A Bold Move Small Internet Service Provider To Take On Phone Giants

Beginning as a small Internet service provider in 1995, Coeur d’Alene-based C-Systems has turned to an aggressive-expansion strategy that it hopes will show ISPs can be much more than bridges to the Web.

C-Systems, which employes 25 and works out of a small office complex near downtown, is close to finalizing an agreement with GTE that will allow the company to offer local and long distance phone service.

While Nextlink and GST Telecommunications have spent billions nationwide competing for customers against firms like US West and GTE, it’s rare - and somewhat risky - for a home-grown ISP to go against the incumbent phone giants.

The move is so rare, in fact, regulators in Washington say they are unaware of an ISP that has plunged into the competitive phone market.

Rick McGee, C-Systems’ co-founder and president, described the company’s push into the local and long distance phone business as a fitting next step.

“A one-stop shop is what it really comes down to,” he said. “It’s a logical progression to move in this direction.”

In four years, C-Systems has gone from providing standard Internet hookups to offering an array of services, including wireless Internet connections and video conferencing. And last month, the company rolled out high-speed digital subscriber lines (DSL) to business customers in Eastern Washington and Idaho.

Phone service could be launched as early as the third quarter.

C-Systems did not discuss its revenues. However, McGee said the company’s 1997-98 fiscal year growth rate was about 120 percent and C-Systems is profitable.

In preparation for its dial-tone debut in the Coeur d’Alene market, C-Systems has spent $750,000 on equipment to connect with GTE’s phone network.

Such high start-up costs are one reason mom-and-pop ISPs have yet to begin pushing into phone markets.

Another barrier, said Glenn Blackmon, assistant director for telecommunications for the Washington Utilities and Transportation Commission, is that many customers’ are not as comfortable with new ISPs as they are with older phone carriers.

“The telephone population as a whole is less willing to take a chance on an unknown name than an Internet consumer might be,” Blackmon said.

Despite the challenges, some believe C-Systems’ strategy will pay off - marking a path for more ISPs.

Gary Gardner, executive director of the Washington Association of Internet Service Providers, a Seattle-area trade group, said an ISP pushing into a local phone market will have a better chance to succeed in small areas that have a competition void.

However, Gardner stopped short of calling C-Systems’ business strategy “a trend” among ISPs.

R. David Wilson, principal of New Frontiers Communications Consulting in Arlington, Va., and a former aide to Sen. Bob Dole said, “I definitely see a lot of stuff popping up like this.”

Citing examples of much larger companies, such as RCN Corp., that are delving into diversified telecommunications on the East Coast, Wilson said the more value companies can cobble together, the better they will be.

“It makes sense; you have to start piling things onto the ISP business,” Wilson said, noting ISP profit margins are thin and firms can benefit from tapping other revenue sources.

As C-Systems begins to establish itself as an all-in-one communications shop, it plans to offer dial-tone service in less-lucrative residential areas, McGee said.

“We have to make sure the business customer and the residential customer are taken care of equally,” he said.

McGee, 38, has lived in the area for 15 years. Before starting C-Systems, he was a telecommunications consultant.

One reason he decided to venture out on his own was so his family would be able to utilize pieces of the technology the company put in place.

“For our kids, there were a lot of technology gaps in our community,” he said.

C-Systems has grown without the support of deep-pocket investors, but financing future expansion will pose challenges.

“As we grow at a fast rate, we might be able to fund internally, but we doubt it,” McGee said.