Wholesale Report Card

Posted: 05/1998

Wholesale Report Card
Resellers Give Underlying Carriers a C+

By William West and Judy Reed Smith

It's no secret that Wall Street loves network providers. This article was written on the heels of wholesaler Qwest Communications International Inc.'s bid for the much larger retailer LCI International Inc.--a bid that was wholly funded by the smaller company's significantly larger market cap of $7 billion. At a time when MCI Telecommunications Corp. is being pulled under the WorldCom Inc. umbrella, no one is unconquerable, regardless of size. Wholesale providers of long distance services (both domestic and international) are fighting for more than minutes; they are fighting to remain on top of the acquisition heap.

Most certainly, Wall Street's love affair with network providers gives wholesalers a distinct financial advantage over retail players in the near-term. However, their networks are built for one purpose: to pass telecom traffic. This simple purpose is complex to implement efficiently and reliably, resulting in far-reaching profitability implications for wholesalers and retailers alike. While one would expect to see intensified competition equate to across-the-board improvements in performance among wholesalers, the 1998 edition of ATLANTIC*ACM's Wholesale Long Distance Carrier Report Card, first published in 1996, finds that not to be the case.

Overall Performance

Based on performance rankings provided by their resale customers, smaller wholesale long distance telecommunications service providers score better overall, particularly among switchless resellers responding to ATLANTIC*ACM's survey. This finding indicates the increasing importance of wholesale services in the overall product mix of these smaller providers which, under the pressure of slimming margins, will allow others to ride their contracts at or near cost to leverage better buying rates from wholesale carriers themselves. This makes the indirect value of the wholesale minute greater than its direct value as it affects the overall profitability of the resellers' retail customers.

Although leading wholesalers have not improved in every category--provisioning, network, service, products and pricing--ranked in the ATLANTIC*ACM study, they are showing improvements overall. Generally, wholesale customers ranked underlying carriers almost exactly the same as they did in 1996--the equivalent of a C+. As price differences among competitors diminish over time due to falling rates, wholesalers are expected to focus on other categories to find their competitive edge.

Among reseller types--switchless and facilities-based--that responded to the ATLANTIC*ACM survey, individual wholesale carrier scores varied. Sprint Communica-tions Co. and LCI International, along with a group of smaller players classified as "other," received some of the top scores given by switchless resellers. Facilities-based carriers reselling long distance gave their best rankings to Qwest Communications.

Category Rankings

Billing. Generally wholesale carriers performed similarly in 1998 as in 1996, receiving scores slightly above average for both years. As in 1996, larger carriers were ranked below the mean score, earning criticism primarily for their systems' inflexibility.

Provisioning. Wholesale carriers were ranked slightly worse in 1998 than in 1996 for performance in provisioning. Again in 1998, smaller underlying carriers generally outranked the large ones with the exception of Sprint, which scored above the mean--an improvement of nearly a full point (on a scale of one to 10) over their 1996 rankings. Other improvements were noted for LCI International and Qwest, which led the pack in this category.

Network. Overall scores for network quality and reliability were down slightly from the 1996 survey. The Big Four carriers held onto the top spots followed by Qwest, which received an improved ranking from seventh to fourth. Additionally, Frontier Corp. ranked significantly better, up more than a point to capture the fifth spot. Significantly, MCI nudged out AT&T Corp. for the top ranking among switchless resellers. WorldCom, Frontier and LCI International performed better among facilities-based carriers than among switchless resellers.

Service. As in 1996, service scores, on average, were the lowest among all the categories ranked, suggesting this is still an area where carriers can improve. Qwest scored significantly higher than the other carriers, and improved its score almost two full points over its 1996 score. "Other" providers received the highest scores among switchless resellers, indicating that small wholesalers have found a niche in providing strong service.

Products. Wholesale providers received highest marks in the products category. AT&T earned the highest product scores overall, moving up from eighth in 1996 to first in 1998. The Big Four performed the best among both reseller types that responded to the ATLANTIC*ACM survey. Generally, switchless resellers gave carriers higher scores--7.5 on a 10-point scale--for products than facilities-based carriers, which only allotted 6.8 on the same scale.

Pricing. Rankings for pricing among wholesale providers stayed relatively constant from 1996 to 1998. The Big Four, not surprisingly, scored the worst once again. Bumping Frontier, Qwest became the front-runner in the pricing category for all respondents, up from fifth in 1996. Frontier maintained a high score among switchless resellers, which gave the carrier the No. 2 spot behind the group of various small providers. Scoring by facilities-based carriers followed the trend of high price with large size with the exception of WorldCom, which they ranked third best in price.

Conclusion

ATLANTIC*ACM's survey results reveal that resellers are using more underlying carriers than in 1996, suggesting that opportunities remain for wholesale providers that can supply a competitive product. Declining prices, in particular, are forcing wholesalers to employ new means of differentiation. One response appears to be diversified product offerings, such as wholesalers' advancing international service integration. In addition, low scores in service provision indicate that this area presents an opportunity for a service-oriented wholesaler to gain an edge. In the future, those wholesale providers that demonstrate a service-oriented strategy will be most likely to improve their standing in the industry and improve customer retention.

William West is principal and Judy Reed Smith is chief executive officer of ATLANTIC*ACM, a Boston-based strategy consulting firm. Information for this article was taken from ATLANTIC*ACM's Wholesale Carrier Report Card published in May 1998. For more information, call (617) 720-3700, fax (617) 720-1077, e-mail atlantic@atlantic-acm.com,  or web: www.atlantic-acm.com