Wholesale - The Wholesale Opportunity PIN

Posted: 04/2001

Wholesale

The Wholesale Opportunity PIN
By Judy Reed Smith and Taher Bouzayen

Fierce competition, exploding demand for data and Internet services, price erosion, new suites of products, and new categories of customers are constantly redefining the wholesale long- distance marketplace. Because of this ever-changing business environment, wholesale providers face the continuous challenge of understanding the needs and perceptions of their target customers and meeting those needs more effectively than their competition.

Reseller profiles and requirements can be as complex as quantum mechanics. Resellers seek specific wholesale purchase options that best match their operational structures and market focus. In order to simplify the choices wholesalers face, we have built our assessment of the value into a simple--perhaps oversimplified--equation. In order to calculate the potential value of a wholesale network, providers will want to think of their appeal to customers in clear and easy terms. Our PIN equation describes the potential opportunity size (O) in terms of the network availability and reach (N) divided by the price (P) and interval speed (I) offered.

ATLANTIC-ACM Inc. (www.atlantic-acm.com), a Boston-based telecom research firm, developed this equation from the research it has been doing since 1995 on the wholesale marketplace. Six drivers that primarily influence decisions to purchase wholesale products were identified and tracked: billing, provisioning, network, customer service, products and pricing. The relative importance of these factors changes from one year to the next. However, over the last three years, resellers' priorities focused on a combination of price, provisioning speed and network reach/availability. Taken together, these mandates represent a simple equation for wholesalers.

On the following pages, we will review our latest annual wholesale research, in which resellers rated their wholesale carriers on each of the six purchase drivers using a "0 to 10" scale. This approach resulted in a better understanding of the marketplace dynamic between wholesalers and resellers of service within the telecom marketplace.

Overall Scores

The aggregate industry score in 2001 improved as a result of competitive pressures. The products and pricing categories showed the biggest rating increase over last year's wholesale research. Resellers unanimously gave high marks to data products purchased from wholesalers, reflecting a relative satisfaction with the capabilities and features integrated into these offerings.

Miscellaneous providers, serving fewer customers but delivering outstanding wholesale service on niche routes, maintained their traditional overall lead in ratings. The "Big Three" received the highest marks from resellers on overall services. Emerging carriers, such as Qwest Communications International Inc. (www.qwest.com) and Global Crossing Ltd. (www.globalcrossing.com), followed next in rating approval. The research indicated that a narrowing competitive gap between traditional wholesale carriers and new providers prompted AT&T Corp. (www.att.com), WorldCom Inc. (www.wcom.com), and Sprint Corp. (www.sprint.com) to focus aggressively on preserving their wholesale market dominance.

For the first time in our six years of research on the wholesale marketplace, resellers gave AT&T the top overall ranking in the industry. Sprint and WorldCom clustered just behind. AT&T also received top ranking in the network and products categories. Sprint received its best scores in the provisioning, network and customer service categories. Resellers gave WorldCom high scores in the all-important provisioning and customer service.

Billing

The billing industry score has improved since last year due to several efforts by carriers to meet their customers' expectations. Williams Communications (www.williamscommunications.com), Qwest and Cable & Wireless Communications plc (www.cableand wireless.com) led this category, specifically differentiating themselves in the billing-timeliness and billing-dispute handling subcategories. However, billing-flexibility was an area that received low scores from almost all respondents, reflecting a clear sign of dissatisfaction. This fact may suggest that billing-flexibility constitutes a competitive opening for wholesale providers to differentiate themselves from their peers.

Provisioning/Interval Speed

Provisioning closely follows price in driving resellers' choice of provider. Provisioning, as defined in the study, includes four areas: intervals/speed, customer interface systems, SLAs, and automated support systems. None of these areas improved in satisfaction overall since last year, with intervals/speed of provisioning and automated support systems both with overall lower ratings than last year.

As margins shrink, provisioning comprises an increasingly critical consideration in a reseller's business model and strategy. Faster provisioning intervals, of course, positively correlate with faster time to market. In other words, resellers with faster wholesale provisioning will have a better chance to seize new revenues and share than resellers with slower provisioning.

The 2001 provisioning scores decreased from last year, translating a clear industry-wide frustration with provisioning- intervals/speed and provisioning-automated support systems. Sprint and WorldCom led the provisioning category. They also led the provisioning-intervals/speed and provisioning-automated support systems subcategories. Qwest's monumental efforts to improve its provisioning systems yielded a third-place ranking in that category. Switchless resellers identified Qwest as the top provider in provisioning. However, facilities-based carriers perceived Sprint and WorldCom as the leading providers with respect to provisioning consistent with these two carriers' strategic objectives.

Network Availability and Reach

The network category has increased in importance as a purchase decision driver since last year. In 2001, network scores positively correlated with provisioning scores. The 2001 network score slightly decreased due to an overall unhappiness with network availability. Even the most successful carriers fell in this last subcategory. They paid the price of their own success by selling more capacity than they could deliver.

Resellers scored carriers on three subcategories for network: reliability and quality, disaster recovery and availability. The "Big Three" led this category with their well-established ubiquitous networks. For the fourth survey in a row, AT&T scored the best in network. Those with low availability of network were punished in network scores as well. Because of this carry-over, Qwest, Global Crossing and Broadwing Inc.'s (www.broadwing.com) low scores in provisioning meant they also finished behind in the network category. In other words, resellers do not strongly value a high-quality network without sufficiently available bandwidth capacity or the ability to quickly deliver new customer service. Since Williams was just completing construction of its state-of-the-art network during the survey, resellers were not yet able to rate the true value of that company's wholesale services.

As more resellers launch operations in less-served cities, their carriers must serve them off net. Thus, an increasing amount of traffic moves off the network of their primary wholesale carrier. Therefore, network monitoring and quality assurance become more difficult to provide, even for a single provider customer.

Customer Service

Resellers rated their wholesale carriers on five areas for customer service: professionalism, information/technical expertise, responsiveness, proactive/consultative selling and marketing support. Overall, the scores for customer service improved from 2000 to 2001. Generally, resellers found their wholesalers' customer service more professional, responsive and proactive as compared to a year ago. The "Big Three" excelled in this category, leaving the rest of the pool lagging far behind. Emerging carriers, such as Williams, Qwest and Global Crossing, dramatically have improved their 2000 customer services score.

The overall reseller sector gave low ratings to wholesalers' marketing support. Marketing support is described as the wholesalers' help for promoting and selling products to end users. Therefore, marketing support is another area where wholesalers can differentiate themselves from their peers' services. However, since most wholesale carriers have retail operations that directly compete with their customer resellers, it is often a strategic choice not to invest in marketing support.

Products

Wholesale products in the 2001 research covering the past 12 months dramatically improved by more than 15 percent. Enhancements of existing products, offering of a fully featured suite of products and custom-designed solutions contributed to this rating improvement. Higher scores in data products generated most of this improvement. For instance, the 2000 score for IP, ATM and frame relay (FR) rose by an average of 18 to 20 percent. AT&T led the pack in the products' category, followed by WorldCom and Sprint. Qwest received the best score in products among emergingcarriers.

Providing resellers with the range of services they need to satisfy their customer's impressive growing demand for Internet, data, wireless, IP and DSL offers a promising area for wholesale carriers to achieve market advantage, and hence, to gain market share.

Pricing

Resellers are extremely price sensitive. For the fourth consecutive year, they indicated that price was the most important purchase decision driver. Resellers reflected signs of satisfaction with dramatic price erosion during 2000 resulting from fierce competition in the marketplace. According to the ATLANTIC-ACM research, the 2001 pricing ratings showed satisfaction was 12 percent higher than in 1999-2000. This resulted primarily from a reduction in data product prices by 45 percent to 75 percent in the last 12 to 18 months.

Conclusions

As competition intensifies and new entrants carve fresh niches, the PIN equation becomes increasingly important. During 2001-2002, the provisioning and network factors will experience dynamic changes. For instance, Global Crossing and Williams will complete their networks and offer the ability to handle huge volumes of traffic over an extensive geographic area. A wide range of new wholesale providers funded in the past few years or evolving from the gas and electric utilities will be putting wholesale traffic on their new lines, as well as buying wholesale traffic to fill out their networks.

However, with bottlenecks moving from the long-haul to metro networks, an additional provisioning challenge complicates the issue. The extent of network reach and a bility to provision increasingly includes connections into the local market. We expect to see long-haul wholesale providers address this matter by building metro fiber, as Global Crossing and Level 3 Communications Inc. (www.level3.com) have been, or acquiring metro fiber builds such as Sphera Optical Networks N.A. Inc. (www.sphera networks.com), Telseon (www.telseon.com) or CityNet Telecommunications Inc. (www.citynettelecom.com). The metro fiber networks add a new competitive weapon for the year ahead.

The parameters are dynamic, but the equation is simple. The power to build wholesale opportunity remains with the flexible and fleet who keep the prices low, the intervals brief, and the network reach and availability high.

Judy Reed Smith is CEO and Taher Bouzayen is an analyst for ATLANTIC-ACM Inc. (www.atlantic-acm.com), a Boston-based strategy consulting firm. They can be reached at +1 617 720 3700 or atlantic@atlantic-acm.com.