New market verticals for telcos

If there’s one thing that Apple has shown the world, it is that network providers have proved themselves to be pretty much future proof, meeting the huge demands made on their circuitry by the late Steve Jobs’s iconic devices with consummate ease. But as the global economy slithers closer to yet another financial meltdown, one question hangs heavy in the air: are they recession proof?

Never has that question been more relevant. In the last two to three years, leading providers have been looking to leverage their assets and diversify away from the core wholesale carrier market, arguably one of the most resilient sectors in the global economy. That search has led them to a variety of opportunities spanning a range of professions and industries, but none more so than the beleaguered financial services sector.

According to the Insight Research Corporation, a New Jersey-based consultancy, US businesses will spend around $80 billion a year on wireline services and a further $180 billion on wireless services by 2015.

The consultancy estimates that the financial services sector and related industries – and to a lesser extent the transport and construction sectors – will account for as much as half of all business spending on telecoms services in the next five years. Industry strategists are now pondering whether, in the face of another credit crunch, that spend will actually materialise and whether other vertical sectors in the enterprise arena can hold good on their early promise?

It is perhaps a testament to the conservative way in which many telcos are mapping out their expansion strategies, that most are sanguine about the effects of a sudden lurch back into recession.

Uwe Nickl, chief marketing officer at London-based euNetworks, sums up the mood thus: “There is unquestionably a correlation between the health of the wider economy at large and overall telecoms spend, but such is the ongoing demand for bandwidth connectivity in the enterprise sector, that the outlooks remains robust.” A prolonged recession might, he suggests, prompt some companies to shelve investment in new Ethernet architectures but greater and faster bandwidth connectivity is now regarded by most corporate entities as a “must-have” rather than a “nice-to-have”.

John Donaldson, managing director at AboveNet in Europe agrees: “Everyone needs more bandwidth and they need it now – a few years ago the number of global enterprise customers looking for 1Gbps of capacity on their networks was relatively small. That is now the industry standard for any global enterprise.”

Many more, he adds will need up to 10Gbps and some will even be looking for up to 100Gbps as prices come down on the supporting hardware. “Our sweet spot starts at about 1Gbps – that’s pretty much the inflection point where a customer with maybe a lot of legacy low bandwidth circuits might be able to make significant savings by moving to fewer, higher bandwidth networks.”

Ironically, nowhere is the demand for high-speed connectivity more prevalent than in the financial sector, already staring hard into the face of a crisis that could yet undermine some of Europe’s biggest financial institutions.

The financial enterprise vertical has always been an early champion of new technologies and its appetite for ultra low-latency connectivity is currently proving every bit as insatiable as its hunger for data centre connectivity and disaster recovery solutions was before it.

The need for speed comes from a relatively new trading strategy that relies on computer algorithms to exploit minute pricing irregularities across an array of interlinked stocks, bonds and derivatives. The strategy triggers rapid-fire buy and sell orders that course their way through the world’s major electronic stock exchanges long before the human eye ever notices them, generating millions of low-risk dollars at, quite literally, the speed of light. But the anomalies are soon wiped out and only the quickest profit, which is why banks are both willing to pay a hefty premium to ensure that they are first to a trade and also constantly pushing for faster and faster routes between exchanges.

Faster, at least when it comes to point-to-point fibre routes, really means shorter, and it is widely accepted that a network provider can shave around one microsecond (one thousandth of a millisecond) off the latency of a route every time it shortens the cable by just 100m. In the last two years alone, network providers have chopped around 150km off the route between London and Frankfurt, the busiest trading route in the world, equivalent to clipping around 1.5 milliseconds off the round trip delay.

Meanwhile Hibernia Atlantic will slash latency on the London to New York route when it finishes laying a new 5,000km cable under the Atlantic. The $300 million project, which marks the first significant cut in transatlantic latency for almost a decade, underscores just how important the financial vertical is proving to network providers looking to diversify away from the traditional carrier sector.

There is, of course, no suggestion that the carrier market is itself any more vulnerable to impending recession than the enterprise sector. For one thing, network providers tend to insist on long-term contracts in the wholesale market. For another, any downward pressure on pricing continues to be more than offset by explosive growth in traffic volumes and few industry insiders believe that a dip in global growth will even so much as dent that trend.

And yet network providers recognise the importance of expanding into the enterprise sector and hold up their experiences in the financial vertical as proof of its merits. “I think our experiences in the financial vertical have been very illuminating – banks have shown themselves willing to unbundle the way in which they buy telecoms services in order to chase after ultra low latency and we have been able to concentrate on what we do best – offering a niche product to a tailored customer. We have never wanted to position ourselves as a one-stop shop for financial institutions. What we do well is to offer very fast connectivity between financial exchanges”, euNetworks’ Nickl explains.

The task now facing Nickl and his peers is to leverage the expertise garnered in the financial vertical to other sectors of the enterprise market.

But while most potential customers would like ultra high-speed connectivity, very few are willing to pay the premiums that banks are happy to stump up. That said, a lot of ultra high-speed circuits follow a different route to the more traditional (and indeed longer) carrier networks, so there is value in touting them as a play on physical diversity. Moreover, many applications in the media sphere are increasingly latency sensitive.

“Media companies are the bandwidth hogs of today’s world”, says Hibernia Atlantic’s chief executive officer, Bjarni Thorvardarson. But having the right assets doesn’t necessarily guarantee success in any vertical, he warns: “Sometimes people think they can take their product portfolio, give it a different name and then sell it into a brand new sector like media or healthcare, but it just doesn’t work like that,” he says. “You need to think about how a particular sector will use the fibre, what the level of bandwidth demand actually is and how buying patterns differ. It can take years to understand the ecosystem of a particular vertical and even more time to successfully penetrate the market.”

In the case of the media sector, for example, everything from the hardware that guarantees the quality of the content signal right though to the circuit monitoring systems are different. “In a live soccer game, there’s no leeway for any dip in quality at any point in the chain from the camera on the touchline, through to the outside broadcasting truck and the editing suite right though to the distributor,” explains Thorvardarson.

Equally, service level agreements can be wildly different: “If we put a low-latency feed into a bank, it’s there for 36 months. We deal with media events where the connectivity might only be up and running for six hours. That requires a considerable amount of resource in terms of back-up support.”

Even the buying patterns among media companies can differ. Broadcasters, for example, are used to a revenue model where their end subscribers pay for content transport and there is some reluctance on their part to be seen when it comes to footing the bill for connecting up to, say, third-party data centres.

“Essentially, you have to be a bit creative in the way in which you package up the service but that all comes from doing the right homework before you launch a product into a new customer segment,” says one senior industry insider.

Thorvardarson readily concedes that Hibernia would not have made such a big play in the media vertical had the company not acquired MediaXstream in December 2009. The company, which specialises in transporting HD video, now forms the platform for Hibernia’s media effort and a move into the gaming vertical is potentially on the cards. “I think it’s entirely possible that our media business could well triple over the next two years,” he says pointedly.

TeliaSonera International Carrier, one of the first major telcos to recognise the potential of the online gaming sector, is similarly optimistic. Justin McAleer, head of strategy and business development, says that the company’s media vertical, which encompasses online gaming, video and application segments, is already growing at a faster rate than its traditional wholesale arm.

Further, Justin says, “We find that these customers, who traditionally have been coming to us for international IP connectivity, are increasingly buying across our entire product portfolio, from infrastructure to managed hardware services. Bundling these different products together enables us to differentiate and generate multiple revenue streams from single customers.”

The group is now to roll out this package of bundled services to other customers: “We have all the basic building blocks, including various product offerings spanning IP, co-location and managed hardware services. Now we want to take it to the next step – to commercialise it and move into different customer segments.”

Another customer vertical garnering considerable interest, though perhaps less activity, is the healthcare sector. “Clearly there is a huge amount of data that needs to pass, either from hospital to hospital or down through the pyramid to private clinics and even individual doctors and you tend to get a flavour here and there for its potential”, explains euNetworks’s Nickl. “The privatisation of Germany’s public healthcare sector is throwing up some interesting opportunities”, he adds.

To slice and dice the enterprise market into segments is to run the risk of missing more generic opportunities that might arise from companies sitting, quite literally, on top of your network.

AboveNet, for example, has signed up a number of customers that might otherwise slip between the cracks of sales forces targeting specific groups of high bandwidth users, including several charity organisations and a celebrity chef. “The move to the cloud is causing a buzz right across the enterprise sector,” AboveNet’s Donaldson says. “IT buyers are basically saying to us that they want LAN performance but that all their data is housed in servers located right across the other side of London.”