Companies Trim Sails for E-Rate Trade

Ingram Micro Inc., a giant computer distributor, has set up a special program to funnel sales leads, bid support and product discounts related to the federal government's $2 billion E-Rate program to its education resellers. Another smaller vendor is "giving away" PCs to schools and libraries that it hopes will subscribe to its Internet access service.

The prospect of winning a piece of the E-Rate program has these and many other big-time vendors taking special measures-including launching marketing programs, sponsoring equipment giveaways and making creative financial deals-to increase the odds they will take home at least some of the huge E-Rate prize. Schools that qualify for E-Rate are eligible for up to a 90 percent discount on the cost of telecommunications equipment.

"It is a very complex program," said Shelly Talbott, vice president and general manager of Ingram Micro's Government and Education Division. "About 40,000 schools have applied for and will receive funding from the Federal Communications Commission. The demand is much greater than the government anticipated. But that demand means there is a lot of information to sort through."

To manage the information, Ingram Micro and other companies are scrambling to launch programs to make it as easy as possible for resellers to land E-Rate deals. In part, this has been prompted by concerns that potentially hefty E-Rate profits are too dependent on resellers-smaller companies at real risk of being buried in the procedural details of the E-Rate program.

"Ingram has worked to put together a program that will make our vendor partners and reseller partners better able to assist schools in becoming successful at using the E-Rate program," Talbott said. The company's new E-Rate program enhances its Partnership America program of product discounts for the government and education markets offered through 260 resellers.

Intel Corp., 3Com Corp., Allied Telesyn and Cisco Systems Inc. are also working with Ingram Micro on its E-Rate program to offer additional discounts. Meanwhile, Cisco has also introduced its Channel E-Rate program to its own resellers. Among other things, Cisco's program offers "attractive financing to schools and libraries," according to the company.

Closing E-Rate deals before the federal government makes payments is another trick that networking companies must learn. Federal guidance on payment is this: Schools and libraries must pay only their portion of the bill after the E-Rate discount is factored in. For example, if a school is eligible for a 60 percent discount on services, it pays only 40 percent of the charges.

"It will be up to the service providers to apply for reimbursement of the remaining 60 percent of the bill from the universal service administrator," according to the Schools and Libraries Corp., the newly created nonprofit organization that is the FCC's primary agent on E-Rate administration. "We have been working with the service-provider community to get their thoughts and ideas on what works for them and how we can help them with upcoming billing and invoicing challenges," an SLC spokeswoman said.

That guidance, however, has not been enough to prepare the industry for most E-Rate challenges. "It is an accounting nightmare," Talbott said. "But Ingram has a very sophisticated collection of accounting systems already in place for our vendor partners and resellers. We are hoping to be the middleman in helping this whole thing work by simplifying it first.

"We would anticipate that everyone in this space would be jumping on the bandwagon," she added. "This is a very large opportunity."

Indeed, most are not sitting this one out. "The discount rates and the way the E-Rate program works falls way outside of a company's normal way of doing business," said Jake Schlump, Compaq Computer Corp.'s product manager for government, education and medical programs. "But I think as an industry there is a real desire here to make sure the processes are in place to make E-Rate successful. It would really be a shame if schools have to suffer because we as an industry can't get our act together."

Even companies without a history of mining the education market are working this opportunity. For example, Hughes Network Systems has hired Minneapolis-based JDL Technologies to take the lead on its E-Rate business. "We're a large company, and our traditional markets have not included education at all," said Scott Cress, HNS' director of new business development. "Our challenge was that we did not have expertise in house to talk to those schools interested in our products. JDL already had contacts in a great number of schools. They were a name known in that industry."

And JDL is willing to accommodate. "Cash flow can be a real problem for school districts, so in some cases they are not being required to pay their portion until the FCC sends out its portion of the bill," said Jody Johnson, manager of the national programs office for JDL. "Obviously, we prefer a situation in which a school can pay upfront, but we're trying to work with those customers who can't."

Along with picking a partner, HNS is sweetening its E-Rate deals by luring schools with free equipment. "What we're basically doing is giving away 500 DirecPC ISA-based units to schools that have at least tried to get E-Rate money," Cress said. The units would connect schools to the company's DirecPC Internet service.

However, the list of E-Rate applicants far exceeds the number eligible for the HNS giveaway. E-Rate demand will likely hit $2 billion in 1998 alone, according to May figures calculated for the FCC. The program is potentially worth more than $10 billion over five years.

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Congress Warns on E-Rate Abuse

While many companies are willing to go the extra mile to get E-Rate contracts, some have been asked to do too much, according to a stinging letter from the U.S. Senate Committee on Commerce, Science and Transportation.

In a letter to the Federal Communications Commission, the committee cited rumors that several school districts had padded their E-Rate bids by requesting items such as cell phones, video cameras, carpeting and painting services that were outside the definition of networking equipment allowed by the program.

"It is said that some school districts may be requesting many thousands of dollars in ineligible items 'free of charge' from bidders as a condition for winning the bidding process," according to the May letter, signed by chairman Sen. John McCain (R-Ariz.) and Sen. Ernest Hollings (D-S.C.). Three other senators signed the letter. The committee also was concerned that some school districts wanted to use the E-Rate program to purchase networking facilities that were far beyond the level required by school-age students. "It is alleged that in some cases, the equipment requested even exceeds that used by research institutions," the letter said.

"I'm estimating about 20 percent of all school systems are asking for things that don't qualify," said an industry source who asked not to be identified. "It's raising the prices for everybody."

The FCC was directed to respond to the letter, including "an explanation regarding how the FCC and Schools and Libraries Corp. will prevent schools and libraries from using E-Rate funds to purchase gold-plated computer and networking facilities at heavily subsidized rates."

A spokeswoman for the SLC maintained that just because school districts request additional items in their bids does not mean they will get them. "We reminded folks in mid-March that they needed to comply with the FCC rules," she said. "The E-Rate application is a two-step process." The first step-filing an SLC 470 form-represents a mere "wish list," she said.