small biz feature/mike1st/mark2nd

By BEN SULLIVAN

Staff Reporter

In the world according to Robert Lorsch, the future lies in plastics pre-paid plastic telephone cards.

The founder, chairman and chief executive of SmarTalk TeleServices Inc. in Westwood sees a place for the credit card-sized items in every wallet, purse and promotional mailer, and on the shelves of every retail outlet from drug stores to office supply warehouses.

Such a grand vision is a dramatic departure from the primary channels traditionally used to sell pre-paid phone cards gas stations and convenience stores.

“The focus of our business is retail,” Lorsch said. Every customer of a Sav-On or Best Buy also uses the telephone, he reasons, so each is a potential telephone card user.

Recognizing that fact has been SmarTalk’s competitive advantage, said Fred Voit, an analyst at The Yankee Group.

“They have this unique ability to get their product into retail outlets,” Voit said. “Some of the other major players, you’ll find them in the smaller stores where a $10 sale is a big item. But SmarTalk realizes there’s a market for prepaid cards in other, non-traditional outlets too.”

Lorsch’s retail savvy comes from two decades in the advertising and sales promotion business. Los Angeles-based Lorsch Creative Network, which he founded in 1970, represented such big-name clients as Northrop-Grumman Corp. and Beatrice Foods, and was perhaps best known for its marketing of the Wuppee, a “lovable fuzzy creature” that still serves as a staple of marketing give-aways.

In 1994, one of Lorsch’s clients asked him to put together a business plan for a pre-paid telephone card venture. When the client opted not to pursue the business, Lorsch said, he decided to take the plunge himself.

“I had $5,000. I put it in the bank, started a corporation and hired an outside graphic designer to design a card,” he said. Contracting with a telecom services company in Nebraska, Lorsch was able to start buying chunks of phone time from major carriers and reselling it through the cards.

Now arguably the fourth- or fifth-largest provider of pre-paid telephone cards nationally, behind the likes of MCI Communications Corp., Sprint Corp. and AT & T;, SmarTalk sells its cards through about 9,000 outlets across the country. In some chains, such as Staples, Office Depot and Office Max, SmarTalk has exclusive distribution deals to keep competitors out.

“We own the home office channel,” Lorsch said.

That aggressive approach has served SmarTalk well. Last year, the company had $15 million in sales, with nearly half of that coming in the final quarter. That compares to revenues of less than $500,000 for all of 1995.

“Our growth is 25 to 50 percent per quarter,” Lorsch said, and he anticipates steady growth throughout 1997.

Nationally, the pre-paid telephone card industry generated about $1 billion in revenues last year, and is expected to grow to about $2.6 billion within three years, according to a study by The Yankee Group.

Though they may sound high-tech, pre-paid phone cards are, for the most part, just a piece of plastic with a toll-free telephone number printed on the back. A user, typically calling from a pay phone, punches in the 800 number which puts them in touch with the card company’s computer system. Then the user enters a personal identification number, and the telephone number they want to reach.

Behind the scenes, the provider will then calculate how much time the card has on it and forward the call through a national carrier. SmarTalk initially contracted with go-between companies to do that switching for them, and still relies on such firms to handle about 20 percent of its business. But last June, the company bought a switching system located in San Francisco from Pacific Bell Information Services.

Because Pacific Bell had decided to get out of the pre-paid card business, Lorsch said, “we were able to take over a $2 million facility for $325,000.”

Though the system offers far more capacity than SmarTalk currently needs (the company processes about 50,000 calls a day) it has already cut the company’s processing costs and will allow it to expand for some time to come without significant equipment investment, Lorsch said.

“If I’d had 125,000 calls yesterday, I wouldn’t have had to add one more employee,” he said.

The purchase will serve SmarTalk well, Voit said, as the popularity of pre-paid cards grows.

Though once considered mainly a way for people without credit cards to place long distance calls from pay phones, the cards are increasingly used as a standard payment method, Voit said.

“A lot of people using these things have other calling options,” such as a credit card or a phone card from their long distance carrier, Voit said. “But people are starting to make the conscious choice to use pre-paid calling.”