01 November 2009 |
International voice, it seems, is becoming a business for the global few. Tim Phillips looks at the latest chapter in a tale of scale and reach
“Volcanoes didn't erupt, nor did the seas boil, but it’s a Biblical event for the global telecoms industry when a major operator announces that it’s pulling out of international voice. That just happened,” wrote Yankee Group vice president Camille Mendler in her blog in June, as BT announced that it was to outsource its international voice business to Tata Communications.
Mendler’s rationale: as carriers break with tradition, they are prepared to think what, only a few years ago, would have been the unthinkable. Today, international voice is a business which BT could continue to make a small profit from, but which would tie up large amounts of cash. Better to concentrate on its priorities.
“Now BT has taken this decision, it is far more likely to prompt further action,” says Mendler. “Carriers looking for the rationale to do this will push that decision further along. They will be thinking that the good news is they can still get money out of the business, but it’s off their balance sheet.”
At BT, Andrew Dodsworth, head of international voice products for BT GTM, admits that “it feels like this has been a long time coming”. The five-year arrangement, under which Tata will handle six billion minutes of traffic a year (an immediate 25% boost in the amount of voice traffic its networks handle) covers all BT’s international voice except for a few core markets in Europe. Though neither party is discussing the value of the deal, Tata’s existing revenues for 24 billion minutes of traffic are $1.2 billion. So that would represent $300 million of revenue.
The bottom line
But can this be profitable revenue? “We have been constantly reviewing the revenue position in this business,” says Dodsworth. “It is not the case that we can’t make money out of the business. It is increasingly difficult though to make the bottom line returns from our capital in what’s a low margin business. We are not talking about a double-digit EBITDA for this side of the business. It’s a mixture of scale and reach. Tata successfully managed and merged the systems together from its acquisitions, and it has a very strong back office. In the voice market Tata has been one of the predominant wholesalers. This sort of business is what they do.”
While voice wholesale is nothing new, what pleases Mendler about this deal, and the other large voice outsourcing deals such as KPN, TDC and Swisscom that have preceded it, is the willingness of large carriers to create innovative ways to structure the deal, whether that means taking a stake in the outsourcing partner, or a sale-and-leaseback arrangement. An example is the deal between MTN and Belgacom International Carrier Services (BICS), under which MTN hands over the assets of its international carrier services operation to BICS, and MTN gets a 20% stake in BICS as a result. When the deal is completed the combined entity becomes the largest wholesale operator in Africa.
The reason for such innovative structures to share risk is that while the businesses are not hugely profitable, nor are they likely to grow rapidly, they are core services for a major carrier. “BT is one of the largest carriers of international calls on the globe, so there are not many people who could take BT’s volumes on even if they wanted to. There would be three, or a maximum of four other carriers we could have done this deal with,” Dodsworth says. “We have been talking about how the industry might consolidate for a number of years. This business will be about scale, and I would be surprised if there were not more deals of this type.”
The deal also markets the emergence of Tata Communications as a major player. Almost overnight it emerged as one of the three or four players that BT’s peers would consider, alongside Ibasis, BICS and Deutsche Telekom ICSS. While other smaller players may do local deals, by common consent the international voice business will continue to consolidate.
Michel Guyot, the president of global voice solutions at Tata Communications, wants to drive that consolidation. “You will only see a few global carriers take on this business,” he says. “To make money in this business you need scale and you need scope. You need to invest in the business, and we believe that BT has a lot of other areas in which it needs to invest today. We have growth in the wholesale business of 13% to 15%, and when we have scale we are able to negotiate better termination costs.”
One can see why many carriers are reassessing whether voice, and wholesale voice, needs to be a priority. Guyot does not pretend that voice is one of the most dynamic parts of the Tata business. “Our voice business is less than 50% of the company’s top line. The nature of the voice business is also different to other businesses: you can’t expect to grow it 25% a year, but it doesn’t require a lot of investment compared to other projects. We maximise the cash contribution, but the percentage of Tata business that comes from voice will decline only because we expect other parts of the business to grow more quickly.”
And yet he is talking about generating more business from Tier 1 customers in the future (“We have some in the funnel. This is a global phenomenon”) to achieve those economies of scale. Mendler foresees a future where wholesale aggregates to three or four de facto “carrier alliances” – because the carrier involved is managing multiple businesses for its voice carrier customers.
Guyot took 12 months to negotiate the BT deal, and it will take a further 18 months to implement. To work this hard, carriers need a strong incentive to outsource, and competition which depresses margins to single figures, as in BT’s case, is the spur. “In highly competitive markets this is more a reality than in markets which have been very regulated. When you’re a monopoly, you’re less interested in outsourcing something like this,” Guyot adds.
So where are the comparable businesses that are saying “If BT can do it, why can’t we?”. Chris Ward, the senior director of marketing at Ibasis, thinks that even the major carriers in the US would now consider something similar. “I don’t think there’s any cultural bias against us. The largest American carriers are now looking at the opportunity in the same way as smaller carriers. Sometimes it can be easier to talk to them: the larger you are, the more methodical you tend to be.”
He agrees that margins are tight, but also that the current financial conditions in which many carriers are capex-constrained has focussed thinking on where they want to invest in the future. “Because the business model for international voice is now so different from the business model of the rest of the business. It is a commodity, it is a business requirement for many carriers, it requires massive scale to make it work, and it requires a low-cost infrastructure and sophisticated and scalable systems to do it efficiently,” he says. “This has become more of a requirement in the last few years.”
A good reputation
But if the impetus is the desire to conserve cash and target it at faster-growing investments, the problem may be a willingness to trust a large reputational driver to an outside organisation. Reputation, Ward agrees, is vital for a company like Ibasis. “We have now successfully integrated two large outsourcing deals, two different types of deals. KPN was very different in character to TDC, but we gain credibility because we successfully integrated both of them. KPN took 18 months, and we were doing TDC’s integration at the same time, which took less than 18 months. They have transformed our scope and scale.”
In that case it is unfortunate for Ibasis that KPN’s buy-out bid for the company has created high-profile corporate infighting. With the future ownership of the company undecided, has this provided a problem when negotiating the large deals which Ibasis wants to conclude? “On the operational level, it has not been a distraction,” Ward says, though he admits, “In terms of communication, it has naturally been a distraction.”
Change and conflict are inevitable parts of the carrier business, but they are least attractive in a voice outsourcing partner. For Belgacom, Tata and Ibasis, there could hardly be a better moment. If the current momentum continues, then international voice may become a business which is handled predominantly by three or four aggregators. But to do this, other major carriers need the confidence to follow BT’s lead.
On the other hand, five years ago one carrier was announcing that its wholesale international voice business was growing by 30%, and that its target was to continue growing until it was in the top two international wholesalers of voice. No one knows better than BT that this is a cyclical business.
Carriers who don’t want to outsource the entire management of their TDM networks can still benefit from the savings offered by outsourcing interconnect, says Michael Boehlert, director technology and consulting at Ancotel, which has just celebrated its 10th birthday.
Ancotel’s Kleyer 90 Telehouse in Frankfurt (plus similar facilities in London, Hong Kong and New York) is now home to co-location facilities for more than 300 carriers, but as co-location growth slows, says Boehlert, Ancotel can still grow its business because it offers the ability to manage interconnect as a service. “The long-term trend is not away from co-location but towards intelligent co-location, flexible services. If you’re just a co-location provider and you don’t have any alternative services, you might be in trouble,” he says.
Ancotel’s “Meetme Rooms” concept allows TDM interconnects or for TDM networks to connect to VoIP, but the process is handled automatically by Ancotel’s systems. “Normally establishing an interconnect can take weeks or months, we can do that in a few days, or even a few hours. Typically a carrier needs bilateral agreements and that’s a huge overhead. Now they can come to us instead. We have a flat-rate model for charging them. They just place an order on our internal system. We charge per port, and set up with a monthly recurring charge.”
In current economic conditions, Boehlert adds, one of the most important drivers for this type of behaviour is the ability to reduce the employee base for a people-heavy and time-consuming activity. But he adds that outsourcing simplifies the management of this part of the business, which drives efficiency and profitability.
“Even in a financial crisis there is a stable, maybe increasing demand for interconnection. Carriers have a TDM structure that they don’t want to work hard to optimise any more. They don’t want to keep inventing the same thing and this has a low cost.”