A wholesale change: Will IP be the ticket to ride?

Times are right for interexchange carriers. RBOCs are clamoring to get into long-distance and need long-haul networks, long-distance call volumes and international calling have increased, and resellers and end users are craving bandwidth. Those factors put IXCs and other major wholesale players in the driver's seat.

U.S. wholesale long-distance voice services generated $10.8 billion in 1998 and are expected to grow at an annual compound rate of 15.3% during the next seven years, according to a report by Lawrence Herman, an analyst at Frost & Sullivan (see figure). And while the wholesale local voice service market is expected to grow faster, it faces more roadblocks, particularly regulatory obstacles and the absence of operations support system standards.

But wholesaling long-distance voice and data is not easy. Wholesalers and their reseller customers have some fierce competition as they try to maintain or build adequate profit margins and meet end-user demands for data products. Wholesalers also must differentiate themselves from the many new participants in the space.

"It is a time of incredible change as margins slide out of the old circuit-switched voice," said Judy Reed Smith, CEO of Atlantic-ACM. "Those that succeed in wholesale will need a wide range of bandwidth and data services to find the new margins."

Long-distance wholesale is Sprint's second fastest-growing business unit, said Brian D. Newby, director of wholesale marketing at Sprint. But the profile of the wholesale market is changing. Unlike 10 years ago, there isn't a huge discrepancy between the price that resellers pay per minute and the price they can charge end users.

Competitive local exchange carriers and ISPs are converging, producing a more complex customer for wholesalers to address, Newby said. Instead of a simple switchless vs. facilities-based demarcation, wholesalers must market to the growing segment of hybrid resellers, some of which may have their own international switches, for example, but domestically want to ride Sprint's network.

"We're trying to position ourselves as the network provider that understands their business model," Newby said. "All of our resellers are selling a feeling to end users. We're kind of the underlying aspect of that therapy."

But differentiation is difficult in such a price-sensitive business, Newby said. "All the carriers are linked together in terms of perception. We differentiate through the network - our provisioning capabilities and our processes to get [connections] installed faster."

Reliability is increasingly important to resellers, Newby said, and will become even more so in the future. Sprint hopes its Sonet ring architecture and service level agreements will enable it to stand out.

Other wholesalers also have spotted opportunity in the IP voice services realm, perhaps because of the lower buildout cost or the long-term capability to sell more complex services and applications on top of IP-based platforms.

"An increasing number of wholesale offerings will be provided through IP telephony instead of the traditional public switched telephone network," Herman said in his report.

"There will be growth in both areas; however, there will be more growth in the area of packet-switched voice," Atlantic-ACM's Smith said.

For that reason, service providers such as Bell Atlantic are enhancing their gateway services targeted at Internet telephony carriers. A year ago, Bell Atlantic's wholesale division got its toes wet in IP telephony. It set up a point of presence in New York to terminate calls for ITXC, which offers voice over the Internet.

Now Bell Atlantic has built a new "mass-market" platform using Cisco Systems gateways and VocalTec gatekeepers. iBasis, a phone-to-phone Internet carrier that carried 156.5 million minutes last year, uses the platform for call termination in northern New Jersey and Philadelphia. ITXC also will switch to the new platform.

"We can get economies of scale if we can have just one platform to serve everybody and don't have to run parallel networks to serve each individual customer," said Debbie Allison, product manager of wholesale and carrier services for Bell Atlantic.

Clearinghouse-type firms such as iBasis are being targeted "because [they] aggregate a lot of traffic from a lot of other networks, so they will be able to bring me more minutes than individual service providers would," Allison said.

Bell Atlantic's next step in IP wholesale will be in origination services. Although she didn't provide specific numbers, Allison said her business case for wholesale IP forecasts traffic will double every year for the next five years.

The RBOC is off to a good start with iBasis, which will terminate its international traffic coming to the U.S. on Bell Atlantic's network.

Still, IP telephony has a way to go. Features used by call centers and large companies that are part of the circuit-switched network are only beginning to be built into IP networks via softswitches, Smith said. But the fledgling nature of the category also means more opportunities for differentiation.

Wholesale providers will add applications, such as unified messaging and other enhanced services that can bring higher margins, because their reseller customers need to do so for the same reason.

In addition, service provisioning still is uneven. In Atlantic-ACM's recent customer satisfaction report card on wholesale providers, it found that service providers were not particularly adept at rapid provisioning, Smith said.

"During 1999, Qwest and Level 3 used disruptive pricing and pushed a lot of the margin out of the market, but they weren't able to provision what they promised," Smith said. "That leaves opportunities for others to come in and fill the need."