Ari Ramezani and Jim Murphy, owners of Extreme Telecom, dropped out of college to sell pagers, then graduated to dial-up service and finally, to broadband
By MICHAEL THURESSON
What's important to Ari Ramezani and Jim Murphy, two college friends who founded Internet service provider Extreme Telecom Inc., is grabbing a small piece of a big pie and hanging on.
The Canoga Park company, which operates as DSLExtreme.com, claims 45,000 subscribers, barely a ripple in a U.S. market estimated at 150 million users.
Still, Ramezani said he would be happy grabbing from 100,000 to 200,000 subscribers for high-speed and dial-up Internet services and Web hosting, after which he believes it would be difficult to service accounts without taking on an outside investment.
DSLExtreme customers pay monthly fees ranging from $9.95 for dial-up service to $125 for some high-speed services. He said 40 percent of its clients are businesses.
The company overcomes its lack of brand recognition by offering new DSL subscribers a monthly introductory rate of $25, barely above what it pays to lease the phone lines that the data travels over.
"It costs us $200 per client to get them signed up and working. We definitely are losing on every new client that comes through the door for the first year," said Ramezani.
At the end of the first year, DSL subscribers are switched to a $40 per month rate, still less than some larger competitors like EarthLink Inc., and Ramezani said there is only a 2 percent attrition rate.
DSL, or digital subscriber line, sends signals over the existing copper wire infrastructure built by phone companies. Regulations require local landline owners to make their wires available to third parties, though Murphy and Ramezani won't say what they pay to lease the lines.
In the first step to expand its base beyond the L.A. area the company started offering high-speed access in San Francisco, Sacramento and Chicago in August. There are plans to offer DSL in Chicago, Dallas and Detroit next year, using the same strategy of cut-rate service to lure customers.
Tough road ahead
Still, the small company has a long way to go before making a dent in a market where the 10 largest ISPs have at least 1 million subscribers each, and the largest, AOL, tops 25 million, according to Jupiter Research.
"They will be hard pressed to match the incumbent providers, particularly the local telcos like SBC and Verizon," said Jim Penhune, an analyst at Strategy Analytics. "There is more perceived security with those than going with a startup. Plus bigger cable companies can bundle Net service with things like digital video service."
To do what it can to take on better-known brands, DSLExtreme has been spending up to $80,000 per month on a mix of local and national radio ads in recent months.
More than ever the game is keeping customers, something the company claims is its biggest advantage against the bigger players. "There's an inherent dislike of phone and cable companies. It's because of their customer service," said Murphy.
Ramezani and Murphy's partnership dates to their days as undergraduates at California State, Northridge, where they were housemates in 1993.
Ramezani was a 25-year-old student spending more time on his small pager business when Murphy talked him into switching over full time.
Convincing Ramezani's father to lend them $5,000 to expand the business was the easy part. Telling him they were dropping out of school to do it caused some problems. "Our folks were not happy we were spending all this time on some harebrained scheme," said Ramezani.
The shift from the pager business to Internet access was born of necessity.
The company at first focused on partnerships with local gasoline stations, giving away pagers to people filling up their cars in order to sell monthly paging services.
To fund expansion, they tapped their families for about $100,000, which they used over the next few years to buy stores selling paging supplies and services. But by 1999, the paging business began to disappear.
Ramezani and Murphy could have moved into cell phones, which operated on the same model as pagers, but they were looking for more equity in their customer base.
"Stores selling cell phones just get commission on the sale and then it's the carrier's customer. We weren't interested in that," said Ramezani.
The idea of getting into the Internet service business was first floated in 1994, though at the time they felt it would require too great an investment and that they would be unable to compete with phone companies.
"I remember Business Week was saying phone companies were going to give away Internet access for free if you sign up for long distance service," remembered Murphy. "Luckily we did revisit it a few years later when it wasn't so daunting and our business was bigger."
In 1999, Murphy and Ramezani opened a two-employee office next door to the pager service to sell dial-up, leveraging their base of several thousand paging customers to sign on as Internet customers. Eventually, they got half of their customers to switch over.
"We took (the pager) profits to cover the Internet company until it could stand on its own," said Murphy. "We always made money."
PROFILE: Extreme Telecom Inc.
Year Founded: 1999
Core Business: Internet service provider
Revenue in 2002: $7 million
Revenue in 2003: $12 million
Employees in 2002: 30
Employees in 2003: 60
Goal: Increase the percentage of business from commercial accounts and continue nationwide rollout
Driving Force: Continuing to provide high levels of customer service as subscriber base grows
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