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Tomorrow's industry
Some carriers believe international wholesale is in line for an upturn in fortunes, boosted by new applications and services.
The wholesale carrier business has long been the ugly duckling of the telecoms industry. Subject to over-supply and falling prices, and without the glamour of new fixed-line consumer IP services such as IPTV, wholesalers are struggling to make a margin on their predominant voice businesses.
That is leading some carriers to outsource or sell their international voice assets. In January, Denmark’s TDC agreed to off–load its international voice business to IP carrier iBasis in a managed services deal. iBasis will pay TDC $10 million in cash and expects to generate around $80 million in revenues per year. The deal follows Dutch incumbent KPN’s decision to sell its Global Carrier Services business to iBasis last October to outsource its international voice services.
Most recently, Tiscali International was due to complete, by the end of January, the sale and handover of its wholesale voice network to an unspecified corporate service provider. The business accounts for 12%–15% of the Italian wholesale carrier’s revenues.
“We are disposing of [our wholesale voice business and network] because margins are so tiny compared to data,” says Paolo Gambini, director of new business at Tiscali International. “If [an operator is serving] direct routes in developing and emerging economies then [the margins on trading TDM voice minutes are] around 10% to 15%. If [it is] trading wholesale routes including Europe and the US, and fixed and mobile, then [they are] between 6% and 7%. Much larger operators are working at 5%. You may as well put the money in safe bonds or in the bank; it would be less stressful.”
Slowing voice growth
Today, many of Europe’s incumbents still depend heavily on voice trading for their international wholesale revenues. Fully 70% of Deutsche Telekom’s wholesale revenue comes from voice trading, and the figure rises to between 80% and 90% at Orange/France Telecom group’s international wholesale arm.
However, average prices for international voice calls are 70% lower than they were 10 years ago, according to recent research by TeleGeography. Until recently, wholesale operators have been able to count on a steady rise in voice traffic to help offset the negative financial effects of lower prices. But now that growth is slowing down. While voice traffic grew on average 15% each year over the past two decades, from under 18 billion minutes in 1986 to just less than 300 billion minutes in 2006, it increased by only 10% in 2006, according to TeleGeography (see chart below). The company says it also expects to report sluggish growth for 2007.
“Carriers depend on rapid traffic growth to offset falling prices,” says Stephan Beckert, director of research at TeleGeography. “Slower volume growth hurts carriers’ revenues, and will almost certainly force further consolidation in the international long-distance market.”
Yet European incumbents with wholesale businesses, including Deutsche Telekom and TeliaSonera, believe their fortunes are finally turning, shaped by changes in retail markets and the promise of value-added IP services.
Of course, wholesalers have been betting on data growth ever since companies like Global Crossing and Level 3 built huge IP networks in the late 1990s. Now, however, they claim IP data services are finally making a positive impact on their revenues and margin growth.
“Voice is still a big share of our total revenue, [but] in 2007 IP has been taking off in a totally different way to what we have seen in the past,” says Malin Frenning, senior vice president and head of wholesale and International Carrier (IC), TeliaSonera, pointing to three- or four-fold growth in IP-based revenues.
TeliaSonera has the ambition to be “one of the top three in the global [wholesale] IP arena” by 2010 says Frenning. To do this it will “focus on certain applications and certain target groups”, says Frenning.
For example, TeliaSonera has focused heavily on capturing business from gaming companies, says David James, a principal analyst and senior manager at Ovum.
TeliaSonera estimates that about 20% of all gaming traffic travels over its wholesale networks. TeliaSonera has a contract with a leading, unspecified online multiplayer gaming company, and emphasises the quality of its networks and dedicated hosting centres as key to its success.
Last March TeliaSonera IC announced that it would expand its transatlantic capacity by a minimum of 160 gigabits per second (Gbps) over the next three years through deals with Apollo Submarine Cable Systems, Flag Telecom and VSNL International. It cited online gaming and media services as reasons for transatlantic capacity becoming “a scarce resource”.
“The main reason they are using our networks is quality and our wholly owned network, which we control end-to-end 24/7,” says Frenning.
All wholesalers emphasise the quality of their networks, of course, even if they claim it is a differentiator compared with other carriers. And as with many other telecoms markets, many international wholesale carriers are pursuing the same communities and services.
In the coming year, wholesale carriers typically say they hope to increase business by transporting gaming services and broadcast and video content; ensuring they capture a large share of higher margin mobile transport; and by developing new niche IP businesses, such as providing IP platforms to systems integrators so that they in turn can provide enterprises with managed network services and collaborative IP applications.
But no niche is exclusive for long
“Competition is so strong that if you manage to offer a premium [service] then someone always offers [the same] premium [service] at a lower rate,” says Gambini at Tiscali International.
Deutsche Telekom, for example, is looking to develop a wholesale gaming business, much as TeliaSonera has done.
“Gaming is one of the key content businesses. We intend to resell white label and co-branded applications and develop an aggregation model…based on [our] experience in retail,” says Helmut Angst, senior executive vice president and head of the International Carrier Sales and Solutions Division at Deutsche Telekom. “We will have billing systems to ensure games are invoiced [so that consumers can] pay per game,” he adds.
Deutsche Telekom’s strategy is to invest relatively small sums to develop such new wholesale IP businesses quickly, and tear them down if they do not take off. “It costs less than $20,000 dollars [to develop a wholesale gaming service]. We’ll try it and [if we fail, we] fail fast,” says Angst.
Angst says two years ago voice represented 90% of Deutsche Telekom’s business. The company currently gets approximately 70% of its international wholesale revenues from trading voice.
BT also wants to develop more sophisticated wholesale content distribution models, but is reluctant to provide specific details of potential services. “There is an opportunity for content caching and content distribution, and we are actively working on that. There are a variety of roles to be played and it will evolve over the next year or so,” says Sally Davis, chief executive, BT Wholesale, referring to BT’s international wholesale business.
Wholesalers cite several positive reasons for continuing to shift their emphasis away from TDM voice and towards value-added IP services, including the growth of voice over IP, gaming and video content transmission. But the most pressing driver is profitability, and that is largely dictated by the size of a company’s operations.
That is why some of the businesses without significant scale have decided to outsource their operations. Following the iBasis deals, there is industry-wide expectation of further consolidation in the wholesale market.
“There is a possibility of more opportunities for outsourcing...and taking on all the international business of other telcos,” says Ovum’s James. “As well as offering higher margins, [such deals] are much closer to the client…they [provide] longer-term contact and there is more opportunity to upsell.”
Indeed, one of the problems facing Tiscali International’s voice business was its lack of scale. After all, says James, just “5% of a huge volume, and if [it is] part of a broader offering of wholesale services,” can still be a viable business.
In 2002 Interoute sold its international TDM voice business. “It was 5 billion minutes a year and it was subscale,” says Matthew Finnie, CTO of Interoute. Finnie expects the voice trading market to consolidate further around a handful of huge volume players.
Skype and other computer-based voice services are a key reason for the slowdown in international voice growth, according to TeleGeography. It estimates Skype generated some 14 billion minutes of international traffic in 2006. “Skype only accounts for a small share of international calls. But they’re generating enough volume to have a clear impact on the growth rate of traditional calls,” says Beckert in the company’s annual international long-distance report.
This trend presents a challenge to international carriers, says TeleGeography. With average international calling prices 70% lower than they were 10 years ago, scale has become an ever more important consideration. “Carriers depend on rapid traffic growth to offset falling prices. Slower volume growth hurts carriers’ revenues, and will almost certainly force further consolidation in the international long-distance market,” says Beckert.
“Wholesale termination…will be the business of very large wholesalers [such as] BT, AT&T and Verizon. If you’re not AT&T, what do you do?” asks Finnie.
The answer, according to many wholesale carriers now, is switch to value-added IP services. Global Crossing manages to secure margins of 52% on its wholesale IP business, according to Derek Lister, vice president of carrier sales at Global Crossing, EMEA. But like its rivals, Global Crossing does not break out margins for the lower-revenue IP transit market; nor does it disclose margins on its TDM and IP voice business, which represented between 25% and 30% of its revenues in 2007.
“I know [talk by other carriers of] 5% [margins] is out there,” says Lister, but “that would keep me awake at night and I would run away screaming.”
Nevertheless, Global Crossing relegated its international wholesale voice business to its “manage for margins” unit in 2004, while IP services have been placed in the company’s “invest and grow” unit. One of the areas in which Global Crossing sees growth is through providing IP platforms for systems integrators that in the past would have bought bandwidth and added their own switches.
“If you can make the financial metrics stack up [systems integrators] will buy [an IP platform] at a wholesale rate and go to market very quickly,” says Lister. You can set it up any way you want for video and voice,” he says, adding that voice applications are particularly popular.
The advantage for systems integrators is “they don’t have to buy switches from Cisco...or Siemens...and they don’t have to host the equipment in the network. They pay rental per month...and the cost per site is much less,” says Lister.
James at Ovum also envisages growth in serving systems integrators, because increasingly “they want to have as much done for them as possible”, he says.
Interoute, meanwhile, is building a business out of voice over MPLS through its Arena service, which it describes as a virtual voice network for exchanging voice traffic. Arena’s customers include BT and AT&T. “When we started two years ago it was all TDM [voice] and there was no-one to connect to. [Now] it’s a growing business and it’s a very high margin business…because of the cost of our network,” Finnie says. “We’re putting serious amounts of capacity [into this]…We do it at a hosted session level…and manage signalling…on a big provisioning platform.”
In the longer term, Finnie believes the development of IP-based communications services offered by companies such as Microsoft and Google have the potential to further change the nature of wholesale voice provisioning.
“Microsoft has half a billion Outlook clients…[What] if it becomes connected by Interoute acting as a big integrator?”, asks Finnie. “Half a billion subscribers, and a proportion of them [will] call off mobile and fixed [networks]. It’s not going to happen next year…[but it is an example] of an increasingly less geographically constrained form of communications.”
Indeed, despite the conservative predictions of analysts, not every wholesale provider expects to reduce international voice traffic volumes in the immediate term. Much depends upon the routes they serve (see table left).
Gambini at Tiscali points out that wholesale voice margins are healthiest when an operator is transporting mobile traffic and on routes to certain developing countries.
That view is shared by Orange/France Telecom. Its wholesale division differs from others in its emphasis on serving primarily the group’s retail businesses around the world.
“What we resell is what we negotiate for our retail customers,” says Claire Papponeau, vice president of international carrier services and sales in the Orange/France Telecom group. The company argues that an international retail business is essential to underpin a healthy wholesale business. “Footprint is important and it is important to aggregate traffic from customers within the France Telecom group,” says Papponeau.
Again, reflecting general trends Orange/France Telecom’s retail businesses are still generating a lot of growth in voice, particularly from the company’s mobile operators in developing regions.
“In Asia, Africa and the Southern [hemisphere] usage is growing. There is an increasing need for low-cost, high-quality [voice] minutes,” says Papponeau. “Some prices are rising in certain countries,” she says, although she does not state where.
Current Analysis, in a recent research note, also points out that “mobile traffic…is the fastest growing and most lucrative international traffic.”
iBasis’s outsourcing deal with TDC did not extend to mobile voice, however.
“The biggest single change [to come in wholesale] is [in] mobile,” says Finnie. “Mobile is seriously dial-up. Today a bunch of [wholesale mobile] markets are still closed. We have a long, long way to go before bilateral markets are gone and everyone is buying on the free market.”
Interoute believes the mobile wholesale market is largely a closed shop, structured around existing bilateral agreements between incumbents.
In the meantime, companies like Orange/France Telecom will continue to develop new wholesale IP services, including voice over IP. In addition to transporting content to serve Orange/France Telecom’s IPTV businesses in Western Europe, the group is looking to develop a wholesale platform to manage banking transactions with developing countries. The company also welcomes an increase in VoIP usage, which it believes need not be a low-value service.
“IP is a great opportunity to remodel and evolve the industry,” says Philippe Millet, vice president of customer marketing and development, international carrier services and sales, at Orange/France Telecom. “TDM growth is less impressive, but VoIP is still voice. VoIP is not a threat. Pure VoIP has a better quality of sound and definition than switched voice.”
Such shifts suggest the wholesale industry is finally growing up.
“Wholesale is a lot more mature,” says James at Ovum. “It is now accepted by telcos as a significant revenue stream and an enabler of what they want to do with retail. The attitude to wholesale has changed a lot and will continue to change.”
This article originally appeared in Total Telecom magazine
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