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

Telecom Asia, Dec, 2003 by John C. Tanner

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."