U.S. Wholesale Opportunities Outweigh the Challenges
Carriers and Analysts Expect Retail Applications To Drive Demand For Wholesale Capacity in 2008

By Paris Burstyn - Capacity Magazine

Without doubt wholesale carriers depend on end users to drive demand for services and bandwidth. Consumers and enterprises want more applications to run across their wired and wireless connections reliably. quickly and efficiently -- and they don't care how their service providers meet their needs for music, file transfers, database queries and plain old telephone calls as long as they're met.

Wholesale carrier analysts and competitors expect demands for converged applications will intensify during 2008, setting up numerous opportunities for wholesale carriers to deliver bandwidth and other services so their customers can meet the increasing demand for capacity and access to new locations,

"Wireless continues to be a key driver," says Judy Reed Smith, president of research firm Atlantic-ACM. "Heavy growth in subscribers is slowing, so the rate is slowing, but overall usage, if data use plays out as it appears it will, increases the need for wireless backhaul."

Almost the entire U.S. wholesale communications industry anticipates 2008 as the year when wireless delivery of video, music, data and voice combine over broadband wireless connections. When those, and wireline, converged applications materialise, that integrated traffic will catalyse tremendous requirements for metro and long-haul IP capacity. Wholesale providers know that wireless providers want to get these huge data streams off their wireless facilities and onto fibre as quickly as possible, which drives the need for more wholesale capacity.

The reality for wholesale carriers in 2008 is a win/win as retail service providers look to them to facilitate providing more bandwidth, says John Scarano, co-founder and COO of Zayo Group and president of Zayo Bandwidth. "Customers can keep costs fairly stable."

CONSTANT CONSOLIDATION
U.S. telecom has experienced waves of mergers and acquisition in the last few years. Observers expect M&As to continue during 2008, fuelled by needs as divergent as acquiring complementary network facilities or additional customers,

Reflecting on consolidation, Quentin Lew, Verizon Partner Solution's (VPS) senior vice president of sales and interconnections services says two forces -- business mergers and traffic consolidation -- help to rationalise pricing.

"Bandwidth pricing continues to fall, but not in free-fall," says Scarano. "Bandwidth creation will continue to grow, as will usage, for years to come." He expects two growth curves -- demand and capacity -- to approach equilibrium so that prices won't experience free-fall and bandwidth won't experience a glut. During 2008, Scarano expects his fellow service providers, to price competitively. The market is coming to terms with the fact that capacity isn't free, whether it is leased or built, he says: "It costs money to provide and so it costs to buy or lease network extensions and equipment, so pricing won't experience the free-fall it has in the past."

Not every competitor or analyst sees prices stabilising, though the optimism or pessimism on pricing seems to be directly related to the tier in which they compete. Most national providers expect prices to level off while regional providers expect continued volatility.

Despite those divergent opinions, no one admits to pricing based solely on capacity. Rather, all say service pricing is based on service quality and reliability. Everyone also says other carriers cut prices to buy share.

Atlantic-ACM believes small players will offer low prices to gain share -- "as XO has done with special pricing for a year or so," says Reed Smith. She compares the competition along XO's end-to-end routes to airlines competing with Jet Blue along its non-stop routes. Where XO has both ends of the route, it cuts prices; some competitors try to meet those prices or differentiate in some other way; just as airlines must meet or, in someway, beat Jet Blue fares. "Pricing will vary by route," she says, "But that won't be enough to pull down all the prices."

Embarq's president of wholesale services, Bill Cheek, doesn't see price stability in 2008. "There's still a lot of providers trying to sink or swim with the investment they have," he says. "And there are smaller providers trying to compete on price. We don't see the model totally changing, but we do see areas where our higher quality services cost more."

METRO'S ROLE
Competing in metro markets plays to wholesale earners' strengths when they can enhance their customers' efforts to reach enterprises that need physical and virtual route diversity as well as managed services. Where incumbents already have facilities, wholesalers can complement them with additional routes to wired buildings or by extending reach to new buildings. Additionally, wholesalers can deploy managed services and VoIP platforms to meet customers' demand.

Reed Smith says that Ethernet wholesale carriers who provide true physical route diversity and unique entrances into target buildings can use those facilities to create competitive differentiation. The wholesale carrier's second wire into a premises translates directly into revenue for its customers, which then sell safety, security and reliability to their enterprise customers, she says,

"Companies that built metro networks and last-mile links are in great shape," she says. "Those networks address the limiting quantity: wires to businesses that long-haul carriers can't reach." These assets are particularly valuable for Tier 2 and 3 carriers that aim at MSOs, RBOCs, CLECs, metro network providers and regional fibre providers, she says. They can also meet the needs wireless carriers have for backhaul capacity,

"The network is our Inventory," says Zayo's Scarano. Since May 2007, Zayo Group has acquired four businesses: Memphis Networx, PPL Telcom, Indiana Fiber Works, and Onvoy. It provides services in 43 markets and nine states. Carrier customers include telecom, wireless, cable TV, LECs and ISPs. "We've been fortunate to acquire networks in regions across the country that are deep in metro areas -- primarily Tier 2 and 3 cities, but with links to NFL cities." Zayo Group's divisions cooperate to meet retail and wholesale customers' needs. When a division needs bandwidth to reach a customer, it wholesales capacity from Zayo Bandwidth Group.

PERFORMANCE PRICING
Competing by promising and delivering better customer service allows Embarq to win with higher prices. Customers appreciate its high performance level and voted in a customer survey to give it an Atlantic-ACM award.

As Embarq, other competitors want to leverage service level agreements (SLAs), speedy repair responses (mean time to repair or MTTR) and other metrics to maintain pricing levels and attract carrier customers. "Even in the carrier space they're buying more on value -- more on what we can deliver -- than on the price per megabit," says Gary Breauninger, CMO and executive vice president of Global Crossing.

The demand for pipes exists, says Breauninger. "But now carrier customers look more like enterprises in terms of turn up time. Our carriers and content providers want SLAs, MTTR, service agreement; they're very important in contracts. It's not just about the bleeding edge price for return on capex."

Striving to differentiate itself, Global Crossing positions itself as a small company with a large network. And because every network service provider sooner or later has problems, Global Crossing gives out its performance data and works to respond quickly.

Tad Deriso, general manager at Mid-Atlantic Broadband Cooperative (MBC), stresses his company's ability to exceed provisioning expectation throughout his regional operating area. He gives the example of a customer calling on a Friday at 2 p.m. when its provider had a network failure. MBC had the fibre and only needed some equipment to help it get back online and provisioned an OC3 and 50Mbit Ethernet service that afternoon. Deriso also points out that he operates in a unique environment in rural Virginia, where he can draw on his member carriers to meet unexpected customer needs through their networks and employees.

Level 3 stresses the predictability of service delivery. "Buyers don't wake up and say, 'I forgot to order my OC12'," says Myrle McNeal, senior vice president of offer management at Level 3. "If you deliver too quickly, the customer may not be ready. So the key is to hit the agreed date. Meeting that date is perfect."

DEMAND DRIVERS
Carrier customers first want quality and high reliability. Since they resell those services to end users, performance must meet their own specifications. "Demand for our services includes IP-based services like interconnection options for voice termination as well as IP toll-free," says Level 3's senior vice president of product delivery, Glenn Russo.

Carrier customers increasingly need the ability to provide local telephone numbers for IP phones and the ability to deliver IP-originated calls to TOM recipients and vice versa. Russo says Level 3 is beginning to see call centres, which are usually risk-averse, seek VoIP capabilities.

But VoIP remains a nascent technology in the U.S. wholesale space. Small carriers provide services to peers and larger providers that need to reach rural areas. Carriers with national and international footprints sell VoIP to carriers that can leverage wholesale VoIP where it would be too expensive to invest themselves.

"For small and rural telcos and MSOs that struggle to keep pace with technology, VoIP from a wholesale provider is very hot," says Josh Holbrook an analyst with Yankee Group. "To differentiate themselves, wholesale VoIP carriers have to offer better customer services -- more responsive, faster and flexible."

Not every wholesale carrier competitor supports VoIP but all recognise the need to support TOM to IP transitions. Some are still assessing if there's enough demand for a reasonable return on investment. For example, Sprint doesn't offer a wholesale VoIP product today. It supports TDM voice and has ATM, Frame and a clear migration path for Sprint Frame over IP. "Everything is tied to IP," says Dave Falter, managing director and vice president of Sprint's wholesale team. "It's key for voice and data and wireless convergence. It's the platform to move beyond TDM services to IP and MPLS."

Falter says Sprint created a clear path to IP from legacy TDM. On a long-haul basis as well, Sprint will help its customers move from nailed-up private line services to IP. "We have a road map migration teams in place to move [our customers] to IP," Falter says. "It's core to our strategy."

PROVISIONING
The long-held debate over the potential market for offering managed services will continue through 2008, says Reed Smith. For the wholesale community, that market may be one step removed. Some wholesale service providers are moving beyond delivering pure bandwidth to offer VoIP and bandwidth on a scaleable basis. But bandwidth remains a critical focus for these carriers as they strive to match carrier customer demand.

Provisioning these services for wholesale customers requires a mix of capabilities. "In our business we have to provide a combination of automation and human interaction," says Roland Thornton, executive vice president of Qwest's wholesale markets. "We can have a customer come into a portal, order a service, flow through, get a quote for a price, accept it, invoke the order, get provisioned and receive a bill. Other customers want to discuss options. We provide what the customer wants." Generally, he says, wholesale customers are more sophisticated and can use automation.

According to Scott Ladin, senior segment manager-carrier at Global Crossing, carrier customers want APls that can link their systems to Global Crossing's to generate quotations and pricing automatically. "Our customers have to develop their own pricing tools so they need APIs to speed the efficiency of quote-to-cash from their standpoint and ours."

VPS is pushing toward automation supplemented with a live help desk. "We have 775,000 T1s in service just in wholesale," says Lew. "So we need some automation, but we deliver live support." In 2007, VPS held an "ordering summit" for sales, support and IT to make sure "they develop customer-friendly, plain-English interfaces that customers are accustomed to using."

Two of the more automated provisioning approaches come from AT&T and Global Crossing with Business Direct and uCommand, respectively. Relatively sophisticated wholesale customers want more complex tasks automated, says Randall Porter, assistant vice president, channel marketing at AT&T Wholesale.

Breauninger says Global Crossing's carrier customers want to move toward automation, "but there's room for humans." Automated or human, customer service gets a high level of executive support. For efficiency's sake, he says, customers file and track trouble tickets using U-Command. "But customers can also call me or (Global Crossing CEO) John Legere if they feel the need."

ANTICIPATING 2008
Looking ahead, the wholesale players see the industry driven by end-user demands for new, data-intense applications and services. The challenge that wholesale carriers face is delivering those services in the way each of their niche customers want them.

At Qwest, Thornton says: "We're evolving tools and processes to facility transitions from TDM to IP. As consumption of capacity accelerates, so does the transition."

Qwest focuses its wholesale offers on individual segments -- wireless, cable, carrier and resellers. "Wireless customers want more bandwidth to handle the data intensity of new services," says Thornton. "Cable companies look to supplement their network where they don't reach. So they need IP products and services from a carrier that can take VoIP and terminate TDM and vice versa. Other carriers use raw capacity they can divvy up for their retail customers. And resellers look for finished products for resale and re-bill."

AT&T's Porter agrees with this assessment. "The proliferation of wireless data applications and the explosive demand for content such as high-end video applications generate more bandwidth demand than ever. Wholesale providers will have new opportunities to carry that content including transit, delivery and storage services."

While U.S. wholesale providers look forward to a growth year as consumers gobble up sophisticated, high-end services, there are some voices of restraint. "The mortgage crises cause concern," says Cheek at Embarq. "If consumer spending slows and there's a recession, that can affect our customer base. We're already seeing some small businesses lagging past trend behaviour." The wholesale providers depend on their customers' retail customers. If that market slows down, it will delay the anticipated demand for new capacity.