Charting future wholesale trends
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 telecoms?
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 explain.
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) gadgets.
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 players.
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 Europe (-3.4%).
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 period.
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 market.
“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.
The 198mph smartphone
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 service.
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 discounter.
“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.
Fighting the fraudsters
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 office.
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 opportunity.
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.
The OTT threat: If you can’t beat them, joyn them
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 possibly cannibalise.
“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 it.”
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 – a reality.
“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 edge.”
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.