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It sounds like a simple enough question: what will the future hold for wholesale? But as with all ‘simple’ questions, things are seldom as clear as you might first imagine – and not always for the reasons you’d expect. One of the key challenges in determining the future direction of the wholesale market is to define where it stands at present. While the telecoms industry might consider the definition of wholesale to be clear, wholesale’s boundaries appear to be a little malleable. As Stephan Beckert, VP of strategy for analyst TeleGeography, puts it: “Wholesale is a very loosely defined concept.”
All about the labels
While terminology alone should not be relied upon to define the prospects of an industry, it was striking that a number of key market players who spoke to Capacity about the subject distanced themselves from the notion of being a pure ‘wholesaler’. Allan Chan, VP of mobility services at Tata Communications, was perhaps the clearest when questioned on the subject: “We typically don’t call this a wholesale business, or a wholesale model, any more. The business model is changing.” James Heard, president of Europe for Level 3, was a little more inclusive in his definition: “Our focus is on providing a suite of wholesale and enterprise and content services to our customer base.” But he did justify his broader perspective with some figures: when he joined Level 3 four years ago, 90% of their European business was wholesale-focussed; today, 27% of revenues come from the enterprise or corporate marketplace.
A similar view is held by Drew Kelton, president of enterprise services at bharti airtel: “The reason I don’t describe our business as traditional wholesale is because it extends to a broader range of services, which might be described under traditional models as actually retail services. It could include mobile distribution, managed services, telepresence, and the whole range of what would traditionally describe the needs of global enterprise.”
While a number of businesses have focussed their sights upon the enterprise and corporate markets, vertical sectors such as finance and gaming have also become prize assets for those telcos possessed of the low-latency infrastructure demanded to service their high-end requirements. Content provision and content delivery networks (CDNs) also generated significant interest from some players.
Telcos, of course, retain a strong interest in their core, traditional activities, and not all are looking to redefine their position in the market. Edwin van Ierland, VP of global sales for iBasis, when commenting on the strength which the SMS providers demonstrate in a niche market, says of his own business: “For us as a wholesaler, it’s more important to act like a hub, and to facilitate traffic without interfering with the retailer and the end customer.” But there certainly appears to have been a gradual evolution in the parameters of the wholesale market, which only looks set to continue. Kelton’s explanation of the shift certainly seems to capture the mood of the market: “If we think of wholesale as the selling of plumbing, or minutes, or capacity, or infrastructure – on a strictly capacity or low unit-cost basis – then this market will be in a race to the bottom.”
But these developments are not without controversy. As Beckert puts it: “If you’re selling directly to financial companies, is it wholesale? A lot of wholesale carriers are also moving increasingly into selling services to large enterprises.” He retains the view that “wholesale means telco to telco,” but even he is prepared to qualify the definition a little: “Or maybe telco to very large content provider, to a Google.”
New players
For the wholesale market has not been static in terms of its key players. Recent years have seen a number of new-generation businesses forging themselves a position in wholesale: the likes of Skype, Google, Facebook and Yahoo. Initially, many telcos handled their accounts out of retail, but management accounts structures have gradually shifted them to wholesale, perhaps a good reflection of their developing role in the industry. Mike Last, director of business development at WIOCC, says of Google: “Google are investing in the construction of submarine systems, which is very much a new direction for them. People tend to think of them as an internet company that sits on top of everything else, but they’re actively looking at space in data centres, at physical connectivity between locations.”
Indeed, companies like Skype are increasingly participating in negotiating direct agreements with carriers. As Beckert explains: “Originally, they routed all of their traffic through wholesale carriers but increasingly they’re moving to bilateral agreements. It’s an interesting twist that, as their traffic has grown they’re taking a more traditional path and seeking direct business relationships with the destination telcos.”
The buoyancy of these new businesses is not necessarily a threat to telcos. Beckert points out that well over 80% of Skype’s revenue comes from its SkypeOut business and that traffic still gets terminated to the PSTN: “That traffic still ends up on a network and telcos still end up getting paid for it.” There is clearly a role for wholesale in this new world. As Kelton says: “I can offer capability to mobile operators, to content providers – both collection and distribution, to media and content companies, and even to caching and content aggregators, like Google, Yahoo, Facebook, Limelight and Akamai. These to me are the next generation of subscriber who would take your access to excess capacity.”
But if the financial position of the more established telcos is coming into question, these newer players potentially face an even more precarious balance sheet. Beckert recalls a conversation when he joked with Josh Silverman, the previous CEO of Skype, asking him: “What are they going to do when everyone’s on Skype? They’re going to have zero revenue. He said that was a problem he hoped to deal with some day; that he wasn’t going to worry about it.”
Size and squeeze
While Skype may be, anecdotally at least, happy to grow and then determine how to profit from its position, for most businesses – driven by a need to maintain balance in a fast-changing world – the question of profitability is unavoidable.
The challenges facing wholesale have become almost clichéd: rapid consumption of bandwidth is being driven by content delivery networks, social networking and a personalisation of communication which means that everyone wants immediate access to individualised information, as cheaply as possible and preferably for free. With technologies such as 3G, 4G and LTE, this drive is accelerating. Heard comments: “Over 50% of traffic delivered over the internet is now video. We see by 2014 that over 60% of traffic over the internet will be HD and 3D content. That presents a huge opportunity – and a huge challenge – for our industry, to ensure that the bandwidth and infrastructure is in place to support that type of growth.” A HD file is 10 times the size of a standard definition file.
Surges in growth will be driven by not only VoIP, but also by a mixed-bag of technological advances including telepresence, videoconferencing, video, gaming, applications on the web and the cloud. Lower latency is unlikely to be optional in this world. One of the difficulties in this new market, however, is that investment and growth is in essence a speculative undertaking, and can leave carriers exposed. Van Ierland explains the challenges of investment in preparing the network for HD voice technology when the market is essentially driven by the end consumer purchasing the end equipment to enable HD voice. “If the end equipment is not there,” says van Ierland, “then why should the wholesaler be facilitating HD voice? Predominantly, it’s an end equipment game.”
With the unit price of data falling while usage is rising exponentially, wholesale providers are feeling pressure from both ends, a factor many in the industry are referring to as ‘the squeeze’. Pressure is on the network providers and those who build the infrastructure. It is coming from the mobile operators, the content providers and the people with the direct retail customer relationship. And it’s no longer a simple pressure for more bandwidth. Chan says: “It’s not just about capacity any more, and it’s not just about quality of service, and it’s not just about cost. It’s going to be very interesting for operators to be able to balance all three. It introduces quite a variable in your wholesale offering.”
Diarmid Massey, VP carrier services at Cable&Wireless Worldwide, believes it comes down to a simple problem of supply and demand: “It’s where we are in the supply cycle that is causing the problems. We’re in the middle, actually building the infrastructure that connects the guys at either end together. At some point, we will have to rebalance the revenue flow.” That basic requirement alone will drive a change in business model, he believes, and the carriers who work out what that model will be, will be the ones that succeed. Unfortunately, it’s a model which still appears to be under development.
The other impact of the squeeze is that there is a clear need to get ahead of the supply curve in terms of infrastructure provision. With profit margins ever more under scrutiny, the financial security of infrastructure investments and an accurate assessment of profitability is crucial. Essentially, the industry is calling for a true valuation of its capex and opex. A number of telcos highlighted transatlantic cables as a notorious example of capacity being sold well below replacement costs: built during the boom, many costs were sunk during a period when companies filed for chapter 11. Currently, as Massey says: “The bandwidth across the Atlantic is very, very cheap. And the reality is, it’s probably cheaper than would make commercial sense for anyone to build a new cable.” Of course, this is not true of all capacity on all cables; and Hibernia Atlantic at least is busily doing its best to disprove the case with its construction of a new ultra low-latency cable linking the banking hubs of the US and the UK.
Another factor limiting infrastructure development is that the lead time on such projects can be two to three years or more, meaning that cables are often constructed either as a speculative investment in areas of anticipated growth or as a rather belated response to existing demands. Massey believes the industry needs carriers to be able to roll out infrastructure much faster in an on-demand way: “We need to start coming up with some just-in-time cabling.” Meanwhile, some carriers are upgrading cables from 10G to 40G or 100G; this can be expensive and Massey believes it still needs to be proved to work from a commercial perspective before its adoption as a new business model. But it does doubtless extend the lifetime and capacity of existing cables.
Open engagement
Only a few years ago, it was not uncommon to hear of the rise of the ‘mega-operator’, and there was a concern in the industry that a small number of telcos with aggressive acquisition plans would dominate the telecoms industry. But while some businesses are still growing substantially, size isn’t everything. There have been some high-profile acquisitions in recent months: AT&T’s bid for T-Mobile USA; Level 3’s acquisition of Global Crossing; VimpelCom’s purchase of Wind Telecom. And it isn’t just the big telcos – a number of players anticipate that we will see metro services and regional services combine over time to provide a more scalable offering. As Beckert says: “There are an awful lot of service providers out there. The margins are very narrow and to make a profit really depends on efficiency and scale. The wholesale voice market is flat, so the only way a company can grow is by taking business away from another. ”
However, there is a real sense that a partnership approach is becoming much more common in the telecommunications industry, particularly when it comes to infrastructure development. These significant investments are being increasingly driven by carriers joining together to meet their own personal needs, rather than from a wholesale desire to construct superfluous capacity which can be sold on to other carriers. Massey comments: “Apart from some African cables, you’re seeing very few private builds. Consortia tend to be made up of carriers that need the capacity anyway; it’s about meeting their own natural demands.”
It’s not only the big infrastructure builds which are bringing players together. In a very real sense, the model is shifting, perhaps learning the lessons from some other major international industries. Kelton seems to be a particularly strong advocate for change on this front, keen for his business to build upon its regional strengths in the global telecoms market. “I am not going to be in all markets at all times,” he explains. “But I would like to be part of the ecosystem when a global multinational or global business wishes to deliver their capabilities for business into my markets of choice.” The key differentiator to the traditional wholesale model is that Kelton wants the partnering to take place in the public eye: “If we get the model right, we should take the responsibility of standing up to the end-to-end service level agreement on a retail level for the service provider. And therefore, there should be no reason for that service provider not to openly engage and talk about the operation that it has with its partners.” His argument is that the airline alliance model has adopted this methodology already, where end-to-end capability is offered by two business partners – such as British Airways and Indian Kingfisher Airlines – who are both clearly identified by the customer.
Kelton also points out that mobile roaming alliances have already implemented this model. However, he does believe roaming alliances should be simplified to develop a universal service level agreement that would support the partnership model, offering: “a compelling experience over a series of partner-delivered capability in almost a virtualised world.”
Increasing creativity
The prospects for telecoms are not necessarily gloomy, but there is certainly a sense that businesses are repositioning themselves in the market. One of the key drivers appears to be ensuring that their individual differentiators are sufficiently distinctive, and well enough understood by the market, to secure business in difficult times. “I think you’ll see further specialisation in the industry, rather than there being one size that fits all,” claims Massey.
Heard echoes his comments: “It’s a concern if you’re a pureplay provider.” He talks of the significance of having “a breadth of services, a portfolio of services – transport services, IP services, colocation services, CDN services, internet broadcast services.” On top of which, Kelton believes that customer business models are changing, with increasing acceptance of host-based and cloud-enabled services forcing carriers to address a broader range of requirements in the business models.
The issue of adding value is recurring one, which draws a mixed response. And no surprise: “adding value” has been a catchphrase for years, and it can be difficult to pin down the precise values which are being added. Generalised improvements such as improving quality of service management levels, while welcomed by customers, can still make it difficult for telcos to charge a premium for their services and increase margins. But where telcos can identify genuine opportunities to improve their business offerings, there are real advantages to be gained.
Van Ierland speaks of the significance of adding value in the mobile space: “For me, when it comes to data adding, I see the mobile-value added services become more and more important, services like SMS, GRX, IPX, international roaming and international data. They can offset loss in margin and can create new revenue streams and new margin streams.”
Telcos, it seems, are not trying to be all things to everybody, but are instead focussing upon their strengths, capabilities and reach, in a period of both consolidation and refinement within the industry. With this new focus, cloud computing is an obvious area for development. Tata, for example, has launched a cloud computing service in Singapore, and is in discussions with several global operators to establish cloud pods around the world, where they could resell Tata’s cloud computing service, effectively planning a straight infrastructure as a service offering to meet enterprise’s needs for burstability and flexibility.
Content delivery is another hot potato, which Kelton is clearly excited to develop using bharti airtel’s digital media exchange. He describes a model where his business would, for example, partner with BT, distributing premier league information from the UK in exchange for coverage of IPL cricket from India, “using common infrastructure, common capability, common distribution, common subsea systems” to stay ahead of the game. But his excitement is driven by a realistic desire to be responsive to market pressures in challenging times: “I don’t ever want to be saddled with the fact that I’m sitting on a stranded asset with a cost to my books, which is significantly higher than you can pay on the spot market.”
Financial returns?
It’s clear that the telecommunications industry is in a period of evolution. While it is reaching out to benefit from developing areas, companies are to some extent learning as they go, and as they grow. “Margins will become slimmer and slimmer,” says van Ierland. “And that’s why most parties are looking at alternative products which initially generate revenues which might not be that big; but at least the margin component is significantly higher than a wholesale minute can generate.”
Kelton’s comments recall, to a degree, the bravado of Skype’s previous CEO: “Whether economically or technically, it’s more about creating the environment and the engagement with other partners that might make them excited.” Heard’s comments on the thriving gaming vertical are also honest: “I think the financial models of some of these things are still being worked out. I think we’re on a journey.” But he is encouraged by his customers’ determination to get what they want from carriers: “When we talk to carriers about how they can provide their content online, it isn’t a price discussion. It’s about scalability and access, who they can connect to and how they can get their content to the consumers. When we talk to the financial institutions, it’s not about price. It’s about providing latency services, SLAs and a suite of services that ensures they are able to trade quickly and generate revenue for their company.”
Telcos seem to be uniting behind the view that they are offering a clear service, and that they need to realign their offerings around what the customer or service provider wants to buy, thereby meeting their demands for bandwidth, for new applications in the cloud, for content and for data storage. But it’s still an uncertain time, and while new models are developing there are no clear, definitive solutions.
“I don’t know that we need to know how the future is going to be, anyway,” says Beckert. “We need to figure out where the business is now. We have all got far more questions than answers.”
