Neustar competes again for the contract that started it all


Brad Missal stands at a White Board located in a common area at Neustar’s offices. (Jeffrey MacMillan/JEFFREY MACMILLAN FOR CAPITAL BUSINESS)
February 10, 2013

Sterling-based Neustar has been at the heart of one of the biggest technology revolutions in recent decades, yet it’s a company that few people outside of the telecommunications industry have ever heard of.

The firm got its start in 1996 by winning a contract to transfer telephone numbers among carriers, allowing customers to switch from one provider to another with little hassle and, in turn, forcing companies to compete more fiercely for their business.

Seventeen years later, that competition is a cornerstone of the industry as consumers chase ever-more-powerful smartphones.

“Number portability is one of those critical behind-the-scenes activities [that’s vital] to a successful communication system,” said Scott Cleland, president of Precursor, an industry analyst. “The fact that we don’t hear about Neustar and problems with number portability is a huge compliment.”


Rashad Smith monitors traffic at the network operations center in Sterling. (Jeffrey MacMillan/JEFFREY MACMILLAN FOR CAPITAL BUSINESS)

But Neustar faces a challenge common to pioneering technology companies: Finding new engines for growth while working to hang on to its legacy business. That’s especially true as the company prepares to compete again this spring for the contract that started it all.

Today, Neustar counts 1,500 employees scattered from California to Costa Rica to China, quite the increase from the four-person team, then part of Lockheed Martin, that won the initial contract in the mid-’90s.

What’s more, the company has made a concerted effort in recent years to diversify its information and analytics businesses beyond the telecommunications industry. Neustar today offers marketing, cybersecurity and Internet services to retailers, financial institutions and entertainment studios, among others.

Still, the company’s foundational values of neutrality and reliability — not to mention about 50 percent of its revenue — are still deeply rooted in that initial number portability contract.

At the helm of the company is Lisa Hook, a longtime technology executive who knows something about the need for technology companies to refresh themselves. Her résumé includes several years at AOL at the time of its ill-fated merger with Time Warner. She led the company’s broadband division, expanding both its subscribers and revenue.

Now she’s looking to replicate that growth without the crash that AOL later experienced when its Internet subscribers moved on to new Internet providers, leaving the company to redefine itself as an advertising and content provider.

“We have so many possibilities [ for growth], it’s how do we move even faster to enchant our customers and to create solutions that make their lives easier,” Hook said in an interview.

‘BASIS FOR COMPETITION’

The Telecommunications Act of 1996 ushered in sweeping changes to how the nation’s telephone providers do business, effectively tearing down barriers between regional operators and establishing interoperability technical requirements among networks.

The changes gave rise to a concept called “portability” that allowed consumers to retain phone numbers when switching from one telephone provider to another, thus ensuring no customer felt beholden to a company by a simple series of digits.

“Number portability is the basis for competition,” said Hook, the company’s chief executive since 2010. “People really identify with their phone number in the U.S. [About half] of consumers will not change carriers if they can’t take their number with them.”

But the technological underpinnings of number portability were, to put it simply, complex. Creating an easily amendable database of the nation’s phone numbers and their respective locations and carriers was no easy feat. What’s more, Neustar was charged with directing a call from one person to another, all in a matter of seconds.

The company processed about 1.2 million updates to its database per day in 2012, and helped to complete a staggering four billion phone calls and seven billion text messages, Hook said on a recent conference call.

But Neustar learned in its early days that the bigger challenge was existing as an intermediary between companies in such a fiercely competitive industry. It meant developing a commitment to neutrality that went beyond the firm’s nameplate.

“I believe we succeeded because we were in Washington, D.C. Neustar could not have succeeded if we were physically located anywhere else,” said Jeff Ganek, Neustar’s founder and longtime chief executive who is no longer with the company.

“The challenge required that we be technically very, very sophisticated, and the labor force in Washington is very high tech. However, the understanding of the public policy implications of local number portability was critical. For the first time, technology had changed so that competing players in the industry had to share, essentially, highly valuable, highly proprietary operating data.”

AN INGRAINED IDENTITY

That devotion to neutrality has only grown with time. As telephone companies, particularly wireless operators, battle one another on price, data packages, devices and network coverage, number portability must remain equitable.

“You don’t ever want to be in a position where AT&T somehow is able to get its transactions processed before Joe’s Telephone Company of Western Pennsylvania,” Hook said. “We need to treat them all the same. We need to treat them all on a blind basis, if you will.”

In that vein, the company established a three-member committee that includes Hook and two board members to oversee neutrality policy. Employees receive training in how to address potential conflicts, then must pass a quarterly exam consisting of what-if scenarios.

“We spend every waking moment thinking about how to service everyone in the industry and favor nobody,” Hook said. “And we’ve got lots of different ways built in to ensure that we comply with that.”

That could work to Neustar’s favor if it faces competition for the number portability contract. Competitors would need to prove their existing businesses do not pose a conflict and create plans to mitigate future conflicts.

“Our view is given the historical relationship with the carriers and the high-level service they’ve provided ... there is a high likelihood they will regain that business,” said William Power, senior analyst at Robert W. Baird & Co. “The bigger question for me is what type of price pressure they might face in the initial year.”

Some industry observers expect Telcordia, now owned by global communications giant Ericsson, to bid on the contract, though a request for proposals was only formally issued last week. Ericsson did not respond to a request for comment.

“When we started, we thought [neutrality] would be an administrative and legal constraint on the growth of our business, and it became a key element, maybe the most important element, of the value we delivered to the market,” Ganek said.

A GROWING MARKET

Neustar’s market is no longer as narrow as when Ganek founded the company. Executives have grouped the company’s many products into two categories: information, such as databases of phone numbers or Internet domain names; and analytics, the use of that information to help other companies make decisions.

To that end, Neustar announced in October 2011 it would pay $650 million to acquire Vienna-based Targusinfo, a then-private company that provides caller ID services. Renamed Neustar Information Services, the company's technology now helps to identify a caller’s demographic information for marketers to sell them products.

“We could either try to build the expertise ourselves, hiring one data management person at a time, or we could go down the road with this company that’s perfect in every way and see if they want to get married,” Hook said.

The acquisition marked Hook’s boldest move as chief executive to date. The integration of the two companies, now mostly complete, and its success to date is reflected on the company’s balance sheet.

In a Securities and Exchange Commission filing last week, Neustar reported revenue of $831.4 million for 2012, a 34 percent increase compared with the company’s $620.5 million revenue the prior year. Net income dipped 3 percent from $160.8 million to $156 million, though that is in part because of expenses related to the Targusinfo acquisition.

The company predicts both figures will grow in 2013.

“It’s a stable boat in a choppy market,” said John Bright, a senior research analyst at Avondale Partners. “What the numbers indicate under the hood is that they’re growing their core [number portability] contract business and diversifying away from that.”

About 50 percent of the company’s revenue now comes from lines of business other than number portability, a fact that Bright said reduces the inherent risk that comes when a company relies too heavily on a single contract or customer.

But the importance of the number portability business to both Neustar’s bottom line and its corporate identity has garnered renewed focus as the work comes up for renewal. Losing that business would deal a significant blow.

“One of the reasons that we won the original franchise, and the reason that we were successful with it, is we never understood our mission as one of technology, or even economics,” Ganek said. “We believed that we had a public trust and doing what was right for the public trust was the business. And that’s turned out to be the case.”

Steven Overly covers the business of technology, biotechnology and venture capital in the Washington region for The Washington Post and its weekly Capital Business publication. In that capacity, he has written about start-up struggles, investment trends and major drug discoveries.
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