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Ovum wholesale cloud

  1. 1. Wholesale telecoms: fit forgrowth?31 August 2010Paris Burstyn www.ovum.com
  2. 2. Table of Contents................................................................................................................1Wholesale telecoms: fit for growth?....................................................................................2 Executive summary ..........................................................................................................2 Wholesale market segment analysis................................................................................3 Appendix...........................................................................................................................8 © Ovum 2010. Unauthorised reproduction prohibited. 1 of 8
  3. 3. WHOLESALE TELECOMS: FIT FOR GROWTH? 1Wholesale telecoms: fit for growth?Executive summaryIn a nutshellMany new Web 2.0 enterprises, cloud service providers, and contentowners purchase capacity in quantities comparable to that of smallcarriers. How telecoms service providers classify sales to these newintermediaries – whether as retail or wholesale – doesn’t always reflectthe true nature of the provider-customer relationship; wholesale revenuesmay end up in the retail bucket and mask healthy demand for wholesaleservices.Ovum viewPresident John F Kennedy said “a rising tide lifts all the boats.” This adage aptlydescribes the current health of the wholesale telecoms services market. Virtuallyall the key customer segments are growing, and as they do they buy morewholesale services. The expanding definition of an intermediary also increasessales opportunities for wholesale carriers that serve them (see our report “Newintermediaries re-define wholesale telecoms”).We believe the wholesale telecoms market is at the beginning of a healthy growthphase. Building on their traditional carrier customers, wholesale providers can takeadvantage of increasing consumer and business demand for cloud-based services.A growing number of intermediaries that reside in the cloud represent a class ofenterprises that purchase telecoms services on the scale of small-to-mediumcarriers. They may not fit the classic definition of a wholesale customer becausethey don’t resell the capacity, but they do bundle the telecoms service into theproduct or service they provide to their customers.Businesses and consumers that increasingly rely on network-resident resources forapplications and entertainment will catalyze growth in the backbone and in thewireline and wireless access networks. Wholesale telecoms service providers cantake advantage of this growth too.Additionally, we see mobile service providers providing a continued demand forbackhaul and virtual services. Wholesale service providers that can leveragewireline and wireless network resources can provide white-label, managed MVNObundles that include everything from handsets to cell sites and network transport.No matter how telecoms carriers classify their wholesale revenues, we believe thatline of business will enjoy healthy growth for as long as consumers and businessescontinue to rely on mobile devices and cloud-based services. © Ovum 2010. Unauthorised reproduction prohibited. © Ovum 2010. Unauthorized reproduction prohibited. 2 of 8
  4. 4. WHOLESALE TELECOMS: FIT FOR GROWTH? 2Recommendations for playersWe believe wholesale telecoms service providers must take advantage of growth intheir traditional and nascent intermediaries’ businesses. How they classify therevenues – as retail or wholesale – is less important than putting in place theappropriate human and technology resources to capture the new business.Key messages• Wholesale segments are growing. As intermediaries experience increasing demand for their products and services, wholesale telecoms suppliers have an opportunity to grow with them.• New intermediaries are emerging. As businesses and consumers demand a wider range of virtual and mobile services, enterprises will emerge to fulfill their requirements. Wholesale telecoms suppliers must marshal the appropriate resources to address this nascent demand. As these enterprise intermediaries grow, their need for wholesale telecoms will grow too.• Demand from traditional and emerging intermediaries is increasing. Wholesale telecoms revenues will experience growth over the next few years as consumers and businesses rely heavily on mobile and cloud services.Wholesale market segment analysisOverall health of the marketQuantitatively measuring the health of wholesale revenues requires a mixture ofscience and art for a variety of reasons. During 2008 and 2009, we observed theworld’s carriers reporting relatively stable wholesale revenues. However, carriersaccount for their wholesale revenues in different categories depending on tradition,strategy, and desired market positioning. The lack of uniform reporting demandsthat we temper the science behind our market assessments with some art.Although reported wholesale revenues fluctuated in the range of +/- 2%, webelieve the overall trend was positive because a considerable fraction of enterpriseand other retail revenue could be counted as wholesale, based on the waycustomers actually use the purchased telecoms services.Major market developmentsDuring the last few years, the market for wholesale telecoms services has evolvedfrom its origins in carriers buying and selling complementary network assetstowards a future marked by an expanding set of intermediaries that bundlecapacity and resell it as part of a value-added solution.Traditionally, most wholesale carriers have focused on infrastructure and wholesalevoice, but recently a number have expanded into delivering outsourced andmanaged solutions. These include global support of extended reach solutions for © Ovum 2010. Unauthorised reproduction prohibited. © Ovum 2010. Unauthorized reproduction prohibited. 3 of 8
  5. 5. WHOLESALE TELECOMS: FIT FOR GROWTH? 3regional providers and expansive network links to Web 2.0 enterprises that existpurely in the Internet’s virtual (or cloud) environment.Prevailing definitions, including ours, segment wholesale intermediaries into:• infrastructure-based carriers• mobile operators, including MVNOs and mobile virtual network enablers (MVNEs)• xSPs (ISPs, ASPs, etc.)• content and applications providers• non-telco intermediaries (includes systems integrators, resellers, brands).Reading from top to bottom, these intermediaries require increasingly complexservice bundles that extend from capacity to turnkey solutions. With increasingfrequency, wholesale intermediaries cannot meet their customers’ needs with theirown infrastructure. Their demand, therefore, creates an imperative to broaden theelements contained in wholesale solutions.Growth for these intermediaries comes from the ultimate end-user demand. Forthe wholesale provider, its extended solutions represent a growth opportunitycatalyzed by changes in the way people use the Internet and the new wave ofaccess devices and applications.Successful wholesale tactics include partnerships and close relationshipsOur research and observations indicate that wholesale opportunities are no longerlimited to customers that rebrand or resell carriers’ capacity. An increasing numberof wholesalers work with their intermediaries to enable a range of new servicesthat their customers either use for personal or professional tasks, or add additionallayers of value before selling to the ultimate end users.The complexity surrounding this value chain is far greater and carries much greaterprofit potential than the basic intermediation that takes place between voicenetworks. The new model requires more support, skills, efficiency, and knowledgeof customers’ needs because wholesalers must tailor or bundle services to addressthese particular needs.Creating partnerships or in-depth relationships with intermediaries assureswholesalers of their position as a trusted source that can anticipate and customizewholesale packages in a timely manner.Establishing business intimacyThrough these tighter relationships, wholesale carriers extend the manner in whichthey allow customers to manage the facilities they buy. Some carriers givecustomer engineers (both wholesale and enterprise) access to their NOCs so theycan manage their purchases. Other wholesalers may allow them to use customer-centric remote network management tools. © Ovum 2010. Unauthorised reproduction prohibited. © Ovum 2010. Unauthorized reproduction prohibited. 4 of 8
  6. 6. WHOLESALE TELECOMS: FIT FOR GROWTH? 4From a sales management perspective, creating relationships with intermediariesenables wholesalers to “hear” and understand the voice of the end user. However,creating this depth of partnership requires a greater degree of “intimacy” (as onewholesaler put it) between customer and supplier than do such relationships in theenterprise space. Intimacy comes into play as the intermediary must learn to trustthe wholesaler with information about its own customers’ requirements.Some wholesale service providers involve their customers in product development.They need to know what the intermediary plans to sell so they can design productsthat customers want to buy.Customer and supplier – one and the sameMany wholesale providers also purchase wholesale services from other carriers. Inthese cases, building customer intimacy becomes a two-way street as customerand supplier support each other in “competition”-style working relationships. Theserelationships require mutual understanding or they could degrade into reciprocaltrade agreements, which represent limited possibilities for growth in the 21stcentury.Opportunities to exploitLarge-scale users and corporate customers that need unbundled and unmanagedservices represent increasingly important targets for wholesale telecoms ventures.Companies with sophisticated IT staff (e.g. those in telecoms-related fields, largelaw firms, manufacturers, and financial companies) can manage their ownnetwork; they just buy pure capacity and negotiate volume pricing based on thebandwidth they buy. This customer type uses its own personnel to avoid paying formanaged services and better control costs. They might also opt to work with thewholesalers’ NOC engineers who provision and support all the larger customers.Content, software-as-a-service (SaaS), applications services, search, socialnetworking, and online retailing represent a significant wholesale opportunity.However, some wholesalers say these intermediaries fall into a gray area betweenwholesale and retail since they do not sell communications services.Some wholesale carriers put these firms in the enterprise segment even thoughthey behave more like carriers. Revenues fall into retail or enterprise sales becausesome of these intermediaries started as enterprise customers, but they are oftensupported by the wholesale team. Carriers often find themselves unable toreassign these customers because the enterprise side of the business cannot affordto lose the revenues.Emergent applications and content stores represent a nascent customer set forwholesale services. As they grow, these companies will consume services in asimilar manner to today’s Web 2.0-style customers. © Ovum 2010. Unauthorised reproduction prohibited. © Ovum 2010. Unauthorized reproduction prohibited. 5 of 8
  7. 7. WHOLESALE TELECOMS: FIT FOR GROWTH? 5Growth coming from growth in others’ nichesIn the gray area between wholesale and retail falls a wide range of intermediariesthat consume vast amounts of capacity. Because these intermediaries generaterevenues from advertising and transactions rather than from the resale of networkservices, many wholesalers count them as enterprise customers. That classificationsubtracts sales to these intermediaries from the wholesale column and adds themto the enterprise column.As these intermediaries grow through expanded services and extended reach, theywill drive wholesale carriers’ revenues even if they are accounted for in a differentline of business.Managed services developmentA growing number of intermediaries demand packages of wholesale services thatinclude hosting, storage, security, telepresence, and other capabilities that theycan’t afford to build on their own. Wholesale telecoms players will invest significantsums to deploy these platforms because both they and their retail counterparts canleverage them.With these facilities in their networks, wholesalers can offer them on a white-labelbasis. In these cases, the intermediary is essentially a channel for the wholesaler’snetwork, but the intermediary’s customers see them as the supplier.Turnkey solutions that do not competeOne US-based wholesale carrier sells copper-based broadband access and long-distance transport as a turnkey package to other US carriers that want to expandinto regions where they have no infrastructure.These packages allow its customers to promote their own brands without actuallycompeting with the wholesaler. Because these solutions are copper-based, thiscarrier says its customers can’t match the speed and performance of its fiber-based products in the same geographies.Other wholesalers are offering similar “enabling” bundles in other parts of themarket.Leveraging buying power to grow wholesaleLarger carriers that wield significant buying power on their own can leverage thatpower to help their wholesale customers. By layering value-added services ontotheir support infrastructure, including equipment and other products boughtthrough their suppliers, these carriers’ wholesale solutions become increasinglysophisticated and attractive to their customers. They can also drive higher returnson network infrastructure investments and improved margins; these wholesaleproducts are not commodities like bandwidth. © Ovum 2010. Unauthorised reproduction prohibited. © Ovum 2010. Unauthorized reproduction prohibited. 6 of 8
  8. 8. WHOLESALE TELECOMS: FIT FOR GROWTH? 6Carriers making investments in new service platforms can take advantage of thetotal solution opportunity. With the ability to provide network-based applications(e.g. unified communications, managed security, telepresence) they can approachpotential wholesale customers that want to offer services regionally and globally.In non-competitive situations, wholesale providers might allow their customers towhite-label any or all these services.Investments support managed servicesHaving leveraged their bandwidth business to address new customers’ needs,wholesale telecoms suppliers must manage the diverse and complex technologiesthat their customers expect. Wholesale carriers must manage this complexity onan internal, organizational basis that includes customizing channels and productsto optimize the buyer/seller relationship.Numerous carriers rely on key customer relationships to contribute to or totallyjustify the costs of the network, which allows infrastructure expansion. In mostcases these are enterprise customers, not wholesale customers. Carriers tend notto build out just for wholesale, but justify expansion based on the existence of abusiness customer in the market. In these cases, network enterprise demanddrives network expansion, but then wholesale revenues deliver profit since theyride essentially free while helping to cover the risk. Moving beyond commodityservices will increase revenues and customer loyalty.Market threats to guard againstThe main threat to wholesale revenues is missing the opportunity to takeadvantage of newly emerging intermediaries. Wholesale carriers that limitthemselves to traditional peering or carrier sales will miss the potential to increaserevenues and capture customers their retail arms cannot reach.Wholesale opportunitiesOpportunities for challengersInternecine competition in this market represents the greatest opportunity.Wholesale carriers developing advanced services and capabilities meeting theneeds of Web 2.0-style intermediaries will enjoy competitive advantages overthose that do not move in this direction. Presented with these value-addedresources, customers can use them as differentiators to pick one wholesaleprovider over another.Opportunities for incumbentsWholesale carriers must maintain customer-facing go-to-market strategies and thetactics to match. They will need to move quickly to bring new capabilities to theircustomers, enabling them to address the changing demands from their users.Wholesalers have to think outside the traditional box of wholesale services so they © Ovum 2010. Unauthorised reproduction prohibited. © Ovum 2010. Unauthorized reproduction prohibited. 7 of 8
  9. 9. WHOLESALE TELECOMS: FIT FOR GROWTH? 7can bring new ideas and capabilities to their customers. That will be an importantway to maintain their customer base while growing revenues and profit.AppendixResearch methodologyThis report was produced based on interviews with 17 global wholesale carriersconducted for our research into the evolving segmentation of wholesale customers.Ovum continuously carries out primary and secondary research into the wholesaletelecoms market. That process includes regular briefings with a wide range oftelecoms service providers, wholesale competitors, suppliers, and customers, aswell as reviews of publicly available primary and secondary sources.Ovum does not endorse companies or their products. Ovum operates under an IndependenceCharter. For full details please see www.ovum.com/about/charter.asp.For full details of Ovums citation policy, see www.ovum.com/media/citation.asp.Whilst every care is taken to ensure the accuracy of the information contained in thismaterial, the facts, estimates and opinions stated are based on information and sourceswhich, while we believe them to be reliable, are not guaranteed. In particular, it should notbe relied upon as the sole source of reference in relation to the subject matter. No liabilitycan be accepted by Ovum Europe Limited, its directors or employees for any loss occasionedto any person or entity acting or failing to act as a result of anything contained in or omittedfrom the content of this material, or our conclusions as stated. The findings are Ovumscurrent opinions; they are subject to change without notice. Ovum has no obligation toupdate or amend the research or to let anyone know if our opinions change materially. © Ovum 2010. Unauthorised reproduction prohibited. © Ovum 2010. Unauthorized reproduction prohibited. 8 of 8