Choose or lose: rethinking the service equation: thanks to falling prices of minutes and bandwidth and increasing local loop competition, the days of the full service provider are numbered. The solution? Customized wholesale services, where carriers can leverage their infrastructure strengths

It's not easy being in wholesale telecoms these days. After a rush of facilities-based players in the 1990s in the midst of liberalization and fiber buildouts, the subsequent glut of raw bandwidth and minutes--the bread and butter of telecoms wholesalers--sent prices screaming down, the results of which are well documented in annual reports and bankruptcy court documents worldwide.

And that's just on the global scene. Down in the local markets, most incumbent telcos have been under pressure ever since competition was thrust upon them, either from fellow facilities-based operators or from niche resellers taking advantage of regulatory efforts to unbundle the local loop and cut into their customer bases.

Consolidation is already happening in small degrees. We see this in Reach's acquisition of Level 3's Asian assets, and Teleglobe's recent purchase of VoIP wholesaler ITXC. If nothing else, networks are starting to change hands, from Global Crossing's purchase by ST Telemedia and Asia Global Grossing by China Netcom, to Reliance Infocomm's gateway subsidiary buying FLAG Telecom. But it's only a matter of time for the others, and the general wisdom is that, five years or so from now, there will only be two or three global fiber network infrastructure owners left on the planet.

Indeed, many analysts consider that consolidation is likely throughout the wholesale chain. Actual market breakdowns will depend on user numbers, average spend, and other factors, but on average we may end up with only a few regionally-focused infrastructure providers, and local markets left with an incumbent, and one or two facilities-based CLECs specializing in either residential or business services.

Which isn't to say that the overall playing field is going to get less crowded--quite the opposite, in fact, because on top of aft that will be a layer of service providers, content service providers and application service providers who will also be the new wholesale customers. Either way, fewer players will have end-to end network ownership.

Indeed--end-to-end is old school. It's also become increasingly unviable in an industry where the carrier's carrier model of raw capacity and voice minutes has reached commodity status. That's why more and more carriers are reorienting themselves to a valued-added service model in the name of differentiation, says Lain McNeill, Asia/Pacific telecom research manager at IDC.

"While basic bandwidth services will continue to be necessary for the tier-2 carriers, ISPs, wireless providers and global carriers operating domestically, wholesale providers will look more and more to alternative services that cannot be easily priced down in commodity type markets, such as managed data services, the Internet and complete enterprise-facing packages for carriers," McNeil says. This alone is expected to help the Asia/Pacific wholesale leased fine market grow from $2.3 billion in 2002 to $3-9 billion by 2007.

Stephen Young of Ovum agrees. "Wholesale is an ugly duck in the market right now, because it's seen largely as a carrier's carrier market, which is what's responsible for the bad smell around wholesale," he says. "But now there's starting to be a greater recognition that wholesale is a market that has customers, but you need to know how to serve them."

However, a new Ovum report on wholesale argues that it's far from an easy transition, as operators have to strike an uneasy balance between retail and wholesale channels. The way to revitalize wholesale, Ovum says, is to redefine it to encompass not only commodities like bandwidth and minutes, but also customized services, grouped broadly into infrastructure, transport, managed data, access, MANs, voice, and e-services, as well as subsequent services like OSS and co-location for each of these.

"Anything that can be resaled is wholesale," Young maintains. "All of the services that telcos offer now can be segmented and provided to intermediaries. Typically that can mean mobile operators, cable operators, ISPs and xSPs, but we'll also be seeing a new breed of non-telco intermediaries, like banks and media companies."

VAS as a differentiator

In many ways, this is already happening. Across the telecoms industry, Young says, the lines are already blurring between supply chain elements such as transport and delivery, and fixed and mobile services, while vertically integrated suppliers are undergoing disaggregation and being replaced with more horizontally focused players--all of which are making content and information more significant differentiators than the core and access networks they run over.

Many global and regional carriers are already on the case, adding VAS layers to their wholesale offerings. Reach, for example, positions itself as an upstream provider that enables incumbents to have VAS already onboard their international offerings.

"There's two ways the incumbents can go," says Dave Chalmers, Asia director for Reach. "They can outsource transport and add the value themselves, or they can outsource transport that supplies services on top of the transport."

The range of VAS may depend on the strengths of the wholesaler. BT, for instance, views its CRM outsourcing business as a key growth opportunity for its global wholesale business.

"CRM is not something that happens only in a call centre," says Ian Pulford, head of sales for BT's global wholesale division, making the point that CRM is such a complex undertaking that many service providers would benefit from wholesaling a CRM solution from someone that understands those complexities. "Every time a customer interacts with one of our 16,000 field engineers, every time a BT-branded van cuts people up on the highway, or a shoddy BT shop front--these are all elements which impact on our relationship with our customers. Our experience of managing CRM both for ourselves and other businesses has taught us that there is no one answer."

Another potentially hot wholesale service segment, according to Ovum's Young, include metro area networks, where there is something of an "access gap" for wholesale capacity to Tier 2 locations and the local loop, with service segmentations ranging From straight Sonet/SDH and ducts to Gigabit Ethernet and dark fiber.

However, says Young, e-services such as distribution, content/application hosting, Web hosting and data centers represent the biggest wholesale opportunity in the long term in Web-based networking hotbeds.

"The provision and distribution of wholesale content for 3G mobile networks is a major long-term opportunity for a broad range of network operators and service providers," he says.

A matter of trust

While this neo-wholesale model sounds promising on paper, it's a tall order for many carriers in the retail space who are loath to lease out their facilities to virtual service providers (VSPs) and other intermediaries who are going to compete for their market share in a given service--even if they are required by law to do it.

This is perhaps most clearly evident in the local access segment, where incumbents have been noticeably resistant to unbundling and Type II interconnect tariff mandates that otherwise play well into the redefined wholesale concept. McNeill of IDC observes that while liberalization will continue to drive domestic wholesale markets, leading to price reduction and greater wholesale choice, "this does not necessarily hold true in all cases, however, as some incumbents have managed to maintain strongholds on local access even in relatively open market environments."

"Some incumbents have woken up to the fact that they can't be all things to all people, and are moving to restructure and anticipate the new realities," says Young of Ovum. "Others find this idea very threatening. That's why we've seen many incumbents fulfill regulatory requirements in a defensive manner--for example, by blocking loop access, failing to provide co-location space in exchanges, or employing defensive price tactics. Carriers that act that way are afraid of the negative effect of wholesale on their retail business. However, they should view wholesale as an additional revenue stream, not a threat."

BT's Ian Pulford says telcos should look at wholesale as another channel to reach the end-user. "BT is a major pure play wholesaler in the UK," he says. "Outside the UK we tend to use the wholesale channel to underpin the BT retail operation outside the UK."