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05 February 2013
An unintended consequence of network innovation is that it opens the floodgates to as many threats as it does opportunities – just ask mobile operators struggling to make the economics of 4G investment stack up in a world where OTT players proliferate. Richard Irving assesses the prospects for wholesale operators.
Which of the following telling
developments is most likely to set the agenda in wholesale
News that WhatsApp, the almost-free over-the-top (OTT)
messaging service is now handling more than 10 billion texts a
day – a 10-fold increase in a year?
Confirmation that Google is trialing a new technology called
WebRTC (short for web-based real time communications)
– an application that could turn telephony on its head
by embedding voice services in internet browsers?
Or the revelation that Eddy Cue should be able to wangle
cut-price tyres next time he takes his sports car in for a
service? If you are unfamiliar with the name, then let me
Cue is the rising star of Apple – head of the
company’s internet software and services division,
driving force (no pun intended) behind the launch of the hugely
successful iPad mini and chief executive Tim
Cook’s all-round Mr Fix-It.
Late last year, Cue, who has been with the iconic device
manufacturer for 24 years, broke with a long-standing Apple
convention barring senior executives from holding top-level
positions with other companies, when he joined the board of
Ferrari.Cue, a long-time customer of the supercar maker, has
yet to elaborate on his reasons for the move, although company
watchers believe it marks a new push at Apple to connect up the
car with internet friendly "machine-to-machine" (M2M)
Apple is already working with General Motors, Honda and Toyota
to develop a hands-free version of Siri, the voice-activated
personal assistant, for the car market. But a joint venture
with Ferrari on a host of in-car devices that might talk to
other internet-based applications either in the car, back home,
or even at Ferrari HQ, could eventually pave the way for
something a little more substantial with Ferrari’s
ultimate owner, Fiat.
Apple’s potential interest in Ferrari should send
shivers down the spines of many wholesale operators –
or a least, those lucky enough to bear responsibility for M2M
within their remit. For the wholesale telecoms market faces a
Doomsday scenario in which revenues from each of its three main
pillars – voice, messaging and data access –
are slipping into terminal decline (or expected to within two
to three years).
One of the few bright spots on the horizon is the M2M market,
which the London-based consultancy Machina Research says could
be worth a combined $50 billion a year to service providers by
the end of the decade. So any collaborative efforts between
Apple and Ferrari/Fiat that might ultimately poach some of
those revenues will be most unwelcome.
To unravel the prospects for international wholesale operators
you must pick a path through a complex web of rapidly changing
dynamics between fixed and mobile telephony; voice, text and
data; and the love-hate relationship between telcos and OTT
You must then recognise that there is not necessarily a
correlation between rising volumes and rising revenues. And
finally, you must set those often very disparate interactions
against an uncertain global economic backdrop that appears to
favour a raft of developing economies over the troubled
Eurozone and the ex-growth markets of Spain, Italy, Germany,
France and the UK.
In a nutshell, most analysts expect core telco wholesale
revenues to flat-line over the coming years but the overall
trend is littered with inconsistencies.
According to Catherine Haslam of the telecoms consultancy Ovum,
Africa is expected to top the league, with international
wholesale revenues growing 9.4% between 2010 and 2016. Asia
also puts in a strong performance, up 4.1%, while the Middle
East (+3.8%) and South and Central America (+3.25) deliver on
their potential. But the overall performance will be dragged
down by Canada and the US, where revenues will fall 12.2%, and
Within this sweeping geographical context, Ovum expects fixed
international volumes to fall by 5.2% as the march of OTT
players such as Skype decimate the business, but international
mobile volumes to surge 11.1% as the roll-out of 4G fuels sales
of bandwidth-hungry smart devices.
The bad news is that wholesalers will struggle to turn those
surging mobile volumes into cold hard cash – Ovum
reckons international mobile revenue will grow 3.0% at best,
while fixed revenues will crash 11.2% over the same
The European context is important, not just because it reflects
continuing concerns about the viability of the Eurozone as a
robust economic entity and all the implications that might have
on long-term competition within the telecoms sector. But
because many of the crucial market segments within the region
have peaked, or appear close to peaking.
Drill down further, and the outlook for European operators
looks even more cloudy: Mobile data, which includes voice over
the internet (VoIP), the de facto network of choice for mobile
international voice, is set to drive revenues forward but it is
not clear to what extent it can offset the slump in fixed
international voice revenues and traditional SMS revenues
– both of which are falling faster than anyone feared
in their worst nightmares.
And if all that wasn’t enough, many companies are
trying to pay the interest on huge swathes of public debt while
at the same time maintaining cash handouts to shareholders and
saving up for that all-important investment in 4G. Amidst all
the confusing signals, some clear trends are emerging
– and not all of them bad.
For one thing, the OTT community represents a huge business
opportunity in the data arena, as wholesale providers seek to
cope with the fast expanding backbone demands of key players
such as Skype and Viber. More comforting still, is the fact
that even a small upwards tweak to the pricing models for
mobile data revenues in, say, 2015 would be more than enough to
hoist the entire market back to profitability.
But perhaps the best news of all, must surely be the assumption
that Vodafone clearly sees value in the wholesale model, hence
its £1 billion acquisition of Cable&Wireless
Worldwide last year. Trusting to luck in the hope that mobile
data will save the day with forecast-beating profits is hardly
an option for today’s wholesale chiefs, most of
whom are determined to preserve what little value there still
remains in international voice for as long as possible.
For them, the challenge is to find an elixir to make voice
stronger for longer. Most are pursuing strategies that fall
into three main categories: delivering new products and
services that command a healthy premium over mainstream voice;
building scale in order to underpin eroding margins with much
higher traffic volumes; and forging closer links with retail
operators to better understand the threat from OTT.
Yijing Brentano, vice president of international wholesale for
Sprint, must feel the pressure more than most. Chief executive
Dan Hesse reportedly parachuted her in to a specially created
role in order to help rejuvenate the business and much is
expected of her.
The 15-year Sprint veteran’s business unit
currently contributes around $1.6 billion to group revenues, a
large chunk of which comes from traditional services such as
voice, where margins are getting squeezed ever thinner. Last
year Brentano oversaw a root-and-branch strategic review and
came out the other side with a five-year plan to focus on
higher margin growth opportunities such as the M2M
"Our traditional business will always be there because pretty
much everything that drives demand – either wirelessly
or over fixed lines – ultimately has to travel through
a pipe," she says. At the end of the day, it
doesn’t really matter what type of traffic is
coursing through the network, so long as it’s
going through your network, she adds. Nevertheless, she says,
more profitable opportunities must also prevail.
At last November’s LA
Auto Show, Sprint showed how to turn a $95,000 Dodge Viper into
a next-generation smartphone with a top speed of 198mph. The
vehicle acts as a Wifi hot spot, can send text messages via
voice command and offers emergency location services.
Chrysler even plans to offer an app store where drivers can
download entertainment, navigation and safety apps through
Sprint’s network, but analysts say the system
could easily be adapted to offer an insure-as-you-drive
Like Apple’s Cue, Brentano believes that a deep
understanding of the consumer market will help Sprint tap a
potentially huge international market in vehicle connectivity
– which is probably just as well. In a curious twist
of fate, Fiat announced last December that it wanted to take
full control of Chrysler in a move that could ultimately see
the Apple dealmaker become involved in the programme.
There is no doubt that Brentano intends to guide
Sprint’s wholesale unit away from its
voice-centric roots: A top priority for 2013, she adds, is to
forge new partnerships alongside its ground-breaking alliance
with France Telecom-Orange last January. The deal will allow
Sprint to offer its US customers M2M connectivity in more than
180 countries: "Our priority is to get another couple of big
wins along the lines of our partnership arrangement with
Orange," she says.
Colt, the pan-European wholesale provider based in London, is
already reaping the benefits of a shift in focus. "Until about
two years ago, we designed our services with our corporate
customers in mind – if we could sell it into the
wholesale market, it was a nice add-on", says Lutz Blank, a
vice president of marketing. "Now we design solutions
specifically with wholesale customers in mind right from the
big global carriers down to the local resellers. We can offer
everything from a range of configurations at the access level,
right up to white label services that can help operators move
into new geographical reaches."
This fundamentally alters the relationship between carrier and
wholesaler and skews the financial dynamics back in favour of
the provider. If all you have to offer is plain vanilla
connectivity from Point A to Point B, then customers can
harness the competition to drive down prices against you.
But if you are offering value-added services that carriers can
utilise in their own drive to capture new business, then they
will pay a premium. The clever bit is that it allows a
wholesaler to monetise its infrastructure assets, not in terms
of heavily commoditised minutes, but as a value-added service.
And the really clever bit is that it transforms the wholesaler
into a strategic partner rather than a cut-price
"It’s really working for us," Lutz says. Of
course, this is not particularly bleeding edge thinking in the
wholesale arena, but it is gaining traction, not least because
the decline in international fixed voice revenues is starting
to prompt carriers to rethink their network investment
priorities and in many cases, rein them back in favour of a
white label alternative.
Some value-added services work best
when they are adopted en masse and the wholesale
community’s attempts to combat fraud, for example,
have drawn on some of the most innovative technologies around.
Championing the fight back is Alexandre Pébereau,
executive vice president for international carriers at Orange.
"Innovation is a big differentiator", he says.
"In the past, the wholesale sector wasn’t
necessarily a place where innovation flourished, but
it’s fast becoming an important arena in which to
showcase cutting edge technology". The better you can show how
good your network is, the easier it becomes to monetise, he
says. "We saw that with HD Voice and we’re seeing
it with IPX".
Fraud remains a huge problem for wholesale providers –
each year operators lose an estimated $40 billion –
equivalent to the entire global revenues of the Walt Disney
company. Compounding the problem is an increasingly complex
array of devices and services that sit on a growing number of
international networks. "Wholesale operators need to take
collective action to develop the means to protect their
interconnect revenue", he says.
A key priority for Orange over the coming months is to speed up
deployment of its @first initiative, which is designed to stop
fraudsters interfering with on-net and off-net calls, in South
Africa, the Middle East and South America.
As wholesalers embrace their new role as strategic partners,
they will naturally forge closer ties with their customers. One
consequence of this, is that the wholesale world is getting an
early heads-up on the problems that operators will face as
workers start to bring their much-loved smart devices into the
According to a recent survey, nine out of every 10 small and
medium-sized enterprises in the US now allow their staff to use
tablets and smartphones for work-related business. The
so-called "Bring Your Own Device" (BYOD) trend effectively
opens up the network to consumers and is expected to make a
significant impact in Europe as 4G rolls-out and the cost of
ultra-fast connectivity comes down. It also raises a big
question over the long-term future of fixed networks.
Colt, which provides physical connectivity to more than 40,000
buildings, making it one of the largest access operators in
Europe, is currently considering its strategic response in the
light of this threat. François Eloy, executive vice
president, explains: "The big question for us is how do we stay
in the game when it comes to access – will customers
actually need that wired access if all their workers are using
smart devices over a 4G mobile network?" The company might
decide to pursue an acquisition or it might look at building
its own MVNO, Eloy says. "There’ll be more to come
on that in the next few months."
For every threat, of course, there is an opportunity and while
the relentless squeeze on margins is prompting some players to
question whether there is a future for them in the wholesale
arena, others view the impending round of consolidation as an
Daniel Kurgan chief executive of BICS, explains the dilemma:
"Unless you have scale in the wholesale market, you
can’t cushion yourself against the squeeze in
margins and you can’t make money. But unless you
have money to invest in the value-added services that operators
want these days, you can’t achieve scale."
Consolidation will necessarily come, he says, so that operators
can generate the sort of cash flow that is needed to finance
the development of new value-added services.
Does that mean Kurgan himself has sights on any particular
prize? "We will remain very attentive to any opportunities to
scale up the business," he says. "That includes opportunities
that might take different forms and that might not necessarily
include mergers and acquisitions."
The biggest play in terms of consolidation in recent months
was, of course, Vodafone’s £1 billion
acquisition of Cable&Wireless Worldwide (CWW) last year.
This January, a new enterprise unit focussing on wholesale as
well as M2M solutions, cloud services and global businesses
formerly became operational, offering rival wholesalers a first
glimpse at what Vodafone might plan to do with the wholesale
infrastructure that it inherited as part of the deal.
Whether Vodafone sees the wholesale arm as a big value
generator remains to be seen – few telcos see the
prospect for margin growth in wholesale as overwhelmingly
attractive at the moment. And yet, say analysts, Vodafone
clearly felt isolated in being one of the few big retail
operators to lack a meaningful wholesale business.
"This is the birth of a new giant," says Orange’s
Pébereau, "and it will surely impact the wholesale
market."Whether that’s for the good or the bad,
only time will tell.
Only time will tell whether the
advent of the smartphone will ultimately prove to be the
undoing of mobile operators, rather than their savior. But as
they dig deep into their pockets to fund the roll-out of 4G,
they must surely wonder how much more of the voice and
messaging market OTT players such as Skype and WhatsApp can
"Have we raised our game?" asks Daniel Gurrola, vice president
of group strategy and business development at Orange. "You bet.
We no longer fear the threat from the OTT community, we embrace
Gurrola, who joined Orange in 2005, has just put the finishing
touches to Orange’s five-year mobile strategy
– a process born out of the realisation that the world
was moving to a data-centric model far more rapidly than anyone
had anticipated, even as recently as a year ago.
Gurrola’s remit is to find innovative ways to
monetise data –a task that will inevitably pit him
head-to-head with the seemingly unstoppable juggernaut that is
the OTT community. A co-founder of the Wholesale Applications
Community, a non-profit making initiative aimed at promoting
open standard mobile web technologies and a former chairman of
the Chief Strategy Officers group for the GSMA, he is helping
to orchestrate a credible and sustainable counter-attack that
is starting to offer financial analysts some hope for the
future for legacy operators.
The OTT market has a very strong culture of being able to
reinvent itself – and at great speed, the Orange
strategist concedes. But it suffers greatly from a lack of
network infrastructure and that could prove to be critical in a
world where service providers are starting to make the Holy
Grail of unified communications – bringing disparate
devices and operating systems onto a single platform –
"Perhaps the greatest impact of the OTT phenomenon is that it
has made us as mobile operators wake up and appreciate the
network assets that we actually have and what we can do with
them. We may not be able to move quite as fast as OTT rivals
but we have the infrastructure and that gives us a competitive
In the cloud, for example, Gurrola is looking at opportunities
that extend way beyond storage to solutions that embrace
real-time synching and access across devices and networks. He
is also keen to leverage off Orange’s customer
care operation: "There’s never anyone to call at
an OTT player when you need help," he points out.
To meet the OTT threat head-on, he says, operators have to face
down some uncomfortable truths. The first concerns pricing: "We
must rapidly move to the point where we close down the
opportunity to arbitrage our services." That means abundant
pricing – something operators have hitherto been
reluctant to do in international voice – and
imaginative bundling. "We think the differentiator in tariffs
shouldn’t necessarily be size of data, but network
speed," he suggests.
The second concerns products: "Customers don’t
just move over to OTT because of pricing but because the
products themselves are often better."
Orange is a cornerstone supporter of the GSMA’s
Rich Communication Suite-enhanced initiative, which offers
messaging, 'rich’ calls allowing simultaneous
sending of pictures and video and file sharing. The platform,
known more commonly under the brand name 'joyn’,
will be pre-loaded into handsets, making it freely available
automatically across a plethora of networks.
Essentially, joyn, whose advertising slogan is
"It’s just there; it just works", is an OTT
platform but while most of the leading handset makers have
signed up to the venture (with the unfortunate exception of
Apple), the application has yet to launch in a significant way.
In the US, for example, joyn is currently only available on one
handset and through one network operator (MetroPCS), while in
Europe, the project is currently only live in Spain.
Orange, meanwhile, has launched its own OTT lookalike
– Libon – that enables customers who download
the app to call and text other members for free. The service
boasts the added attraction that it supports HD voice.
If imitation is the sincerest form of flattery, then the OTT
market has just won a big fan: "We’ve embraced the
OTT challenge by playing in it," Gurrola says.