“In 2015 you will see traditional enterprises moving internal network assets into the cloud, and also improving the performance of their internet facing assets and applications,” says Kyle York, chief revenue officer at Dyn, which helps optimise network performance for both internet and traditional enterprises: customers range from BT to Hershey,
Twitter to The Guardian and Seeking Alpha to CNBC. “The way enterprises communicate with their customers becomes much more important. They are asking: how do I build high-capacity infrastructure for global audiences? Every enterprise will be doing what internet companies were doing between 2006 and 2010,” York adds.
Who will they turn to when they need help? “Carriers who want to build enterprise business are not just facing their traditional competitors, they are facing Microsoft and Google and others,” warns Andreas Hipp, CEO at Epsilon.
“Their customers love this stuff, and the carriers typically struggle because of the historical reputation that they use their dominant power to tell you what telecoms services look like, and how much they will cost. It takes time for a carrier to move their idea of the people they do business with from being a subscriber to being a customer.”
And that’s the tension for wholesale carriers who are increasingly targeting enterprise business to be the engine of growth. On one hand they have the technology and the expertise. On the other hand, they are not always recognised by the customer as value-creating or easy to do business with.
The CIOs at those customers have an appetite that is rapidly changing. In 1984, the chief researcher at Sun Microsystems, John Gage, coined the tagline that was repeated everywhere during the first dot. com boom: the network is the computer.
In 2015, CIOs are investing on this principle. A recent survey by IDG Research Services asked 590 CIOs of enterprises (the average size of their IT department was 697 people) in 23 countries what their priorities were for the next 12 months.
It characterised their responses this year by labelling the CIOs as “disruptive innovators”: 55% of respondents are increasing their use of technology partners. Four out of five of the strategic assets that they predict will drive growth in the next three years are network-based: mobile applications (39%), web-scale IT (39%), IoT (32%) and M2M communications (31%).
CIOs in the survey place unprecedented value in network services. “We’re moving from being consumers of the as-a-service model to becoming providers of services and solutions to our customers and supplier partners,” says David Guzman, CIO of HD Smith, one of the largest distributors of pharmaceuticals in the US.
“As soon as we discover a challenge in our industry, we look for a solution in the cloud, and these days we often find just what we need,” says Michel Berret, CIO of Aperam – a fast-growing global supplier of steel that split out of ArcelorMittal in 2011.
ADDING VERTICALS
Enterprise-focussed carriers are targeting acquisitions and partnerships to build that enterprise business, both by creating network reach and by adding vertical market services (security, cloud and uni_ ed communications) to their portfolio. Yet for large wholesale-dominated businesses, this is a big transition that needs careful management.
The death of wholesale as a growth opportunity has been predicted for many years: exactly 10 years ago, consultants Broad Group released a report predicting that “telecoms wholesale carriers need to change their business models, as their options for future growth are extremely limited… the financial and economic models used in wholesale businesses, suggest little or no margin growth opportunities exist”.
The death of the wholesale-only carrier has been long and sometimes painful. As recently as 2010, Tinet were making a brave, yet ultimately unsuccessful, bid to build a wholesale-only carrier with a limited range of products. But, while its volumes were growing, it was apparent that wholesale capacity might be one of the few businesses that approximate the economic concept of perfect competition.
Gambini admitted as much: “Pricing has been sliding fast in all markets, as this is a truly global market with a nearly perfect flow of information with buyers being able to choose from a number of seemingly similar offers.”
In 2013, Inteliquent sold the global data business that had been Tinet to GTT for $54.5 million. For Tier-1 carriers, enterprise business offers the opportunity to secure growth by differentiating. They can use the scale of their network infrastructure, built on wholesale business, to create a global reach to develop a broad portfolio of services.
Anthony Christie, CMO at Level 3, makes no secret that many of his company’s acquisitions have been targeted at building enterprise business, which is currently 70% of revenue and growing faster than wholesale. Level 3’s third quarter results show that, for core network services, enterprise business has grown 9%, while wholesale was flat.
“It has been intentional,” Christie says of the growth plan for enterprise. “It was a deliberate strategy move, we started to move to it six or seven years ago. The enterprise has higher growth but also a recurring revenue model. For example, our IP VPN is a foundational offer. Once the customer is on that platform, we have the ability to offer other converged services.”
One of the useful features for a public company is that enterprise business created revenue smoothing.
“A lot of carriers started by building Layer 1 networks, and they were deployed on an IRU basis. The revenue from that is lumpy,” he says. “When you do get that revenue, it might be a while until you get another. You can manage that internally, but external stakeholders prefer something that’s smoother.”
By comparison, broadening an enterprise contract by adding services is a smooth, recurring revenue model, in which the carrier is well-placed to pick off valuable business opportunities.
Christie singles out the “fast-moving, not-fully-shaped market” for cloud as one of the best examples. Yet he is aware that large enterprise contracts will demand more than products and services that are common to many carriers. Level 3, like other carriers that are active in enterprise, is recruiting.
“Sales and account management interaction is very different to the wholesale space. In wholesale, someone else is doing the communication with the end customer. When you sell to the enterprise, you’re on the front line. We look for people who are coming from the industry they will sell to.”
IN DEMAND
For many Tier-2 carriers, or regional carriers, growing enterprise business is also a priority, but with less scale they need to focus on specific vertical markets or products in the short term. An example is Colt, which reorganised into business line-focussed units in 2014, and November’s purchase of Asian carrier KVH, was partly done to align with the buying habits of enterprise business.
Today, Colt’s wholesale business is a little more than 40% of revenues. Zhongmin Guo, VP, network services at Colt Technology Services, explains: “For us, the key focus is our tremendous asset metro networks – now we have 47 of them. So we are strong in particular verticals.”
These verticals – financial services, media and similar businesses – need that metro connectivity. Colt has found “double digit” growth in managed network services. “Fundamentally we have a lot of assets, and our objective is to increase the utilisation of them. That improves economics and profitability. We are not incumbent. We have to focus, and our verticals are where there’s room for growth.”
Why, in that case, acquire KVH when Colt was already in partnership with the carrier? “If you look at our customer base, these industries tend to be global markets. Capital markets or cloud: it’s very hard to be a local player. KVH had the same business model. By putting together two sets of assets, we can support these customers much better.”
The second area in which Colt predicts growth will be cloud services. Colt has agreements with VMware and Amazon, among others, to provide managed connections to external cloud, and KVH has given them a global footprint of dedicated data centres.
Guo claims that it has built connectivity to managed cloud services that is unique in Europe. Colt also offers connection to 450 other high-traffic data centres in Europe.
Owning the cloud business drives bandwidth growth, as well as the services business. If the last 20 years has often been about building network, the current problem may be building credibility among customers that drive the traffic to those networks. Colt has elected to create dedicated teams for vertical markets.
“For example, we have a self-contained group focussing only on capital markets,” Guo says. “In that group there are sales and solution architects, and we do proposition development: that wasn't the case before. We hired a lot of people from the industry, so they know what customers are looking for. The conversation is easier, and we get to the point with the customer more quickly.”
At Dyn, York warns that it takes time to build this credibility. Spending his entire time selling to enterprise, he knows that often the carriers still lack focus in their approach. “Too many companies segment ‘enterprise’ as ‘enterprise’: but Twitter has very different criteria to Morgan Stanley when it comes to making buying decisions,” he warns.
“They want to know that you’re innovating ahead of their smart engineers – you have the best and brightest in the world working on it. The hardest part is getting to the right person. The more traditional enterprise is more interested in the credibility of you as an enterprise selling to an enterprise – can you pass third-party service authorisations, for example? Their implementations tend to be more rudimentary, because they are heading into the cloud for the first time. They are concerned with business continuity and enterprise risk.”
As carriers transition, they will need to build vertical market credibility quickly, and so may need to rely on partnership. Deeper integration builds vertical market enterprise business, says Ben Parker, principal technologist at Guavus, which provides analytics capability to seven of the 10 biggest MSOs in North America, and works with many Tier-1 telecoms customers and cable companies to develop enterprise services.
As the enterprise network becomes more intimately part of its business – for example, controlling logistics – then the ability to collect, transport and compute can become a service, Parker explains.
“The collection of data can be done by the enterprise, or naturally by the telco – it’s an extension of their existing architecture,” he says. “If you collect data in one country, and your data centre is in other country, the laws must be managed. If the telco can manage this, and understand that the data has to be managed appropriately, that is of extreme value.”
If the business model is in place – Parker picks out logistics as a candidate, where the benefit of M2M-driven analytics is “a huge industry with hundreds of billions of dollars of potential” – the carrier can partner externally to win business. But it will also have to manage relationships internally: if wholesale is no longer the focus, how do you motivate the wholesale specialists who helped build the business?
At Level 3, for example, Christie accepts that maintaining wholesale and enterprise sales together in the same unit is a source of two types of conflict: internally, between units that are managed for cash (predominantly wholesale) and those that are managed for growth; but also externally, as Level 3’s wholesale carrier customers try to compete for the same enterprise accounts.
Managing internal channel conflict is a challenge that carriers have been faced with as long as there has been enterprise demand. In 2015 and beyond, the rewards for success are greater.
Building a strong enterprise business isn't just about diversification. Perhaps it is the way that carriers can use their networks to build sustainable, profitable growth when wholesale profits are too often traded away in this truly global market with a nearly perfect flow of information.
MANAGING THE SALES CYCLE
Bob Fletcher, now lead of worldwide sales at Dyn Research, worked for many years at Renesys before it was acquired by Dyn in 2014. Now his colleagues’ analytic skills are used to motivate business opportunities.
“We see an evolution in enterprise sales. In the first steps, the enterprise is a group of people in a basement: you call the phone company because you need an internet presence. The same applies in the cloud. When you move out of the basement and you get an autonomous system, you have some level of independence in who you buy from, and you can buy from several people at once. As you go from a small professional company to one that’s a bit bigger, you get multiple providers: different connections with a lot of upstreams to provide resiliency. On the cloud side, you might have a direct connection and high-performance Anycast DNS: so all your web pages perform well.”
Large multinationals, he says, start to look more like a service provider with multiple providers linked into them, some direct peering, multiple data centres and Anycast capability.
Managing those transitions is an enterprise-focussed telco’s core skill, he argues, because it protects the enterprise from unexpected risks.
“The network engineers in the enterprise all understand this. But the people in the business don’t think about it. The problem I had with one enterprise was that the engineering guys knew what they needed, and the purchasing guys had compensation based on saving money compared to last year. They had diametrically opposed goals, and brought me in to referee it. You have to transition out of the nuts and bolts and speak to someone with management responsibility. Lower in the organisation you can talk about metrics, but [for this] you need someone who can speak to the C-suite.”
Dyn Research’s visualisations are effective tools in making the conversation relevant to enterprise management. An example (see images below): Fletcher’s research produces comparable maps of internet posture, in this case comparing BA and Virgin Atlantic: “As an enterprise customer you don’t need to know all the speeds and feeds: you need to know if your nearest competitor is better than you,” Fletcher says.
“In this case BA has a more sophisticated posture than Virgin Atlantic. That’s a competitive advantage. When you’re making changes to a BA reservation, you’re more likely to have a satisfactory experience. The guys at BA don’t need to care about how many routers they have - they care about the customer experience.”
