Business; A Phone Upstart, Still Annoying the Giants

That is probably because change has not come easy to the telecommunications world. The Telecommunications Act of 1996 opened up the regional Bell system to smaller competitors. The law forces the regional companies to lease access to their networks to new providers. But despite these changes, at the end of last year about 95 percent of the residential and small-business market remained controlled by the four local giants -- Verizon, SBC, Qwest Communications International of Denver and BellSouth of Atlanta, according to the Federal Communications Commission.

''No one really knew how the local market would play out even though the telecom act had passed,'' Mr. Smith said.

But he is not discouraged, especially with a $100 billion residential phone market at stake.

The company has had a rocky journey, he acknowledged. Like many other upstart telecommunications companies, Z-Tel has yet to turn a profit, even after recently cutting its work force to 1,200 from 2,100. In the second quarter, it had a loss of $107.7 million on revenue of $73.1 million, compared with a loss of $23 million on $40.2 million in revenue in the corresponding quarter a year earlier. The company estimated that sales would be up 40 percent for the year over all.

MR. SMITH discussed a litany of reasons for Z-Tel's problems: The company grew too fast by signing up too many customers before it was ready to handle them. It was initially saddled with bad debts from customers who were unable to pay their bills. It was hurt by the stock market's decline. But when this soft-spoken, sometimes shy chief executive talked about the ''often contentious'' relationship his company has with the local phone giants, his tone became roiled. As he tried to compose himself, he rose from the conference-room table in his office with a view of downtown Tampa and grabbed a golf club. He began putting balls across the room into a coffee cup.

''I tell my people it's like working with the motor vehicle office,'' Mr. Smith said, missing his second shot.

While Z-Tel can provide certain services, like call forwarding and voice mail, from its Tampa data center, giving it some control, it still relies heavily on the big regional companies to install service for new customers, to maintain lines and to deal with service problems.

''There's absolutely a conflict of interest here,'' said Nancy Kaplan, a vice president at the Adventis Corporation, a telecommunications management consulting firm based in Boston. The regional phone companies are not sabotaging smaller competitors, she said, but they generally do not put them at the top of the list when it comes to service and billing.

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Mr. Smith says he walks a fine line between developing a good relationship with the regional companies from which he buys service and complaining about them to local and federal regulators when he contends that they do not play by the rules or charge too much for their lines. While he stopped short of saying the big companies were maliciously making waves, he said mistakes occurred too often, costing Z-Tel both money and customers.

Last year, Z-Tel signed up 8,000 customers when it began offering service in Massachusetts and Pennsylvania, but a Verizon error left all those subscribers without touch-tone service for two to three days, said Peggy Rubino, a Z-Tel regional vice president. She said Verizon employees had told Z-Tel that it did not have to include a code for touch-tone service when setting up a new customer's account, but it turned out that the code was needed. Most customers were not aware that they could have used the analog function on their phones temporarily, she said. ''We lost virtually all those customers,'' she said.

''Consumers are typically skittish about changing to an unknown competitor, so at the first sign of trouble they cancel service and run back to the long-time player,'' Ms. Rubino added.

Thomas Maguire, a vice president for operations at Verizon, said the problem was fixed within a few hours after it was reported. ''I'm not going to say it's one person's fault versus another; it might have been both our faults,'' he said. ''All I know is it wasn't that big a deal.''

Then there was the problem last June, involving Z-Tel's entry into Indiana, Ohio and Wisconsin. Service was delayed 7 to 10 days because Ameritech had not updated its database to accept Z-Tel's orders, said Ron Walters, another Z-Tel regional vice president. Every time Z-Tel tried to place an order, it would be rejected, he said, adding that Ameritech did not respond to Z-Tel's complaints until he contacted the president of the wholesale division.

Selim Bingol, a spokesman for SBC Communications, said Z-Tel's initial problems with Ameritech had been resolved. ''I can't tell you there has not been an issue between us and that there never will be an issue that comes up,'' he said. ''But we are all moving ahead in good conscience.

Z-Tel has brought many of its complaints to local and federal regulators, and the regional phone companies are sometimes assessed penalties, Mr. Smith said, adding that his company has had at least $5 million a year in legal expenses. He says Z-Tel receives, on average, $200,000 in fines mandated by regulators every month. ''I'd rather get zero and good service,'' he said.

Besides those problems, Z-Tel is still dealing with start-up issues, like raising capital. The company went public in late 1999, just a few months before the stock market began to falter. Mark Bacurin, an analyst at Robert W. Baird & Company, an investment banking firm, noted that the company spent the majority of the $114 million in proceeds from its initial public offering to help the business grow, but in hindsight, he said, more of the money should have been invested in the technology that would have made it easier to place orders and to run the day-to-day business. The stock, which initially traded in the $40 range, is now trading below $1 a share.

Despite those growing pains, Mr. Bacurin expressed confidence in Z-Tel's management. ''The company will survive,'' he said.

Other fledgling phone companies have not been so lucky. There are only about 75 phone companies now offering residential or business service, versus nearly 200 last year, according to the Association for Local Telecommunications Services, a trade group based in Washington.

Years ago, Mr. Smith said, he never would have imagined that he would ever be running a phone company. He received a bachelor's degree in finance from the University of Virginia in 1981 and went on to become a lending officer at Bank of America in Greensboro, N.C., and Tampa. But he found himself gravitating toward technology and, from 1988 to 1991, raised capital for high-tech companies as a consultant. In 1991, he was a co-founder of Premier Technologies, now called Ptek Holdings, a commmunications and data services company based in Atlanta, but he parted amicably from his partner, Boland Jones, in 1997.

TO start Z-Tel, Mr. Smith put up $7 million of his own money, proceeds from the sale of his interest in Premier. He immediately hired 50 engineers, aiming to build a backbone to make phone networks smarter through technology. They came up with functions like using e-mail for access to voice-mail messages and sending a recorded phone message simultaneously to many members of a family or to friends with different phone numbers -- a function that analysts say is rarely found in the residential market.

Mr. Smith is concentrating on other initiatives, like providing phone service to small businesses, not just individuals and home-office customers, Z-Tel's initial focus. The company is also teaming up with utilities to offer bundled packages of electricity and phone service to consumers and having major retailers carry Z-Tel brochures at cash registers.

James J. Linnehan, a telecommunications analyst at the New York office of Thomas Weisel Partners, says he thinks the new business plan will help. He also noted that the company had a base of residential customers and little debt. Z-Tel's most recent balance sheet showed $25 million in debt.

''I have them going profitable in the next quarter, but even if they just break even that's good enough,'' he said.

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