Traditional distinctions between the big global wholesale carriers and their retail service provider (SP) cousins are blurring. Old models, which relied on a clear division between products, customers and roles are breaking down and bi-lateral agreements are being replaced with more flexible and transparent partnerships.
Wholesalers and SPs still compete and cooperate but the dynamic way in which they interact with one another is changing beyond all recognition.
What was a relatively simple, reciprocal and interdependent value chain is becoming more complex as more players sell more to each other. Previously clear demarcations between what wholesalers sold and to whom are becoming foggy as they exploit new infrastructure capabilities to add more retail-type value added services (VAS) to raw capacity and transport.
That search has led them to a variety of opportunities spanning a range of professions and industries but by far the most successful has been the push into banking. The financial enterprise sector has always been an early champion of new technology and its appetite for ultra-low latency connectivity is every bit as insatiable as its hunger for data centre connectivity and disaster recovery solutions was before it.
What has concerned and encouraged wholesale operators in equal measure is the extent to which banks have shown themselves willing to unbundle the way in which they buy telecoms services in order to chase after the fastest routes.
It could be argued, of course, that pure wholesale carriers no longer exist, if they ever did. Many of the biggest global wholesalers have long played in the retail market, delivering international capacity and connectivity direct to enterprises. To do so they have both cooperated with and competed against their traditional SP customers. However the ground rules are evolving along with markets and customer expectations: now wholesale and retail operators increasingly compete directly for enterprise contracts including more developed product suites.
“No carrier is exclusively wholesale,” argues Robert Schult, research director at analyst firm TeleGeography. “Most have consolidated huge infrastructure and bolted on VAS, offering managed services and integrated solutions to other carriers, systems integrators (SIs), and enterprises. The balance of revenues may be different, with some realising more from managed services than wholesale and others more from IP transit and wavelengths. Everyone is trying to do everything – stronger players are emerging and a thriving M&A market is creating a new breed of global player.”
This trend does not mean the carrier’s carrier model is dead – there will always be a need for global players to build and run the world’s networks, sell capacity and manage international links cost effectively both for SPs and global enterprises.
Moving up the value chain
The core wholesale business – providing scale and big circuits; voice; IP transit; IP VPNs; SDH SONET and wavelengths – remains healthy but thin margins are pushing carriers to extend the product range and move further up the value chain. Change is driven as much by the need to find new revenue streams, grow markets and differentiate themselves from competitors as by new technologies.
Carriers are sweating their assets by delivering more than plain vanilla products. It makes business sense that as they develop VAS for traditional operator customers to sell on to their customers, wholesale carriers exploit resident expertise and capabilities and extend their markets by selling into multinationals including the over-the-top players (OTTs).
Believing there is an industry shift away from concentrating on interconnecting networks, Matthew Finnie, CTO at Interoute suggests that the wholesale/retail divide is a hangover from the past and no longer relevant because it does not deliver what customers want. “Computing, storage, networks and communications are all scale businesses,” he says.
“Wholesale is about supplying huge international backbones but carriers must embrace enterprises, reduce complexity by cutting out systems integrators which add to costs and may build in incompatibility and, by supplying direct, eliminate inefficiencies. The communications industry is all about possibilities. Too much money is spent on not delivering the objective – this needs to change. Carriers should deliver what people don’t yet know they want and make money on the result rather than the process. Telecoms will be like any other technology market: large service platforms will be used by carriers, operators and enterprises wanting cheaper solutions than they can build themselves in a lease-versus-capital spend model.”
Finnie argues too many players are burdened by legacy technology and attitudes and concentrate too little on what they can do for customers. The Interoute CTO wants everyone, including enterprises, to think differently. He strongly believes that infrastructure should reduce costs and improve the experience of communications in a simpler, more flexible model which adds value to organisations, supports ubiquity of access and develops the knowledge economy. Wholesale carriers can leverage economies of scale by locating data centres where costs are lowest, he maintains.
The breakdown in the traditional definition of wholesale and retail operations mirrors changes in the market. Multinationals and large enterprises, many of which own data centres and sometimes network operation centres, are increasingly behaving more like wholesale purchasers both in what they buy and in what they demand of providers. Requests for international circuits are rising although some enterprises still want an aggregator. TeleGeography’s Schult explains: “Where it really starts to blur is where enterprises, acting like wholesale customers, start looking to buy multiple wavelengths and high capacity Ethernet. Big financial institutions or content providers with in-house expertise won’t pay retail prices for raw capacity. Managers consider networks as a cost item, rather than looking at them as an investment in the business and therefore look to buy on price – they have the ability to integrate and piece together networks and data services and therefore expect to pay carrier-level prices.
Bells and whistles
“Although enterprises won’t go completely wholesale, it’s easier and more practical to integrate these products into their own networks and use wholesale capacity to expand international reach and PoPs. As Ethernet technologies mature and the technical capabilities of staff improve, corporations may want to keep communications in-house but use managed services for multinational networking,” continues Schult.
The biggest enterprises want wholesale networks and capacity but increasingly with all the bells and whistles more commonly associated with retail telecoms. Delivering such solutions direct to large enterprises necessarily changes the way in which wholesale carriers structure their internal resources. In particular, they might need to bolster their marketing and sales effort and ramp up their customer support systems. Generally it takes more staff to support retail solutions than it does wholesale and carriers need employees who can work across disciplines.
The difference between wholesale and retail is in how internal teams are organised says Isabelle Lorin de Reure, senior VP, marketing, development strategy, international carriers for Orange. “Wholesalers can sell direct to multinationals if they invest in appropriate staff and customer support centres. Dealing with enterprises is a very specific job and very different from dealing with other operators in a peer-to-peer relationship. Consolidation is a trend and big is beautiful now although there will still be room for niche players.”
Adding retail solutions requires less of a change in network planning since wholesalers have both the infrastructure and the capacity from which to launch new offerings. Paul Dahlgren, head, product management at TeliaSonera International Carrier, suggests: “delivering high volumes is the name of the game for wholesalers and, since a range of VAS already exist in the portfolio, the knowledge is not an issue.
Attractive bundles
Carriers already offer managed data services, space, co-location, managed servers and internet connections on top of traditional services and these bundles are becoming more interesting to SPs and enterprises,” he explains. “We hope they are equally interesting and profitable new revenue streams for wholesalers. Margins are very thin which underpins the need to add VAS to IP transport. Customers still need to transport information between points: capacity and bandwidth demand is increasing at a tremendous speed. Wholesalers must co-operate with their main customers, the SPs which are buying capacity and VAS to sell on to end users.”
Change is happening to support enterprises direct. The trend for carriers is towards altering their businesses to deliver what customers want rather than forcing them to fit into an existing internal structure, complete with all its legacy processes and systems, believes David James, principal analyst at Ovum. “Wholesalers must adapt to serve any type of intermediary who wants to buy services from them and telcos must be pragmatic. It’s essential not to do anything to make things harder for enterprise customers – there has to be a flexible and carefully organised response to their needs. Different channels were very separate but there is now more complexity, fluidity and flexibility to suit customers.” James is adamant that the carrier’s carrier model is neither dying nor obsolete but expects the number of players continuing to specialise in carrying large volumes of low margin commodity traffic efficiently and cost effectively, to reduce. He dismisses any suggestion that competition between operators is new: “Wholesale has always required players to manage complex inter-relationships, involving reciprocal sales of services and interdependencies while continuing to compete. This is one of the most important differences between enterprise and wholesale channels to market.”
Greg Spraetz, senior VP wholesale at Level 3, further suggests that the carrier’s carrier world will thrive because no one player has total reach so it will always be necessary to sell networks to other operators.
There is huge demand for transport services and to expand networks to handle growth in IP traffic, he claims. However, he suggests that most carriers see considerable growth in the enterprise sector and are investing in Ethernet platforms and portals to deliver real-time access fast and efficiently. “We see demand from our SP customers for VAS and, as we develop them for that group, we are selling them to enterprises,” says Spraetz. “We also help enterprises outsource elements of network management, deliver backbones, managed services and support to cut their costs and the number of vendors with whom they need to interact. We will marry a portfolio of local access, CDNs, video and streaming products with global reach.
Moving to NGNs
“Our services will continue to change from traditional IP transport into VAS which will change the way we invest in the network to deliver higher quality. However, this requires no change in network design or planning because all traffic is IP. The question is how to wholesale services and put them over the IP core.” Much of the change in carriers and their customers can be attributed to the transition to NGNs. Wholesale carriers have built end-to-end core IP networks and are now using new platforms and technologies to develop and deliver bundled VAS more easily, faster and cost effectively. Computing is gradually becoming less tied to physical entities. Virtualisation and the cloud mean customers need no longer invest so heavily in hardware but can negotiate with wholesale carriers and larger operators to supply networks, storage, computing power plus services and applications on demand in an infrastructure/platform/software-as-a-service model.
Believing in next-generation communications, Finnie suggests that carriers rather than their customers should be tied to physical infrastructure. “Enterprises want integrated and unified connectivity, communications and computing rather than separate systems. Virtualisation is the biggest single shift in IT procurement in the last 20 years. Carriers can eliminate the things customers have to do using virtualisation which is convenient and offers faster revenue returns,” he explains. The existing supply chain to enterprises for example is inefficient, he says. It can be overhauled, built into networks and delivered ‘as a service’ replacing the physical system with a virtual click-and-drag alternative. Buying ‘as a service’ means customers get faster more flexible solutions, pay for what they consume and can turn systems up and down as required.
“There is a significant move towards e-procurement, delivering electronically and supporting dynamic relationships with customers. Equally there is considerable fear, uncertainty and doubt but it’s totally feasible to leverage infrastructure and avoid basing RFPs on what people bought three years ago.”
However, Paris Burstyn, senior analyst wholesale telecoms at Ovum suggests it is less virtualisation that is driving change and more end user demand for communications beyond voice. “Operators need to bundle IT and communications and make access both distributed and ubiquitous for companies to use as platforms,” he believes. That is happening as wholesalers and SPs share infrastructure to deliver more value, adding MPLS and Ethernet to interconnect.
Cloud convergence
The trend is towards convergence, delivering products and services, seamless backend support and fault management and it takes work to enable the shift says Byron Clatterbuck, president, global carrier solutions, Tata Communications. “The trick is to work at all levels to capture as much value as possible and drive maximum use of existing infrastructure. The cloud therefore makes sense. Cloud computing will be a significant change but requires servers and global connectivity.”
Enterprises wanting to communicate as cheaply as possible are turning to the cloud to lower total cost of ownership, avoid duplication, inaccuracies, replicating processing and waste removal, Clatterbuck says. “A huge proportion of enterprise customers want hosted managed services – stickier than selling pipes and capacity – although some want to do everything themselves or run hybrid systems.
“The many sub-segments within enterprises buy very differently and different vertical sectors need differing levels of control,” continues Clatterbuck. “Where networks underpin corporate business and are critical, enterprises buy in similar ways to carriers and from several for redundancy and security. In other sectors there are opportunities to help manage data and communications platforms in hosted managed services and outsourcing arrangements. OTTs are relatively new players and, realising the need to own global networks, are becoming licensed carriers, starting to invest in infrastructure, build/buy networks and subsea cables.”
Whoever they sell to, wholesalers are automating processes, becoming more transparent and efficient, making more information available to partners and customers via online portals and increasingly providing greater access to rates and physical locations. A significant industry challenge is how pricing models will evolve and how wholesalers and SPs make money in rapidly evolving markets.
Rather than engaging in a clash of titans, partnership and cooperation between SPs, content and global network owners, sharing and leveraging each others’ strengths is a more productive model suggests Patrick Shutt, CEO at Global Capacity. “Moving away from opaque environments, wholesalers are sharing information on pricing and SLAs. The supply chain is becoming more efficient and effective, meeting enterprise needs for automation, pricing efficiency and SLAs. The key issue is to be accountable, give enterprises end-to-end systems from a single source. The need is to make it all faster; respond to requests for quotes, react online and manage the delivery process.
“Enterprises look to wholesalers to deliver better services in their drive to gain greater control and ownership for end-to-end delivery and are becoming more efficient buyers of networks. Some are becoming telecoms wholesalers themselves supplying to other corporations, developing profit/revenue centres and selling excess capacity and value-added communications. Everything is changing,” concludes Shutt.
There is more than one way of doing business and the move is towards adding bundles and more retail solutions to capacity. Carriers are increasing bandwidth to handle new world communications says Dave Ballantine, senior VP, carrier sales, Allstream. “Wholesalers have evolved from being pipe providers to offering integrated solutions,” he concludes. “One flavour no longer fits the bill. Carriers must be more open, create more flexible networks, products and contracts to meet customers’ individual requirements and help them design and deliver complex solutions. Wholesaler operators need detailed information and insight into networks and product strategy to grow business with other operators and meet enterprise needs.”
Network planning teams now work with other operators on forecast requirements and exchange information with foreign-based carriers as to what they want. There is now not much difference between what enterprises and SPs are asking for – both want flexibility and SLAs and to avoid managing multiple relationships.”
Ultimately global carriers are re-organising. By offering enterprises similar packages to the traditional wholesale, they get two bites of a bigger cherry.
