Bullish: that’s the verdict on the state of the global wholesale market from the inaugural 2010 Smart Wholesale Survey by Capacity and Yankee Group. The survey reveals an industry in robust health, fuelled by continuing demand for international capacity services, but also expanding into new areas and customer segments, notably cloud computing and mobile data.
Eight out of 10 wholesalers expect to achieve revenue growth over the next two years. This is a stunning assertion, since many parts of the world – and many industries – continue to recover from the global economic crisis. Not least, wholesale is winning board-level attention as a strategically important revenue stream, say survey respondents.
The vote of confidence in wholesale operations provides final proof that the scars of the late 1990s Enron era have now healed. The irrational exhuberance of that time, which originated in the international wholesale market, was rooted in a gross miscalculation about the balance of supply and demand. This miscalculation proved fatal for many wholesalers and triggered a decade-long cycle of retrenchment and divestment among telecoms operators worldwide.
Today, the 2010 Smart Wholesale Survey results indicate a vastly different mood – there’s a more tempered expectation that market conditions are right for wholesale to grow and evolve. But instead of being an afterthought in corporate strategy, wholesale operations may well serve the central corporate goals of many telecoms operators. That’s because wholesale is expected not only to serve its traditional customer base of other carriers, but also entirely new customer segments with communications-intensive needs.
Who took the survey?
Capacity partnered with global telecoms research and consulting firm Yankee Group to design and field the survey. Respondents were invited to participate in a 12-question online questionnaire. More than 40% of respondents were C-level executives, and the remainder senior representatives from sales, marketing and operations departments.
As Boxes 1 and 2 show, the 243 survey respondents are a true cross-section of the global wholesale market, both geographically and functionally. Although the bias is towards international wholesalers – representing more than half of respondents – national wholesale players (including cable operators, metro bandwidth, co-location and backhaul providers) are also well represented.
Geographically, the survey taps the views of both mature and growth regions: north America and western Europe represent just under half of the survey sample, with the remainder of responses drawn from a cross-section of emerging regions.
Wholesale represents a significant revenue-generating activity for the majority of respondents (see Box 3). For almost half of the survey respondents, wholesale activities generate more than a third of their total revenues; and for a third of respondents, wholesale brings in 50% or more of their total revenues. Only one in five respondents said that wholesale generates less than 10% of their total income.
Show us the money
Well over a third of survey respondents expect significant revenue growth in wholesale services over the next two years. Only one in 10 respondents believe that their wholesale revenues will shrink. But if growth is hotly tipped, where will it come from?
Here – irrespective of geographic region or seniority – the survey respondents are united in one belief: capacity sales will continue to underpin the bulk of future revenue growth, as Box 5 details.
There are no surprises in this assertion; wholesalers are servicing underlying retail demand which remains strong. Bandwidth hungry video-enriched communications are becoming embedded in day-to-day multinational enterprise operations and also in consumer content consumption patterns. The proliferation of bandwidth-hungry devices – such as smartphones and tablets – is also driving both fixed and mobile data demand.
Meanwhile, the strong emergence of cloud computing as a leading source of expected revenue growth is a major development. As Yankee Group has previously asserted in Capacity, telecoms operators own the physical assets and expertise to act as trusted intermediaries for the cloud, securing the sale and delivery of digital assets such as virtual machines. This is a belief that many wholesalers evidently share worldwide, although we’d question whether all their plans are fully baked. In mature and competitive wholesale markets like western Europe, cloud computing ranks even higher – in second place after international bandwidth – as the primary source of revenue growth.
Western European wholesalers also believe that managed services and outsourcing will drive wholesale growth. That’s a reflection of a pattern of successful national and international managed services deals concluded in region, ranging from international voice outsourcing deals from BICS, DT ICSS, KPN Ibasis and Tata Communications, to managed backhaul deals from the likes of BT Wholesale. Meanwhile, the global survey sample is split on whether more wholesale voice outsourcing is necessary, as Box 7 shows.
Traditional services like voice and signalling are not disappearing, but their growth potential is in question. It’s also clear that wholesalers remain conflicted about new voice interconnect models: IP interconnect services such as IPX garner a modest response as a future revenue source. As members of the i3 Forum – a consortium of leading global carriers focussing on IP interconnect issues – have noted in Capacity, the key challenge is how to manage migration to new IP-based voice interconnect models in a rational way that does not destroy existing market value.
More surprising is the low ranking of content distribution services in the list of future wholesale revenue sources. This can be interpreted as a realisation that CDNs are not a profitable service if sold on a standalone basis. More likely CDNs will be sold as a value-added package with bandwidth, optimisation and importantly cloud computing options.
Regional hot spots
Geographically, Asia is the hands-down winner of growth expectations. This vast region of both mature and fast-growth economies is a source of dramatic bandwidth demand that is now being served with the construction of new submarine cables and carrier Ethernet services.
More unexpected is the second-placed rank of central and eastern Europe as a growth region, since many of its economies remain economically challenged. However, mobile data consumption is booming and migration to carrier Ethernet services is yet to mature, combined with important commitments to build domestic FTTx infrastructure. Combined, these factors suggest that there is underlying potential to exploit.
Similar factors are in evidence in the Middle East, and to lesser degree, Africa, where the pace of mobile usage continues to grow exponentially. Latin America’s vast potential is also now starting to be recognised. Meanwhile, the massive capital commitment which is to build 4G networks in north America by carriers such as AT&T, Bell Canada, Telus and Verizon is a reason why this region ranks far higher than western Europe in growth expectations. That said, on a global level, wholesalers are split on whether 4G will create new revenue opportunities, as Box 11 illustrates, arguably because roll-outs are unevenly advanced across the world.
Who will buy?
The bullish expectations of the survey respondents aren’t simply because existing customers will buy more. There’s a strong belief that there are new customer types to explore. Mobile operators remain primary sources of revenue growth, as do international wholesalers, but there’s growing attention on content providers and also channel intermediaries to the enterprise market such as system integrators, as Box 12 details.
Wholesale providers aren’t standing still: companies like DT ICSS and Teliasonera International Carrier have restructured their customer segmentation and portfolio to address content providers and gaming companies. Others, like Interoute and AT&T, have worked to build relationships with enterprise channel intermediaries. And it won’t just be bandwidth that such carriers sell to system integrators. Many integrators are themselves looking to provide cloud services to their retail enterprise base, and it will be interesting to see if smart wholesalers can successfully offer white-label cloud services to this segment.
Investing in the future
To achieve their growth aims, wholesalers need to invest. The ranking of wholesale-specific capex priorities is revealing: it tells us less about short-term market directions, but more about the longer term, as Box 13 indicates. Here, the belief in cloud computing as a future source of revenue growth gains validation. Globally, the top-ranked priorities of data centres and Ethernet switches are linked, and lead to the delivery of cloud computing services. That’s because Ethernet is becoming the lingua franca for national and international connectivity, but is also the de facto interconnect fabric for cloud computing services.
Also notable is the high priority placed on billing and interconnect investment. Again this makes sense if wholesalers plan to work more intensively with content providers, but equally because new charging mechanisms are needed to transact content and other virtual assets across a diversity of fixed and mobile networks.
Not least, the planned investment in service delivery platforms also gives a strong hint of a wholesale future. It’s a future that won’t be about just “dumb” resale of capacity and minutes. It’s a future leveraging wholesalers’ IT and telecoms assets to deliver enhanced digital services. Above all, it’s a wholesale future that will be smart.¦
Camille Mendler is a research vice president at Yankee Group. She provides strategic counsel on telecoms business, with a focus on managed services and cloud computing. Previously, she held business development and marketing roles in European wholesale carriers. Email: cmendler@yankeegroup.com, Phone: +44 7525 225 277
