Strategic determinants of reseller profitability in the US wireline telecommunications market

Abstract

Resellers of wireline telecommunications services are firms buying transmission or switched minutes capacity from facility-based backbone and local loop carriers to ‘refine’ these raw supplies by introducing their own pricing schemes and sometimes by running own network nodes to switch leased capacity. They market these ‘refined’ offerings then under their own brand and on their own account to end customers. Using data gathered from 12 US toll resellers for the 6-year period from 1992 to 1997 the present study provides an empirical analysis of associations between 15 strategy variables and two profitability measures of such resellers. The sample reported an average sales margin of −7.81% and a return on total capital mean of −9.96%. However, inter-firm profitability differences were very large. Statistical analyses revealed that more profitable resellers displayed (1) a lower share of medium-sized business customers, (2) a lower service portfolio concentration, (3) a higher degree of horizontal service diversification, (4) a focus on fewer sales channels, (5) fewer customer complaints per million $ sales, and (6) a higher costs of service share of total operating costs. Empirical findings are interpreted to support a life-cycle concept of wireline toll resellers. This means that only those firms immediately using cash-flows generated from basic long distance service resale for a cost-conscious expansion of activities into related services in a first step and for a roll-out of facility-based carrier operations in a second step seem to be on the road toward longer-term prosperity.