PAETEC sees downturn as new growth opportunity

May 8, 2009
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Imagine capturing only 3 to 4 percent of the market share and still being in the top 10 companies in that industry.

“We wanted to be the kinder, gentler carrier to do business with medium and large enterprise customers … and take a little bit of the market share away.” said PAETEC CEO and founder Arunas A. Chesonis.

“If we could be 3 to 4 percent of the market share of the nationwide business of that kind of zone, we’d be a Fortune 500 company ourselves. That means you can lose most of the time — and there’s not many businesses like that.”

Everyone has heard of AT&T and Verizon, but the $1.6 billion PAETEC, based in Fairport, N.Y., just outside of Rochester, actually ranks seventh among VoIP providers. One reason the company isn’t a household name is its niche market: It provides data, voice and IP services, as well as communications management software, network security and more to mid-to-large companies.

The company’s expansion into Michigan came as part of an effort to expand its national footprint. PAETEC acquired one of its smaller competitors, McLeod, and moved into Michigan in 2007.

“Part of the acquisition was not just Detroit and not just Flint, but also the Grand Rapids region,” said Chesonis. “It’s tough to do Michigan without western Michigan. You’re just not going to be successful.”

A unique aspect of the McLeod acquisition was acquiring the building. Most companies in PAETEC’s industry buy an existing building and then equip it with the necessary technology. The McLeod building was designed especially for the type of use that PAETEC’s services demand.

PAETEC has 10 employees in West Michigan. The state of Michigan represents a little more than 100 employees of the company’s 3,700, along with about 5,000 clients out of 47,000, and approximately $50 million of the company’s $1.6 billion in revenue.

“Long term, I think Michigan is going to be a great market for us,” he said. “I think people are going to figure out over the next 10 years that water is an important resource; that experienced and talented employees inside this country are a good resource. There’s this backlash coming in Sunbelt cities based on climate changes.

“Also, off-shoring is having a backlash. More and more people are considering in-shoring to get that quality of service and control. You can’t skimp on quality forever.”

Another attractive feature of West Michigan is its health care industry, which Chesonis said his company is targeting in a big way.

“We have about 3,000 health care customers out of our 4,700 — everything from the big HMOs and hospital systems down to a smaller rural hospital,” he said.

One reason health care companies are attracted to PAETEC is its wireless system.

“Some of our newest clients on the wireless model are the health care companies,” said Chesonis. “They’ve got diversity; they’ve got to get redundancy. They’ve got to make sure they can be up 24/7 — and they don’t have a lot of spare millions hanging out in petty cash to build redundant fiber networks. We can do a wireless redundant link very inexpensively.”

Chesonis noted that health care and financial companies as the two most important growing markets for PAETEC. He said the recession does not keep the company from growing and actually helps, especially during the second half. Since PAETEC is a relatively small company with high-end technology, the company is typically able to provide service at a lower cost, which is attractive at a time when businesses are looking to save money wherever they can.

“It’s forcing that inertia that normally slows people down. In 2001, 2003 — in the first part of the downturn, you struggle a little bit because your customers take a step down. They fire some people; they close some offices.

“The second half of the downturn usually turns out pretty good. Now they’ve been working with you on saving money and switching from other providers.

“We came out of that last downturn cash-flow positive, and we’ve been that way for six years … and that’s what we’re seeing now.”

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