Carriers react to price compression: Can squeezed margins lead to wholesaling?

More competition in the telecom market, mixed with the possibility of some services becoming commodities, has caused carriers to adjust their business models. Now, a chameleon-like business model that lets service providers rapidly alter their colors to match changing and escalating customer demands is more critical than ever.

As customers' needs change, service providers increasingly experience price compression for those services, such as basic voice and long-distance. That, in turn, has spurred carriers to find creative ways to work for the same or better revenue levels, although the sources of that revenue may be different.

For many providers, one of the best ways to generate more revenue is to find creative uses for existing assets, rather than just add new products and services. Theoretically, new customer segments can be derived from the same networks by expanding and promoting wholesale capabilities. By wholesaling services to other providers, carriers and service providers can compensate for ground lost to price compression.

"[Wholesaling] is a viable market for us to increase our customer base and market share while it is also a continued source of growth in our revenue stream," said Barbara Peda, president of AT&T Wholesale Market Services. AT&T, which is not new to the wholesale services market, is cognizant of the fact that wholesaling can help against price compression, Peda said.

Another carrier familiar with wholesaling services, MCI WorldCom, shares this view. "These are the best of times and the worst of times," said John Barnett, who oversees MCI WorldCom's wholesale services division. While price margins are being squeezed in almost every offering, the exponential growth in demand offsets the losses, he said.

"There are always new products [being introduced], and every year we outpace the growth of the year before," he said. "We either change with the industry or go by the wayside."

Because of the rapid changes needed to keep profitability high, reselling services may be even more attractive to providers now than in the past because the buyers aren't forced to devote their energies and assets to making those improvements. Instead, the wholesaler does.

"Businesses have to provide the infrastructure and services to power e-commerce - and no one can do that by themselves," Barnett said.

To be successful at wholesaling services, providers have to put together the best package to make it easy for resellers to do what they do best, said Greg Casey, senior vice president of wholesale markets for Qwest Communications.

BellSouth's goal is to give customers competitive advantages and help them optimize their networks, said Ken Ray, vice president of BellSouth Interconnection Services. BellSouth recently won a half-billion dollar deal with integrated communications provider (ICP) Network One, allowing the ICP to serve customers in BellSouth's region as a competitive local exchange carrier (CLEC) without having to build its own network.

"We let them focus their energies on taking care of customers and soliciting new ones," Ray said. That refocusing of energies and investment dollars allows service provider customers to heighten margins and have an overnight footprint that may have been cost-prohibitive before, he added. BellSouth has no plans to back away from wholesaling because it is allowed to offer long-distance service, Ray said.

But regarding the entire concept of wholesaling service, one analyst was quick to point out that the margins for resellers may not be as enticing as the margins for wholesalers. "Controlling the local loop is the most important factor for CLECs," said Andrew Cray, research analyst with The Aberdeen Group. "If you just resell services, you can't control the customer or services, and the margins will be slim."