InFocus: Sharing the wholesale IP experience

Consolidation in some markets is the first sign of trouble. It can sometimes mean that one player is becoming so dominant that others will surely shrink by comparison. It can also be the answer to the question, "Are there too many companies addressing this opportunity already?" This begs another question: Which ones have to go?

The wholesale IP market has been experiencing active consolidation since last year, and in many quarters, it is a welcome consolidation trend that will help stabilize the fluctuating pricing that has haunted the industry.

"A lot of the wholesale market is going to change radically because of this industry consolidation," Robert Rosenberg, president of Insight Research, recently told Telephony. "We may not see it immediately, but there will be some real stability in pricing, which we haven't seen in five or six years."

So far, despite increasing demand for wholesale services, price pressures have offset the increase in usage and potential revenue. In the private-line sector, for example, the market stood at $36.6 billion in 2002. The wholesale market accounted for $16 billion of that. At the end of 2005, that market was down to $32.4 billion, with wholesale dropping to $14 billion, according to Insight Research.

"Demand has continued to grow on a usage basis, but because there were so many competitors and they were playing a cost-cutting game, there was no stability in the market," Rosenberg said. "With fewer players--and not through any collusion, but by the nature of capitalism--we should reach an equilibrium."

This new leverage should carry over into the enterprise market as well, Rosenberg said. Over the last few years, large enterprises could put the squeeze on carriers for 20% to 30% in cost reductions over the term of a contract.

"There will be a lot less squeezing going on. The idea that you could cut the carrier off at the knees may not work anymore," he said.

At the same time that pricing has been hurting the wholesale IP business, worldwide VoIP traffic growth has been surging. At the PTC 2006 conference in January, Stephan Beckert, director of research with TeleGeography, gave a presentation noting that switched and VoIP minutes of use had grown well beyond 200 billion minutes per year, as of 2004. VoIP represented a minuscule percentage of that traffic in 1999, but by 2004 it was in the full single-digit range and growing fast. By the third quarter of 2005, quarterly VoIP revenues stood at $350 million, according to TeleGeography.

The opportunity that traffic growth suggests might mean there is still room for a few more wholesale carriers. "We don't feel that the recent consolidation has affected us in one way or another," said Brent Allison, vice president of the Partner Solutions Group at TELUS. "With IP, we think there's room for more. With the consolidation, price is flattening and volumes are increasing. The wholesale IP business is just a much more rational business now."

If anything Allison is concerned about the prices that carriers charge for various IP services being too low. With the operational efficiencies that IP services create, "they really should be pricing them at a premium," he said. "Companies price down their services when they don't have confidence and aren't sure of their solutions. They should be upselling."

TELUS isn't a widely known name to many in the wholesale services arena. The company, based in Vancouver, British Columbia, was once a regional player in western Canada whose only extension into national services was its membership in the Stentor Alliance with several other regional Canadian carriers. Though carriers in many parts of the world have struggled with the migration to an IP backbone, TELUS never flinched because it had nothing to lose. "We found that we needed a national backbone when the Stentor Alliance unwound," Allison said. "It was easy for us to go with IP technology and to take the lead by building a next-generation IP network. Our focus from day one has really been IP and data."

"Day one" does not actually refer to the company's long history in telecommunications. It refers to the day six years ago when Darren Entwistle took over as president and CEO after having been at Cable & Wireless in the U.K., to lead the corporate transformation program. In addition to conducting an acquisition spree of his own--which included an ILEC in Quebec, wireless provider Clearnet, PSINet, two IT firms, a Web-hosting company and the country's biggest conferencing company--Entwistle created a business unit strategy to drive the company's focus. One of those four units was service provider-focused, a model that Entwistle deeply believed in, according to Allison.

"From day one, Entwistle recognized that the carrier business was important for TELUS. So we now have a proactive approach to becoming the creative partner of choice [in Canada] for carriers globally," said Allison.

He said one of the reasons TELUS makes a good wholesale partner for companies globally and particularly in the U.S. is that it does not go outside its borders to compete for multinational corporations. "We rely on our carrier relationships to manage that [part of] the business in Canada," Allison said.

In the end, Allison said, that makes carriers more willing to have conversations about a more broad set of requirements, meaning value-added services. For instance, in an arrangement worth about $65 million with a large school board in Canada, TELUS provides managed services for back-office support. He said that gives TELUS the kind of proof-points it needs to offer the same kinds of service to service-provider partners looking to do business in Canada, presumably ISP partners.

Instead, TELUS is promoting its operator services and call center alternatives. It also promotes what it calls e-tools, the portals and processes that make it easy to do inter-carrier business.

Still, any business transformation that involves so many acquisitions has to require some dynamic and crafty integration, and the successful completion of that process is another selling point that TELUS uses in the wholesale business, especially to market the outsourced operator services and other kinds of professional services that its wholesale clients require.

"What makes us special is that we share our own transformation story with carriers," said Geoff Telfer, business development manager at TELUS. "We can differentiate ourselves from IBM and the other consulting agencies in that we have lived the painful integration process. We've integrated all of our acquisitions under a single brand. We've consolidated call centers across Canada, and we can help these carrier customers consolidate their call centers."

Allison added, "It gives you a ton of equity and makes them feel like you can take stuff out of their hair for them. The chief concern of carriers we are talking to in the U.S. is how do I transform my business with IP technology, not what price can I get for this circuit. That's a problem we can help them with."

Wholesale carriers across the board say they are seeing service demand continue to grow. Some just see it growing differently than others. Whereas Level 3 doesn't see voice over IP as a big driver of wholesale minutes, a company like Global Crossing does.

"VoIP is a part of IP growth, but truth be told, it's not a huge traffic consumer relative to video, conferencing and other multimedia apps driving IP growth today," said Glenn Russo, senior vice president for Level 3.

Instead, Level 3 continues to see private-line and wavelength usage increase. The company's Internet backbone business has grown 70% per year. "That's like re-creating an entire network's worth of capacity every year," Russo said.

Global Crossing, on the other hand, sees both VoIP and video as intensifying consumers of bandwidth. Its own growing penetration in the Asian markets could have help from this view.

Although VoIP may or may not be consuming a lot of bandwidth for all carriers, it is having an impact on carrier revenue. Of the $300 billion in international voice traffic last year, VoIP providers siphoned off $83 billion. "That's revenue lost by the traditional carrier market," Rosenberg said.

So where, besides eventual price stabilization, are wholesale carriers looking to find the light at the end of the tunnel? The IP/virtual private network (VPN) tunnel, for starters. A Global Crossing spokesman said the company's IP/VPN usage has grown to 100 million IP interconnect minutes per month from last year. That's a 350% increase.

And in addition, "Wavelengths are a big part of what Level 3 does both for its internal consumption and its customers, so putting this platform in place gives us a great deal of the flexibility and scalability we felt we needed," Russo said.

Of course, all this talk of demand and growth doesn't mean that the glut has been neutralized. There is still a lot of unused fiber in the ground.

Although Insight Research's last study on fiber utilization was two years ago, it showed that only 3% to 5% of fiber was actually lit and in use. However, whenever people talk about fiber capacity, they have to talk on a route-by-route basis, Rosenberg said.

"On major metro routes domestically, we will have excess capacity for years to come," he said. "On principal routes between, say, two points in Wyoming, you might have to trench, but in NFL cities, probably not."

In addition to VoIP--and given that the outlook for price stability holds--another big opportunity for wholesale providers can be found in wireless backhaul, particularly the international variety. The world's 1.9 billion wireless subscribers last year generated about 270 billion minutes of use. Eight billion of those minutes were backhauled internationally, Insight's Rosenberg said.

Still, other opportunities for growth are presented by the acquisitions themselves, and AT&T, which recently bid to acquire BellSouth, isn't the only one making whoppers. Verizon and MCI have combined to create another global wholesale powerhouse.

"We believe with the new Verizon organization, there is a lot we can do for our wholesale customers," said Lisa Houser, director of new product development for Verizon Business.

The company rolled out its wholesale VoIP offering late last year, so it's too soon to quantify growth, but overall, wholesale revenues in 2005 for the former Verizon business unit were up over 2004, despite the price pressures.

"I think that's a real good sign," Houser said. "Through 2006 we expect growth to be quite strong in VoIP, and there is significant activity in this very viable market."

Cleaning up the call center mess

Sharing its own experience in helping carrier customers make their way in the IP services business is just one way that TELUS puts its own history to practical use. The Canadian carrier also offers outsourced operator services and contact center solutions that can help carrier customers get their call center houses in order.

As noted in the story above, consolidation can help stabilize a market, while creating an opportunity for carriers to compete on points other than price. One aftershock of consolidation, however, is that combined carriers may have to address an excess and overlap of call centers that have little integration between them. TELUS Partner Solutions can help them address the mess.

"We consolidated dozens of our own call centers over 18 months and saved about $90 million, so that is something we can share with other carriers to show them we've been there and that it can be done," said Pamela Campbell, director in TELUS Partner Solutions. "This is something that's helpful for all of those consolidating carriers, but also for carriers who just have messy operations."

Campbell said many carriers just don't know where to start with call center consolidation and may be frozen into inaction by the prospect. They also may not view solutions like operator service and directory assistance as a core competence and point of competitive differentiation.

"We can take it over for them and help them be more competitive in the process," she said.

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