The Weird World Of Economics

Prison Economics

(Business 2.0 Magazine) -- Brian Prins is an affable salesman who touts the benefits of his prepaid collect-calling service in a distinct Long Island accent. He's also an ex-con who served five years in a Pennsylvania state prison for aggravated assault and possession of stolen car parts, so when he explains that he's simply helping families stay in touch, stay together, and stay out of debt, you might want to listen.

"I know how much phone calls from prison cost, and how much an inmate needs to talk to his family and friends," says Prins, who himself racked up $1,000 in monthly phone bills from behind bars.

Upon his release in 2002, Prins founded Outside Connection in a bid to undercut the collect-calling services that contract with prisons. Those contracts create virtual monopolies that charge a big premium - as much as four times the standard rate for collect calls.

With Outside Connection, family members and friends buy discounted phone time, and prisoners are given a direct-dial local number that routes calls straight to a family's chosen phone. Calls can also be sent to cell or Internet phones, which isn't possible with traditional collect calls.

Because it's a prepaid service, Outside Connection is never stuck with the bill, avoiding one of the major reasons traditional services charge inmates exorbitant rates. Inmate calls are a $1 billion market, so wresting just a small portion of that business from the major providers could give Prins's 12-person shop a solid payday.

Although Prins won't reveal his current revenue, he says his customer base has grown 100 percent a year for the past two years, mainly through word of mouth: "If you're helping these families, the inmates are going to pass the word around."

Indeed, his Berlin, N.J., company is part of a massive and expanding $37 billion prison economy.

There are more than 2 million inmates serving time in the United States, up from 744,000 in 1985. America has the world's highest incarceration rate, and the revolving door helps keep those prisons packed: A 2002 study by the Federal Bureau of Justice Statistics found that 52 percent of released convicts were back in jail within three years.

"All of these things are terrible, but they are good for business," says Martin Roenigk, CEO of CompuDyne (Charts), a security software and hardware provider to the corrections and homeland security markets.

State prison systems spend more than $30 billion annually, and the Bureau of Prisons budgeted $5 billion for just 182,000 federal inmates this year. That translates into plenty of work for companies looking to crack the prison market.

"Our core business touches so many things - security, medicine, education, food service, maintenance, technology - that it presents a unique opportunity for any number of vendors to do business with us," says Irving Lingo, CFO at Corrections Corporation of America, the largest private prison operator in the country, with 65 facilities.

CompuDyne broke into the market in the mid-'90s, when the Annapolis, Md., company was just a $20 million outfit, by purchasing two prison security businesses. The company integrated their electronic and hardware security products - lockdown control and perimeter alert systems, closed-circuit television, blast-proof doors, and bullet-resistant windows.

Since then CompuDyne has ridden the prison market expansion and anticipates $60 million in prison-related sales this year on overall company revenue of $140 million. CompuDyne's latest product, MaxWall, is a modular, prefab prison cell (think high-security cubicle). MaxWall can be dropped quickly into an existing building to accommodate a growing inmate population or serve as a building block for new prison construction.

With 2-inch hollow steel walls, the cells feature built-in lighting, beds, and plumbing. MaxWall, which typically sells for $14,000 to $18,000, is shipped like an erector set and stitch-welded together onsite. The cells can save 10 square feet of space each over conventional cell construction techniques, allowing prisons to accommodate more inmates.

That's particularly important to prison administrators as they grapple with overcrowding and limited budgets. For example, California recently declared its prison system in a state of emergency, in large part because of a lack of cells. The feds, meanwhile, expect the Bureau of Prisons to be about 30,000 beds short by 2011.

That certainly bodes well for MaxWall sales. The company has installed 4,500 cells since December 2002 and has contracts to triple that number in the next year alone. "We expect unchecked growth for the next two or three years," says CompuDyne executive Gary Mangus.

The burgeoning prison economy was on display in August at the annual American Correctional Association convention, a sort of Consumer Electronics Show for correctional entrepreneurs. Some 400 exhibitors attended the confab in Charlotte, N.C., showing off their wares - everything from "finger-puppet toothbrushes" and suicide-resistant toilets to transport vehicles and uniforms.

Hundreds of companies also pay to advertise thousands of products and services in ACA's annual buyers' guide, which reaches 125,000 readers of ACA's Corrections Today magazine. Corrections Corporation of America, one of ACA members' biggest customers, forecasts a continued boom.

"We feel very, very good about the business prospects," CCA's Lingo says. The company's profit of $47 million during the first six months of 2006 nearly matched that for all of 2005. The Nashville, Tenn., company is currently building new prisons or expanding existing facilities to accommodate nearly 3,700 more inmates by the end of 2007. California, for instance, recently announced plans to send roughly 1,000 of its inmates to CCA prisons.

While many companies go directly to jail operators for their business, others target consumers still outside the system but holding a reservation to check into Club Fed.

Steven Oberfest was working as a personal trainer four years ago when one of his clients' friends was convicted of a nonviolent crime. Though she wasn't facing Oz-like conditions, she asked him to train her to defend herself.

"I thought, 'Why not? This could be a business,'" he says. With that first trainee, Oberfest founded Incarceration Optimization Program International in New York City, offering a 100-hour, $20,000 course that instructs mainly white-collar criminals on the finer points of prison etiquette.

"Prison time for someone who lives in a penthouse on Park Avenue?" Oberfest says with a laugh. "You might as well send them to the moon."

His timing couldn't have been better: The stock option back-dating scandal may well produce a new wave of executives headed for the Big House. With a limited number of federal prison beds, convicted execs these days face the possibility of serving time with violent offenders.

Oberfest, a tattooed professional fighter who says he has been arrested but never did hard time, met with police officers and former prison guards and tracked down regulations for facilities within the Bureau of Prisons to develop his class. It combines coursework, physical and mental training, self-defense, and role-playing.

Oberfest's clients learn slang terms, how to address guards and other inmates, and generally what daily routines will be like inside. His program is one of the dozens offered by consulting firms on everything from witness preparation and sentence-reduction lobbying to prison inspection and certification.

Oberfest says his business is expanding, and he anticipates 2006 revenue of $600,000 from 30 clients. In 2007, he expects a 25 percent growth in his clientele. "This still has so much potential and the ability to grow in various different ways," he says.

Despite all that upside, the market isn't always a peaceful stroll in the prison yard. Sometimes it's more like doing hard time.

Outside Connection, for instance, brought in just over $2 million in 2003. But a combination of shaky service and run-ins with carrier MCI and the New York prison system - which was unhappy about the encroachment on its contracts and claimed that call-forwarding services like Prins's are illegal - forced Outside Connection to regroup.

Prins has added security features and filed a pending petition with the FCC to allow him to operate in the prison market without interference. His service is now available in all but a few prisons across the country.

Others point out that fortunes are intimately tied to state and federal budgets and the respective contracting bureaucracies, which made for particularly tough times after the 9/11 terrorist attacks, when money was spent on homeland security projects, not prisons.

According to companies and industry watchers, prisons can also be notoriously slow to adopt new technology and innovative ideas. CompuDyne's Mangus notes that for several years, prisons wouldn't install electronic locks because guards wanted to hear the "clang and clunk" of the old doors when locking down prisoners.

Still, budget, earnings, and prison population trends point to a significant increase in business across the industry. Companies with the patience and products to successfully navigate the prison market should hear quite another sound: ka-ching.

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posted by UncommonBusiness @ 4:18 AM