena has been a solid one. Company growth has been extraordinary. YourTel went from a privately held corporation to the public stock exchange in 1975 and is listed as one of the top 100 companies in information technology. YourTel was added to the Standards & Poors Index in March of 1997. The chart below lists the sales and net income for the last five years.

YourTel filed the following revenues at the end of the fourth quarter of 1999. A comparison with the filing for 1998 shows a continued rise in revenues in all areas except Telephone:

REVENUES

 1999 1998

Telephone 254,066,000 256,599,000
Wireless 98,249,000 91,753,000
Other Operations 28,723,000 25,457,000

YourTel provides telecommunications to a small contingency of customers in any rural areas that are amalgamated into a serviceable area. YourTel has concentrated on those areas where larger companies would not have found profitable. Customers has had little choice on service providers until the present. YourTel has amassed a wide area and one million customers and, though scattered, has turned a multitude of small companies into one large company providing some of the bargaining power advantage that would not have been ordinarily possible to local providers. The logic here was to acquire areas that no one else wanted to service and acquire enough of them to make it profitable. Ashe's greatest concern is whether land-based services will remain the dominant factor in communications that it has been. His position in the past has been "if it's not broke, don't fix it." But recently he has seen the stock market price of YourTel's stock declining at a slight though steady rate. Even more alarming has been the decline in revenue of land-based telephone services.

The arrival of substitute products or services is the greatest potential threat to YourTel. With the advent of cellular phone service and the Internet, customers are no longer bound by their physical location to their telephone service provider. The introduction of long-distance phone calls over the Internet will further weaken YourTel's hold unless the company becomes a major player in that arena.

YourTel has expanding its wireless communications and the Internet services to some extent in efforts to keep its customers from choosing other providers of these services. YourTel serves as an ISP in limited areas. The purchase of InetSystems became effective October 15, 1999. InetSystems is an Internet Service Provider located in Cheyenne, Wyoming and serves 7500 customers in the surrounding communities. YourTel has also gone international in its product expansions. YourTel has procured an equity is IndiaDSL and is serving 12,000 customers in India. YourTel president Ashe says "the Indian and Asian markets show great potential for data services. This is a prime marketplace for DSL services."

Townsend, the head of wireless communications, states again (as he has in past meetings) that YourTel must look for wireless opportunities; that this is the way the whole world is going. He points out the there is an increase of 7.1% in revenues for wireless operations while the telephone services revenues returned a nearly a 0.1% decrease. He takes great care in not looking directly at Blumgren because his future plans will need the support of the Chief Financial Officer.

Allenby, the Chief Information Officer, has been advocating a change in the corporate strategy structure for more company involvement in data services. He knows that despite the modest investment in data services (called Other revenue), the increase in revenue from last year to this year is 12.8%. He tells the group that YourTel has in place an adequate wireless expansion plan and that his opinion is that data services is the next big wave to latch onto. The company has broadened its services in wireless by teaming with TelCanada to provide wireless service in Canada. "Why not look at China as a source of revenue in data services? An official in the Ministry of Information Industry has predicted that China will have 600 phone users by 2005 (E-ventures, 2000)"

Blomgren knows that while China is a huge market, he also knows that present customs there would cost YourTel a large share of any profit they might make and that ownership of any telecommunications company in China will not exceed 50% (Landler, 2000). "We could be there now and get a foothold for a time when that ownership structure changes," Allenby counters. "Besides, the reason that we sold parts of the California Telecom purchase was to free up capital for new expansion," he adds. Johnson, YourTel's chief Administrative Officer, points out that the largest portion of revenue for the company continued to be from telephone services and suggests that the company may want to stay on its present course. "Besides," he says, "China may have the world's largest population but only 2 million Chinese have disposable income of $20,000 or more (Business Week, 2000).

As the members of the executive committee ponder the future of YourTel, they must do so with the realization that a concentrated awareness that the telecommunications world has drastically changed is a must survival for nearly all companies and YourTel is no exception. What worked in the past may not work in the future. Is YourTel moving fast enough in the right direction? What is the right direction?

REFERENCES

Business Week (2000). China's Tangled Web: Will Beijing ruin the Net by trying to control it? BusinessWeek Online, July 17, 2000. On-line. Available: http://www.businessweek.com/2000/00_29/b3690036.htm,

Callon, J. D. (1996). Competitive Advantage Through Information Technology. New York: McGraw-Hill

E-ventures (2000). China to become the world's largest phone market. Sept. 12, 2000. On-line. Available: www.e-ventures.com.cn.

Landler, M. (2000). World Business Briefing: Asia; China Internet Policy. New Your Times, January 6, 2000. On-line. Available: http://archives.nytimes.com/archives/.

Mary L. Rose, Western Carolina University Oscar Flores, Texas A & M International University

Year Sales Net Income

1999 1,592,185,000 216,817,000
1998 1,565,414,000 262,064,000
1997 894,849,000 254,084,000
1996 744,130,000 128,122,000
1995 640,069,000 113,927,000