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Twin Cities Business Monthly,
February 2004
Making the Switch
by Don Jacobson |
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Duluth’s past—and future?: Chad Braafladt, president and CEO of CP Telcom, with the city’s famous Aerial Lift Bridge in the background. Braafladt hopes to make Duluth a telecommunications center using a new kind of technology. Chad Braafladt helped get Duluth hooked to the Net. Now he has a bigger goal—revolutionizing Minnesota’s phone service.
Given Duluthians’ love of the great outdoors, it’s fitting that the man who more than anyone else brought the Internet to northeastern Minnesota got his inspiration at a fish research laboratory.
In 1997, while visiting a friend who worked at the U.S. Environmental Protection Agency’s freshwater ecology lab in Duluth, Chad Braafladt first saw a new kind of Internet browser called Mosaic, which displayed graphics as well as text. Right then, Braafladt— who was operating an IT services firm knew he had found a way to take his fledgling computer-networking business to the next level.
“I couldn’t get in to see the biggest corporate customers in town before then,” Braafladt recalls. “But by offering this kind of Internet, it opened the doors for me.” Catching this early wave of Internet development enabled the new company Braafladt started, CP Internet, to become the dominant dial-up Internet service provider (ISP) in northeastern Minnesota in the late 1990s. By 2001, through a series of acquisitions—including mid-sized ISPs in the Twin Cities and Mankato—Braafladt’s company had become the largest locally owned ISP in Minnesota.
This kind of expansion earned CP Internet a place on Inc. magazine’s list of the 500 fastest-growing private companies in the U.S. in 2000. But what the Internet downloadeth, it can also deleteth. Two years ago, it started becoming clear that dial-up Internet access was turning into another slow-growing commodity business with razor-thin margins. Efforts by independent ISPs to get new customers were facing strong resistance from the regional Bells and cable companies. Braafladt’s entrepreneurial instincts told him it was time to move on to something new.
Now, after many months of preparation, he has once again been an early adoptor of some cutting-edge technology. Braafladt is diving into the roiling waters of the local telephone provider market by becoming a competitive local exchange carrier, or CLEC.
Thanks to a $2.8 million debt financing (completed in October 2002) that allowed him to buy ultrahigh-capacity call-switching technology, CP Internet is giving way to sister firm CP Telcom as the revenuegrowth center of Braafladt’s businesses. Braafladt says the “softswitch” is an exciting new technology that’s enabling
small telecoms with limited financing to avoid having to rent access to the switches of the incumbent local exchange carriers (ILECs), most notably Qwest Communications.
That means more savings can be passed along to the consumer—and, he says, a competitive price advantage over both the ILECs and other CLECs that pay for access to the big boys’ equipment.
Braaflaadt is taking a gamble: No one in Minnesota has ever tried to make a telecom buck using softswitch technology. He was ahead of the curve in adopting the Internet business model. Can he succeed again, this time as a telecommunications visionary?
A Goldfine Education
Braafladt started out as a classic computer guy. After graduating from the College of St. Scholastica in 1985, he went to work for one of the legendary business families of Minnesota, the Goldfines of Duluth. Brothers Erwin and Manley (Monnie) Goldfine gave Braafladt a strategic grounding in how to run a successful business—as well as how to be flexible.
Sons of immigrants from the Soviet Union, the Goldfines started their Northland empire by turning their parents’ general store into the region’s top furniture and carpet outlet in the late 1940s and 1950s. In 1962, they opened one of Minnesota’s first large discount stores, Goldfine’s By The Bridge, which quickly became Duluth’s biggest retailer in both volume and physical size. The brothers merged their retail operations into a publicly traded company in 1970, but that company, Unishops, ran into financial trouble, and in 1979 the discount store closed.
Then, sensing that Duluth’s economic future lay in tourism, Erwin and Monnie formed Zenith Management to buy and manage hotels. By 2000, they owned 40 facilities, extending their reach from Duluth into 17 other states. The Goldfines also took over the city’s well-known Vista Fleet line of sightseeing boats.
From 1985 to 1994, Braafladt was the Gold-fines’ computer whiz. “It was a great time for me,” Braafladt recalls. “I started a family and saved up a nest egg. But I was always looking toward the future with the intention of starting something of my own.”
In 1994, with the help of his wife, Mary McClernon, Braafladt started his own firm, which provided IT professional services and the point-to-point data circuits that businesses used before the popularization of the Internet.
But Braafladt’s real entrepreneurial momentum came after his fish-lab revelation. “When I started, my goal was to have $5 million in revenues by my fifth year,” Braafladt says. “I had no idea how I’d do it. I came in at $4.4 million, a bit short of my goal, but in hindsight I’m happy with it. By last year, our revenues were up to $10.5 million. We’ve posted a profit every year.” Braafladt grew his ISP business in part through an aggressive acquisition program, buying five small ISPs in five years. In 2001, CP Internet—“CP” stands for ComputerPro, the company’s original name—made its first move outside of the Northland, acquiring a Twin Cities–based ISP, ISD.Net, and adding some 10,000 subscribers to its customer base in the Twin Cities metro and Hudson, Wisconsin, areas. Its latest and biggest acquisition was Prairie Lakes Internet of Mankato. The 2002 deal brought in 13,000 customers in several southern Minnesota cities, including Albert Lea, Northfield, and
Owatonna.
Some pain has accompanied the gain. Along with new customers, CP picked up new employees. By early 2002, Braafladt’s company had a staff of about 120. Last May, it had to lay off 18 people, mostly from its Duluth headquarters. His longtime CFO also was let go as the company shifted from ISP to CLEC. Braafladt says these difficult moves were made to eliminate redundancies created by the acquisitions. But he feels he’s now better positioned for his firm’s future.
Tapping New Technology
Central to that future is the softswitch, which fits in a box small enough to sit on a kitchen table. And yet it has the capacity to handle calls “from everyone in Minnesota,” Braafladt says. “If I bought the kind of traditional Lucent or Nortel equipment that incumbent carriers have to do the same job, I’d need 7,000 square feet of space to house it.” Softswitch technology converts incoming voice transmissions into “packets” of data. In CP Telcom’s case, it then routes the data packets over leased fiber-optic cable to several receiving spots around the state. There they are converted back into voice transmissions and sent out over local phone lines. By turning voice into data, softswitch technology can also use the Internet to transmit phone calls—a capability known as VoIP, or voice over Internet protocol. Braafladt has plans to exploit his softswitching technology to expand into the growing VoIP market.
Besides using a fraction of the physical space, softswitch technology’s greatest advantage is its operating cost savings.Braafladt says he spends one tenth of what other phone companies do to run their “legacy” switching equipment. A 2002 study done by Cahners In-Stat/MDR found that equipment costs for telecoms can be cut by 50 percent by going with a softswitch because it takes up much less space than a circuit switch. The study also predicted that softswitch sales, which were $125 million in 2001, would reach $1.32 billion by 2006.
Still, this isn’t to say that softswitches will soon become the dominant switching technology. One reason ILECs like Qwest aren’t rushing to embrace it on a large scale—aside from the huge one-time costs they’d incur to replace their legacy equipment and displace their technical staffs—is that they aren’t convinced software can ever be as reliable as copper switches. Some experts believe it will be another 10 to 15 years before the regional Bells seriously consider replacing their most important switches.
Braafladt asserts that his softswitch equipment, produced by Marlborough, Massachusetts–based Telica, is “99.9 percent reliable, and meets all the international standards. And, just in case, we have duplicate switches—one to act as a backup.”
Braafladt is now taking the next step in CP Internet/CP Telcom’s evolution: offering local, long-distance, and highspeed Internet access-over-T1 service to retail as well as wholesale buyers, first to businesses in the Duluth area, and then elsewhere. This month, he says, CP Telcom will offer these services to Minneapolis business customers. And later this year, residential customers will be able to buy dial tone and Internet service from CP.
Although Braafladt wouldn’t say exactly how much the first T1 packages will cost, he does say that “the price points will be significantly lower than what you can get now.” T1 line prices from ILECs and others have traditionally varied between $500 and $1,300 per month, depending on the number of lines and amount of bandwidth used, plus one-time costs for hardware.
Smaller telecoms using softswitches are “part of So far, CP Telcom’s the evolution of the industry rather than a revolution,” customers have primarisays one expert. users—other small
ISPs, as well as cable television providers that want to sell voice-over-cable telephone service to their customers. Braafladt has been establishing the efficacy of his new platform with wholesale customers first in order to work out any bugs in the system, and also to get a revenue stream going. In 2004, he will be plunging into the business-to-business market, aiming the new product—called Freedom T1—at small businesses located in the Duluth area. Though the new softswitch technology is important, other key differences a small competitor like CP Telcom can provide are pricing and customer service.
That’s why Duluth Public Schools was one of the first to sign up for CP Telcom’s new T1 service, according to Mike Willis, the school system’s director of technology. “They have the best pricing, and for a school district, that’s a critical piece of the equation,” Willis says. “We had other providers before them, and we switched because the reliability wasn’t there. As that company has grown, they haven’t forgotten their roots. We’re probably one of the lowest-margin customers they have, but they’re always there and have been instrumental in helping us.”
Despite happy customers such as Willis, CP Telcom faces a multitude of challenges in the telecommunications field. Along with Internet services, the industry was one of the hardest hit by the economic slump of the past few years and is showing few signs of recovery.
Braafladt, flanked by Greg Tarnowski (left), his vice president of finance, and Bob Beidel, vice president of wholesale sales for CP Telcom.
The softswitch, key to CP Telcom’s big plans, is the white-and-purple device between Tarnowski and Braafladt.
Even the biggest firms, like AT&T and wireless provider Verizon, are still locked in cost-cutting mode as the prices they can charge continue to erode. But upstarts with new technology have an opportunity to be more competitive, according to Andrew Odlyzko, assistant vice president for research at the University of Minnesota and director of the school’s Digital Technology Center. “Softswitches are definitely the wave of the future,” he says. “While I wouldn’t say they are a paradigm-changing technology, they’re part of the trend to lower costs and move toward more flexible systems. They’re good if you want to minimize your costs.” Odlyzko adds that small players who can’t afford traditional phone-switching equipment can get into the game more easily with softswitch technology. They are “part of the evolution of the industry rather than a revolution,” he says. “This is something that’s going to eventually take over the established carriers and in the long run will offer a much more robust telecommunications system. Traditional switches restrict that evolution.” The fact that CP Telcom offers a newer, nontraditional technology should help it make inroads in the outstate market. In many parts of rural Minnesota, telephone consumers don’t have much choice when it comes to local service providers. According to the Minnesota Public Utilities Commission (PUC), frequently the only alternative for rural customers is to switch to cellular, usually a much more expensive proposition. Not many upstart landline firms make an effort in outstate areas because of the costs involved. But CP Telcom believes it can become the first such company to reach every part of rural Minnesota because of the cost-efficiency of its new switching technology.Minnesota’s Phone Company
Part of what Braafladt is doing to diferentiate CP Telcom from other CLECs in Minnesota, such as Pequot Lakes–based USLink and Cedar Rapids, Iowa–based McLeodUSA, is offering local phone service in every part of the state, particularly rural areas with few or no alternatives to their main telecommunications provider.
He’s already made it available in every Qwest-controlled exchange, and CP Telcom has secured interconnection agreements with Minnesota’s other ILECs as well: Frontier Communications, Citizens Telecommunications, and Sprint Minnesota. “We want to be Minnesota’s phone company, not northern Minnesota’s, not the Twin Cities’ , ” Braafladt says. “We want to change the way of thinking about phone companies dominating localities and instead see it from a truly customer-based perspective.” Still, operating a new outstate telecom, especially given the longtime economic challenges of Duluth and northeastern Minnesota, is no slamdunk.
But Braafladt says he’s committed to the area, and wants it to become home to new industries, like telecommunications, that can pick up some of the slack left behind when the steel mills and the railroads faded away and decimated the region’s manufacturing base. “I think what CP Telcom shows is that entrepreneurship can flourish anywhere,” Braafladt says. “It doesn’t just have to be in Twin Cities or in places where there’s a lot of resources.” Maybe, in fact, all that’s required is for inspiration to strike while in a fishing boat, walking along a rocky shoreline, or even hanging out in a fish lab. Don Jacobson covers Duluth, northeastern Minnesota, and northwestern Wisconsin for BusinessNorth magazine, and produces its Web site, BusinessNorth.com.
REPRINTED WITH PERMISSION FROM TWIN CITIES BUSINESS MONTHLY • COPYRIGHT BY MSP COMMUNICATIONS
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