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- 3. WHOLESALE TELECOMS: FIT FOR GROWTH?
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Wholesale telecoms: fit for growth?
Executive summary
In a nutshell
Many new Web 2.0 enterprises, cloud service providers, and content
owners purchase capacity in quantities comparable to that of small
carriers. How telecoms service providers classify sales to these new
intermediaries – whether as retail or wholesale – doesn’t always reflect
the true nature of the provider-customer relationship; wholesale revenues
may end up in the retail bucket and mask healthy demand for wholesale
services.
Ovum view
President John F Kennedy said “a rising tide lifts all the boats.” This adage aptly
describes the current health of the wholesale telecoms services market. Virtually
all the key customer segments are growing, and as they do they buy more
wholesale services. The expanding definition of an intermediary also increases
sales opportunities for wholesale carriers that serve them (see our report “New
intermediaries re-define wholesale telecoms”).
We believe the wholesale telecoms market is at the beginning of a healthy growth
phase. Building on their traditional carrier customers, wholesale providers can take
advantage of increasing consumer and business demand for cloud-based services.
A growing number of intermediaries that reside in the cloud represent a class of
enterprises that purchase telecoms services on the scale of small-to-medium
carriers. They may not fit the classic definition of a wholesale customer because
they don’t resell the capacity, but they do bundle the telecoms service into the
product or service they provide to their customers.
Businesses and consumers that increasingly rely on network-resident resources for
applications and entertainment will catalyze growth in the backbone and in the
wireline and wireless access networks. Wholesale telecoms service providers can
take advantage of this growth too.
Additionally, we see mobile service providers providing a continued demand for
backhaul and virtual services. Wholesale service providers that can leverage
wireline and wireless network resources can provide white-label, managed MVNO
bundles that include everything from handsets to cell sites and network transport.
No matter how telecoms carriers classify their wholesale revenues, we believe that
line of business will enjoy healthy growth for as long as consumers and businesses
continue to rely on mobile devices and cloud-based services.
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- 4. WHOLESALE TELECOMS: FIT FOR GROWTH?
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Recommendations for players
We believe wholesale telecoms service providers must take advantage of growth in
their traditional and nascent intermediaries’ businesses. How they classify the
revenues – as retail or wholesale – is less important than putting in place the
appropriate human and technology resources to capture the new business.
Key messages
• Wholesale segments are growing. As intermediaries experience increasing
demand for their products and services, wholesale telecoms suppliers have an
opportunity to grow with them.
• New intermediaries are emerging. As businesses and consumers demand a
wider range of virtual and mobile services, enterprises will emerge to fulfill
their requirements. Wholesale telecoms suppliers must marshal the appropriate
resources to address this nascent demand. As these enterprise intermediaries
grow, their need for wholesale telecoms will grow too.
• Demand from traditional and emerging intermediaries is increasing.
Wholesale telecoms revenues will experience growth over the next few years
as consumers and businesses rely heavily on mobile and cloud services.
Wholesale market segment analysis
Overall health of the market
Quantitatively measuring the health of wholesale revenues requires a mixture of
science and art for a variety of reasons. During 2008 and 2009, we observed the
world’s carriers reporting relatively stable wholesale revenues. However, carriers
account for their wholesale revenues in different categories depending on tradition,
strategy, and desired market positioning. The lack of uniform reporting demands
that we temper the science behind our market assessments with some art.
Although reported wholesale revenues fluctuated in the range of +/- 2%, we
believe the overall trend was positive because a considerable fraction of enterprise
and other retail revenue could be counted as wholesale, based on the way
customers actually use the purchased telecoms services.
Major market developments
During the last few years, the market for wholesale telecoms services has evolved
from its origins in carriers buying and selling complementary network assets
towards a future marked by an expanding set of intermediaries that bundle
capacity and resell it as part of a value-added solution.
Traditionally, most wholesale carriers have focused on infrastructure and wholesale
voice, but recently a number have expanded into delivering outsourced and
managed solutions. These include global support of extended reach solutions for
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- 5. WHOLESALE TELECOMS: FIT FOR GROWTH?
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regional providers and expansive network links to Web 2.0 enterprises that exist
purely in the Internet’s virtual (or cloud) environment.
Prevailing definitions, including ours, segment wholesale intermediaries into:
• infrastructure-based carriers
• mobile operators, including MVNOs and mobile virtual network enablers
(MVNEs)
• xSPs (ISPs, ASPs, etc.)
• content and applications providers
• non-telco intermediaries (includes systems integrators, resellers, brands).
Reading from top to bottom, these intermediaries require increasingly complex
service bundles that extend from capacity to turnkey solutions. With increasing
frequency, wholesale intermediaries cannot meet their customers’ needs with their
own infrastructure. Their demand, therefore, creates an imperative to broaden the
elements contained in wholesale solutions.
Growth for these intermediaries comes from the ultimate end-user demand. For
the wholesale provider, its extended solutions represent a growth opportunity
catalyzed by changes in the way people use the Internet and the new wave of
access devices and applications.
Successful wholesale tactics include partnerships and close relationships
Our research and observations indicate that wholesale opportunities are no longer
limited to customers that rebrand or resell carriers’ capacity. An increasing number
of wholesalers work with their intermediaries to enable a range of new services
that their customers either use for personal or professional tasks, or add additional
layers of value before selling to the ultimate end users.
The complexity surrounding this value chain is far greater and carries much greater
profit potential than the basic intermediation that takes place between voice
networks. The new model requires more support, skills, efficiency, and knowledge
of customers’ needs because wholesalers must tailor or bundle services to address
these particular needs.
Creating partnerships or in-depth relationships with intermediaries assures
wholesalers of their position as a trusted source that can anticipate and customize
wholesale packages in a timely manner.
Establishing business intimacy
Through these tighter relationships, wholesale carriers extend the manner in which
they allow customers to manage the facilities they buy. Some carriers give
customer engineers (both wholesale and enterprise) access to their NOCs so they
can manage their purchases. Other wholesalers may allow them to use customer-
centric remote network management tools.
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From a sales management perspective, creating relationships with intermediaries
enables wholesalers to “hear” and understand the voice of the end user. However,
creating this depth of partnership requires a greater degree of “intimacy” (as one
wholesaler put it) between customer and supplier than do such relationships in the
enterprise space. Intimacy comes into play as the intermediary must learn to trust
the wholesaler with information about its own customers’ requirements.
Some wholesale service providers involve their customers in product development.
They need to know what the intermediary plans to sell so they can design products
that customers want to buy.
Customer and supplier – one and the same
Many wholesale providers also purchase wholesale services from other carriers. In
these cases, building customer intimacy becomes a two-way street as customer
and supplier support each other in “competition”-style working relationships. These
relationships require mutual understanding or they could degrade into reciprocal
trade agreements, which represent limited possibilities for growth in the 21st
century.
Opportunities to exploit
Large-scale users and corporate customers that need unbundled and unmanaged
services represent increasingly important targets for wholesale telecoms ventures.
Companies with sophisticated IT staff (e.g. those in telecoms-related fields, large
law firms, manufacturers, and financial companies) can manage their own
network; they just buy pure capacity and negotiate volume pricing based on the
bandwidth they buy. This customer type uses its own personnel to avoid paying for
managed services and better control costs. They might also opt to work with the
wholesalers’ NOC engineers who provision and support all the larger customers.
Content, software-as-a-service (SaaS), applications services, search, social
networking, and online retailing represent a significant wholesale opportunity.
However, some wholesalers say these intermediaries fall into a gray area between
wholesale and retail since they do not sell communications services.
Some wholesale carriers put these firms in the enterprise segment even though
they behave more like carriers. Revenues fall into retail or enterprise sales because
some of these intermediaries started as enterprise customers, but they are often
supported by the wholesale team. Carriers often find themselves unable to
reassign these customers because the enterprise side of the business cannot afford
to lose the revenues.
Emergent applications and content stores represent a nascent customer set for
wholesale services. As they grow, these companies will consume services in a
similar manner to today’s Web 2.0-style customers.
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Growth coming from growth in others’ niches
In the gray area between wholesale and retail falls a wide range of intermediaries
that consume vast amounts of capacity. Because these intermediaries generate
revenues from advertising and transactions rather than from the resale of network
services, many wholesalers count them as enterprise customers. That classification
subtracts sales to these intermediaries from the wholesale column and adds them
to the enterprise column.
As these intermediaries grow through expanded services and extended reach, they
will drive wholesale carriers’ revenues even if they are accounted for in a different
line of business.
Managed services development
A growing number of intermediaries demand packages of wholesale services that
include hosting, storage, security, telepresence, and other capabilities that they
can’t afford to build on their own. Wholesale telecoms players will invest significant
sums to deploy these platforms because both they and their retail counterparts can
leverage them.
With these facilities in their networks, wholesalers can offer them on a white-label
basis. In these cases, the intermediary is essentially a channel for the wholesaler’s
network, but the intermediary’s customers see them as the supplier.
Turnkey solutions that do not compete
One US-based wholesale carrier sells copper-based broadband access and long-
distance transport as a turnkey package to other US carriers that want to expand
into regions where they have no infrastructure.
These packages allow its customers to promote their own brands without actually
competing with the wholesaler. Because these solutions are copper-based, this
carrier says its customers can’t match the speed and performance of its fiber-
based products in the same geographies.
Other wholesalers are offering similar “enabling” bundles in other parts of the
market.
Leveraging buying power to grow wholesale
Larger carriers that wield significant buying power on their own can leverage that
power to help their wholesale customers. By layering value-added services onto
their support infrastructure, including equipment and other products bought
through their suppliers, these carriers’ wholesale solutions become increasingly
sophisticated and attractive to their customers. They can also drive higher returns
on network infrastructure investments and improved margins; these wholesale
products are not commodities like bandwidth.
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Carriers making investments in new service platforms can take advantage of the
total solution opportunity. With the ability to provide network-based applications
(e.g. unified communications, managed security, telepresence) they can approach
potential wholesale customers that want to offer services regionally and globally.
In non-competitive situations, wholesale providers might allow their customers to
white-label any or all these services.
Investments support managed services
Having leveraged their bandwidth business to address new customers’ needs,
wholesale telecoms suppliers must manage the diverse and complex technologies
that their customers expect. Wholesale carriers must manage this complexity on
an internal, organizational basis that includes customizing channels and products
to optimize the buyer/seller relationship.
Numerous carriers rely on key customer relationships to contribute to or totally
justify the costs of the network, which allows infrastructure expansion. In most
cases these are enterprise customers, not wholesale customers. Carriers tend not
to build out just for wholesale, but justify expansion based on the existence of a
business customer in the market. In these cases, network enterprise demand
drives network expansion, but then wholesale revenues deliver profit since they
ride essentially free while helping to cover the risk. Moving beyond commodity
services will increase revenues and customer loyalty.
Market threats to guard against
The main threat to wholesale revenues is missing the opportunity to take
advantage of newly emerging intermediaries. Wholesale carriers that limit
themselves to traditional peering or carrier sales will miss the potential to increase
revenues and capture customers their retail arms cannot reach.
Wholesale opportunities
Opportunities for challengers
Internecine competition in this market represents the greatest opportunity.
Wholesale carriers developing advanced services and capabilities meeting the
needs of Web 2.0-style intermediaries will enjoy competitive advantages over
those that do not move in this direction. Presented with these value-added
resources, customers can use them as differentiators to pick one wholesale
provider over another.
Opportunities for incumbents
Wholesale carriers must maintain customer-facing go-to-market strategies and the
tactics to match. They will need to move quickly to bring new capabilities to their
customers, enabling them to address the changing demands from their users.
Wholesalers have to think outside the traditional box of wholesale services so they
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can bring new ideas and capabilities to their customers. That will be an important
way to maintain their customer base while growing revenues and profit.
Appendix
Research methodology
This report was produced based on interviews with 17 global wholesale carriers
conducted for our research into the evolving segmentation of wholesale customers.
Ovum continuously carries out primary and secondary research into the wholesale
telecoms market. That process includes regular briefings with a wide range of
telecoms service providers, wholesale competitors, suppliers, and customers, as
well as reviews of publicly available primary and secondary sources.
Ovum does not endorse companies or their products. Ovum operates under an Independence
Charter. For full details please see www.ovum.com/about/charter.asp.
For full details of Ovum's citation policy, see www.ovum.com/media/citation.asp.
Whilst every care is taken to ensure the accuracy of the information contained in this
material, the facts, estimates and opinions stated are based on information and sources
which, while we believe them to be reliable, are not guaranteed. In particular, it should not
be relied upon as the sole source of reference in relation to the subject matter. No liability
can be accepted by Ovum Europe Limited, its directors or employees for any loss occasioned
to any person or entity acting or failing to act as a result of anything contained in or omitted
from the content of this material, or our conclusions as stated. The findings are Ovum's
current opinions; they are subject to change without notice. Ovum has no obligation to
update or amend the research or to let anyone know if our opinions change materially.
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