EXCEL Communications Inc.

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EXCEL Communications Inc.

9101 LBJ Freeway, #800
Dallas, Texas 75243
U.S.A.
(214) 705-5500
Fax: (214) 664-3615
Web site: http://www.exceltel.com

Public Company
Incorporated: 1988 as EXCEL Telecommunications Inc.
Employees: 1500
Sales: $506.7 million (1995)
Stock Exchanges: New York
SICs: 4813 Telephone Companies Except
Radiotelephone; 6719 Holding Companies, Not
Elsewhere Classified

EXCEL Communications Inc. calls itself the fourth largest residential long distance carrier in the United States, although its $506 million in 1995 sales is still dwarfed by leaders AT&T, Sprint, and MCI, which together control roughly 85 percent of the market. Like most of the estimated 1,000 long distance companies started up since the deregulation of the long distance industry, EXCEL does not own its own telephone network; instead it buys the excess switching and transmission facilities of other providers for its own long distance time. EXCEL buys time at wholesale prices, then resells long distance calls to its subscribers at discount prices. Principal suppliers of these blocks of long distance time are Frontier Corp., WorldCom, Inc., and MCI Telecommunications Corp. Subscriber calls are routed through EXCEL’s Dallas and Houston call centers; in late 1996, the company added a third call center in Reno, Nevada to service its West Coast subscribers. EXCEL employees track subscribers’ long distance usage, and subscribers are billed according to their rate plan. Rate plans vary among subscribers, but include EXCEL’s “Simply One” plan, launched in June 1996. Simply One calls are billed at nine cents per minute during evenings and weekends.

EXCEL markets its domestic and international long distance services, which include calling card and 800-number services, primarily to residential customers, but also to commercial and nonprofit subscribers. In October 1996, EXCEL expanded its service offerings by adding paging through PageMart Wireless Inc.’s paging network. The company is also making plans to add services such as Internet access, cellular service, home security monitoring, video services, and local telephone service. By adding these services, EXCEL expects to become less reliant on the volatile, and possibly threatened, long distance telephone industry, while capturing increasing fees from its subscriber base.

EXCEL went public in May 1996, selling ten million shares, or approximately nine percent of the company’s stock, on the New York Stock Exchange. Founder and CEO Kenneth Troutt holds approximately 65 percent of the company. With shares trading in late 1996 at around $20 per share (after reaching a high of $47 per share in June 1996) Troutt’s worth was estimated at $1.4 billion. EXCEL plans to pump part of the $150 million in proceeds generated by its initial public offering into building the company’s own long distance network.

EXCEL has managed to avoid the expensive marketing costs of its competitors; in fact, EXCEL actually makes money from its marketing activities. Rather than pursue the expensive television advertisements, print campaigns, or direct mail efforts of its competitors, EXCEL markets its services solely through a vast network of independent representatives, each of whom receives commissions based on a percentage of the calls made by the subscribers they sign up, as well as on the number of new independent representatives they recruit into the company. Called “multilevel marketing,” this technique has been successfully used by companies such as Amway, Mary Kay Cosmetics, and Herbalife to sell products ranging from beauty supplies to vitamins and beyond. In 1996, there were more than one million independent EXCEL representatives. Approximately 25 percent of the company’s revenues are generated by signing up new independent representatives, at a rate of about 250,000 per month.

Humble Beginnings for Founder

EXCEL was founded by CEO Kenneth Troutt in 1988 and began operations in 1989. But in his youth, Troutt, who was 48 years old in 1996, probably seemed unlikely to become one of Texas’s, and the United States’, wealthiest men. Troutt was born in Mount Vernon, a small town in the south of Illinois. According to Troutt, his father was a bartender and alcoholic who went through a succession of jobs. About his father, Troutt told the Dallas Morning News, “We didn’t get along.” Instead, Troutt and his siblings were raised by his mother, growing up in a Mount Vernon housing project.

Yet, from his earliest years, Troutt, fueled by seeing other children with things his mother could not afford to buy for her family, dreamed of wealth. In fourth grade, when a teacher asked his class what they planned to be when they grew up, Troutt replied, as he told the Dallas Morning News: “I want to be rich.” Not yet a teenager, Troutt set up a lawn mowing business, hiring his brothers and cousins to do the work. Later, Troutt became quarterback for his high school football team, which in turn led to a partial scholarship at Southern Illinois University.

Initially, Troutt planned to attend law school. But Troutt’s ability as a salesman began to show while he was still in college. Working part-time as a life insurance salesman, Troutt became the insurance company’s top seller by his senior year. He gave up the idea of law school, telling Forbes simply, “[I] found out I was good in sales.” From college, Troutt moved to Nebraska, where he started up a real estate and construction business. The business ran into trouble, however, during the recession of the early 1980s. By 1983, with interest rates reaching 20 percent, Troutt dissolved his construction company. His next stop was Dallas, where he started an oil brokerage business. But the Texas oil industry collapsed shortly after, and Troutt once again found himself out of work.

Telecommunications in the 1980s: The Perfect Business

With these experiences behind him, Troutt set out in search of his vision of the perfect business: A product that everyone needs; that requires no inventory and has a distribution structure already in place; that is consumable, thereby creating continual demand; that has relatively low start-up costs and remains, unlike oil, somewhat stable in price; and, last, a product that continues to generate income after the initial sale. Troutt’s brother, an accountant, suggested the recently deregulated telecommunications industry.

Troutt soon found inspiration for his future company from telecommunications upstart Sprint. In the mid-1980s, Sprint was running its own direct marketing venture, called Network 2000, which allowed that company to join AT&T and MCI at the top of the industry. As Troutt told Success, one of his former oil company employees brought the idea to him, suggesting, “We could hire these college girls to stand out in front of Safeway and hire college guys to walk up and down residential areas and pay them $2 per application. Then we’d get the commission from Network 2000.” But Troutt, reasoning that he would not make his fortune through Sprint, developed a different plan.

Troutt formed his own company, EXCEL Telecommunications, in December 1988, receiving regulatory approval to enter the long distance services industry. The company started operating in 1989, initially serving only the regional Texas market. At first, Troutt acted as his company’s own salesman, approaching individuals and, through another company, offering potential customers discount travel packages as an incentive for switching their long distance services to EXCEL. Troutt also attempted to recruit groups such as churches, school bands, and others, offering the group a commission for convincing their members to sign on as subscribers. Then Troutt was introduced to Stephen Smith, who had experience with a company using network marketing techniques in the early part of the decade. Smith suggested that EXCEL create its own network, or multilevel, marketing plan. “Kenny didn’t like the idea at first,” Smith told the Detroit News. “But it started out with so much power.” Indeed, as Troutt told the Dallas Morning News, “Our cost of sales is almost zero.” By April 1989, EXCEL had its own multilevel marketing plan in place.

Companies using multilevel marketing techniques signed up independent representatives, instead of hiring employees. New representatives typically paid the company a fee for joining the network, and networks often had several entry levels, depending on how much the representative paid. The representatives in turn sold the company’s products to other individuals, receiving a commission on each order. But a representative’s real interest lay in creating a “downline,” that is, recruiting other representatives into the network, who in turn would recruit representatives, forming a pyramid-like structure. Moving up the pyramid, a representative would receive a commission and/or percentage for each recruit he or she brought into the network, as well as for recruits signed on as representatives into the first representative’s downline. The structure of such organizations were often received critically, however. Although multilevel marketing itself remained legal, these networks often functioned as little more than illegal “pyramid schemes,” in which a company generated most or all of its income from recruiting representatives, and not from the sales of any actual product or service.

Company Perspectives:

Excel provides the finest long distance programs in America today. In addition to all the standard services offered by other major long distance companies, Excel offers the opportunity for our customers to save up to 50% on their long distance calls. We also offer a personal 800 service that can’t be beat, and all of our customers, just for trying our service, receive the most attractive incentives in the industry.

Troutt and Smith, who joined the company as executive vice-president, at first employed a scattershot strategy, reasoning that since everyone used long distance services, everyone was potentially an EXCEL customer. As its network grew, EXCEL quickly expanded into providing long distance in neighboring states, and soon on a nationwide scale as well. But signing on a customer and keeping that customer proved to be two different animals. “Our philosophy used to be to sign up the cab driver,” Troutt told the Dallas Morning News. “We had one of the worst attrition rates in the industry and one of the best bad debts.” By 1990, despite revenues of more than $6.5 million, the company was losing money. By 1991, the company’s losses mounted to $400,000.

Warm Market Strategy for the 1990s

Troutt and Smith changed tactics to a “warm market” strategy. Independent representatives were encouraged to sign on family, friends, co-workers, and others with whom they had personal bonds. As Troutt told Success, “If I go out and sign up my mother, my sister, my two brothers, and my two aunts, as long as I don’t cost them any money, they will most likely never leave because of our relationship. When AT&T and MCI and Sprint try to get them back with telemarketing or checks, we have a better chance of keeping them.”

The warm market proved a successful strategy for EXCEL. Attrition slowed, and the company’s fortunes slowly improved, from a loss of $300,000 in 1992 to a gain of $2.4 million in 1993. By that year, too, EXCEL’s revenues had begun to take off. Its $30.8 million in 1993 revenues represented a gain of more than 800 percent over the previous year. Part of the company’s success resulted from fortunate timing. The early 1990s, with the recession, the Gulf War, and a growing wave of corporate downsizing efforts, was raising job insecurities to a new high. Multilevel marketing plans became increasingly attractive to people seeking additional incomes. Others sought the freedom of becoming a full-time independent agent, which not only made them less dependent on an employer for their job and income security, but also allowed them to go beyond the earnings ceilings in place for most full-time jobs.

And EXCEL’s product carried much less risk than the typical multilevel marketing venture. To become a representative authorized to sell EXCEL’s services, the prospective representative was required to pay $50. That amount, however, provided for no additional sales training or marketing support from the company. To receive training and sales and marketing materials, a prospective representative paid $195, receiving the title of managing representative. Managing representatives were required to bring in at least 20 new long distance subscribers. Representatives received monthly commissions based on the total of these subscribers’ long distance calls. In addition, for $395, a prospective representative could become an area coordinator. Area coordinators were authorized to hold training sessions for the representatives and received a $40 commission for each representative they trained.

One EXCEL representative explained the company’s advantage over other multilevel markets to the Lexington Herald-Leader in this way: “You pay $195 to start your own business. If you go home and don’t do anything, and never even get a customer, you haven’t been killed. Whereas if I am in a products business and I ask you to purchase up front $1,500 … worth of stuff, you are stuck with whatever it is we’re selling if you become unmotivated, get tired or whatever it is.”

EXCEL’s network of representatives expanded rapidly, with the company adding thousands of new recruits each month. Those who joined early soon began receiving thousands of dollars each month in commissions. By 1994, EXCEL’s revenues grew another 419 percent, to $157 million, bringing nearly $16 million in net income. The following year, EXCEL’s earnings grew to $44 million, on revenues of $507 million. In that year, the company reorganized under the name EXCEL Communications.

By May 1996, the company went public, selling ten million shares. Founder Troutt, who sold none of his shares in the offering, was now worth more than $1 billion, and earned more than $3 million in salary and bonuses. Co-founder Smith was also doing well: His contract called for him to receive $5 for each new representative joining the network and a commission of 0.5 percent of all long distance charges made through the company.

With this explosive growth, however, came increased scrutiny of the company. EXCEL was forced to revise its training materials after some states charged that they encouraged representatives to recruit more representatives, rather than new long distance subscribers. Because its representatives are independent, the company has also been criticized for being unable to control incidents of “slamming,” that is, illegally switching a customer’s long distance services. In June 1996, the company was forced to pay an FCC fine of $80,000 for slamming two customers. In September 1996, the Dallas Better Business Bureau revoked EXCEL’s membership because of the increasing numbers of complaints that agency had been receiving. Analysts also criticized the company for overstating its earnings, due to EXCEL’s practice of spreading out its costs over the full fiscal year. Others complained that the company’s promise of discounted service was becoming too difficult to keep as price wars raged throughout the industry.

Present Problems, Future Possibilities

In late 1996, EXCEL, despite a forecasted rise in revenues to more than $1 billion, faced other difficulties. Its attrition rate among representatives hovered around 86 percent, while the number of new representatives applying to join began to slip. Many observers were critical of a person’s earning ability as an EXCEL representative. The largest share of the company’s more than one million representatives, in fact, received little to no commissions at all. For example, although the company paid out $35.7 million in commissions for the month of April 1996, only about 154,000 representatives received commissions. Of these, more than two-thirds received less than $100 and about 95 percent received less than $1,000. Not all of EXCEL’s representatives were happy with the company. In May 1996, a group of representatives, including some of the company’s top earners, filed a $400 million lawsuit against the company, charging EXCEL with unfair competition and trade practices, defamation, and interference with their business.

Keeping its long distance customers was also proving more difficult for EXCEL. Attrition rates had grown to four percent per month. The company made a number of moves, including contracting with WorldCom and MCI to expand its long distance capabilities, and also making plans to add new services, such as Internet access, to maintain customer satisfaction as well as to maximize revenues from each customer. In October 1996, the company began offering paging services through PageMart Wireless, Inc. The move to expand its services was hoped to help the company compete in a market soon to become even more competitive with the arrival of perfected internet telephone software. Into the late 1990s, however, EXCEL should be able to continue its evolution into an industry powerhouse with the help of its legion of representatives.