Large incumbent carriers face attacks from next generation voice service providers

Despite lingering predictions of its impending demise, voice service has remained the leading revenue generator for telecom networks. In the wake of the failed generation of competitive local exchange carriers (CLECs), a new generation of “guerilla” service providers is emerging, characterized by companies such as Vonage, threatening to capture substantial voice service revenues, without incurring many of the costs associated with building or leasing local access facilities.

Facilities-based high-speed internet access companies can no longer wait until voice over IP is perfect before launching their own IP-based services. Voice over Internet Protocol (VOIP) has already come to “prime time,” thanks to widespread availability of high-speed internet, coupled with tolerance of minor quality flaws in calls, helped by people being accustomed to imperfections in mobile calling.

Continuing to delay product launches until “carrier quality” VOIP can be achieved, could leave the gorillas of the telecom world, the incumbent phone and cable companies, in the position of providing raw utility capacity to the guerilla VOIP carriers, leaving the gorillas to incur the costs of carrying voice, without receiving any of the associated retail revenues.

Introduction

Guerilla: diminutive of the Spanish word guerra, war, and means petty war, that is, war carried on by detached parties; generally in the mountains; one who carries on, or assists in carrying on, irregular warfare; especially, a member of an independent band engaged in predatory excursions in war time; a member of an irregular armed force that fights a stronger force by sabotage and harassment.

In this paper, we use the term “Guerilla Carriers” to refer to the new generation of telephone companies that exploit existing high speed internet connectivity to provide voice service to customers. The term is fitting. The guerilla carriers are offering an irregular service, using unconventional technology to fight the stronger force of the incumbent carriers. The first generation of competitive local carriers attempted to battle the much larger and better funded gorillas by fighting with the same weapons: standard telephone equipment, the same services, the same quality, but lower prices. These first generation competitors have largely disappeared. Funding dried up as the new companies spread themselves too thinly against a larger, well entrenched opponent.

Changing customer expectations

Conventional telephone companies have focused on competition in “carrier-quality” services. New entrants committed to build networks just as good as that provided by the incumbent gorillas.

Guerilla carriers have learned that many customers are willing to accept “good enough” quality, when providing value in the form of cost benefits, additional services or other types of value. Sometimes, “good enough” is just that – all things considered. Customers’ perception of telecom quality has changed, such that traditional indicators (audio characteristics, central office power, network availability) may not be as important to users today. New features (such as phone numbers from multiple locations or distant location emulation, flat rate long distance pricing, unified messaging with voice-to-email conversion, web feature activation, etc.) provide compelling reasons to switch.

When voice service is dependent on available commercial electric power, the telephone may not work when the lights go out. In an era of near ubiquitous mobile service, people often have a second carrier available. The mobile service can provide emergency backup for an internet based service. Such an alternative on those rare occasions of power failure is “good enough” for most consumers.

Mobile services have served to condition users to prioritize their values in telecom services; mobility as a feature was more important than perfect call quality. For VOIP, voice quality may sometimes be compromised, if the local access IP network is congested. However, expectations of the public have been compromised in an era of mobile and international calls experiencing clipping or dropping. VOIP service may not be everything people came to expect from their phone company, but the phone company has not always provided the emerging capabilities that people can expect to see.

Guerilla companies are innovating with new services, such as allowing customers to pick phone numbers in distant locations yet have the phone ring wherever they plug-in their VOIP adapter. Features for these services are instantly added and changed by visiting an easily navigated website. Unified messaging means that voicemails and faxes arrive by email attachment and can be heard or viewed from any internet connected computer. And new features will continue to be added, fueled by virtually limitless creative minds developing niche applications for micro-markets – one of the few true lessons of the internet economy.

In the not-so-distant future, guerilla services providers will need to innovate in order to have significant market impact. We do not expect these providers to attract substantial revenues by simply replicating conventional telephony at lower prices. One of the lessons learned from long-distance wars is that gorilla-sized incumbents can crush smaller competitors with price slashing and are better able to sustain losses, if a price war erupts. New feature innovations, in many cases targeted at micro-markets and specialized applications, may be the key to guerilla operators securing widespread VOIP adoption. Such an approach will enable a VOIP service provider to build its market presence from the fringe toward the mainstream.

Changing investment strategies

Until the bubble burst, investors saw infrastructure companies as the best way to profit from the explosive growth in demand for internet bandwidth and services. Rather than sorting winners and losers among the myriad of applications, considerable amounts of investment capital flowed into companies that built fibre optic backbones and internet data centres and to the manufacturers of equipment used by such construction. The theory behind this investment approach was that infrastructure was a tangible asset. Investment in telecom infrastructure was a way to hedge the inherent technology risk: derive New Economy yields out of Old Economy values – real estate and other tangible capital asset based companies.

Unfortunately, too much money was available with too little attention paid to realistic ability to derive a reasonable return on the capital investment. Corporate restructurings saw valuations on the assets frequently cut by more than 90%. Telecom infrastructure became so plentiful that its strategic value has diminished. Long haul networks are still being acquired from bankrupt network operators for pennies on the dollar of original investment.

In the past, carriers created competitive advantages for themselves associated with differentiation in products, routes and capacity. Condominium fibre routes, nearly infinite capacity driven by optical multiplexing technology and fire-sale asset acquisitions have made low cost ubiquitous networks available to all comers. Long haul capacity has become table stakes – no longer providing a competitive discriminator between carriers.

Still, there remains limited choice in local access. Most major centres have at best two communications pipes entering most homes: the incumbent telephone company and the cable company. Both compete for providing high speed internet service to users. Both have tended to dabble in providing services that compete with each other’s core business, in order to deliver the “triple play”: voice, TV and internet. In some cases, mobile services, both cellular and Wi-Fi data, are added to the mix. Competition, while limited, has enabled consumers to choose between at least two different suppliers for high speed internet. In Canada, almost a third of all households have broadband service from the incumbent cable or telephone company, creating a platform for guerilla attacks on voice revenues.

While voice calls only require a fraction of the bandwidth capacity of a high speed connection, voice is an especially demanding application. Unlike most internet sessions, voice connections have symmetric resources demands: both sides of the call generate balanced loads. In addition, voice traffic has a sustained level over a long period of time. A single side of a conversation can keep traffic flowing through the entire time that the people are speaking. Contrast this to a web browser request for a multi-media page. The multi-media may need more bits to be transmitted, but the server fills this single request as fast as the network will carry the traffic. The network is then available to serve any of the thousands of other clients. Voice transmissions on IP networks threaten to change the traffic engineering characteristics of existing broadband access infrastructures. As a result, guerilla carriers could drive increased costs for incumbent high speed service providers, as networks need reinforcement to meet end user demands.

Some cable companies have delayed introducing voice services because of concerns about network readiness. Telephone companies have hesitated to introduce voice over their own broadband plant, because of concerns in respect of revenue cannibalization. Ironically, both may find their networks being used for such purposes and those revenues are being gained by guerilla operators.

Conclusion

VOIP services will increasingly appear across cable and telephone company high speed networks, whether or not the incumbent service provider cooperates. In many ways, VOIP is another instance of peer-to-peer networking. Like it or not, broadband service providers will have to engineer their networks to accommodate the traffic associated with voice, just as carriers have to accommodate multi-media music, video and gaming applications. Broadband internet service is marketed as an enabler of capacity-intensive applications. Yet, some providers of high speed services, whether DSL from the local telephone companies or cable modem service from broadcast distribution companies, view VOIP as an annoying consumer of resources. When congestion occurs in the network, some operations departments of high-speed internet providers seem to discourage users that avail themselves of the capacity and capabilities promoted in the high-speed services sales pitch!

Such a perspective, discouraging a continuing increase in demand, is dangerous and contrary to a customer-focused business philosophy. Rather than being viewed as a capacity-hog, VOIP must be embraced as an important application. VOIP drives: improved customer loyalty (thereby reducing churn) for broadband service; increased penetration of high speed services (helping to migrate customers from dial-up and high speed “lite” products); and, differentiated service capabilities, such as unified messaging and geographic independence for numbers.

For more than 100 years, voice service has provided the revenue streams that funded network evolutions of worldwide telecom networks. The gorillas of telecom, the giant local phone and cable companies, must prepare for guerilla attacks by next generation carriers. Alternatively, the gorillas will be left to incur the costs of carrying voice, while foregoing the lucrative retail revenues.

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Telecom Decision CRTC 2003-45, Provision of telecommunications services to customers in multi-dwelling units, issued on June 30, 2003, sets out the CRTC’s rules governing the relationship between landlords and telecom service providers. The decision follows a three year long paper process, initiated by Telecom Public Notice 2000-124.

Background

Despite the rhetoric of customer choice, this has been an issue of money: what will carriers pay to be in the buildings. Also, in many cases, building owners have sought partnerships for providing advanced telecom services as a competitive differentiator in offering new amenities to tenants while increasing revenues derived from the property.

The problems that led to the regulator’s intervention originally began at the height of the dot-com and telecom boom, when many new entrant service providers were seeking access to buildings. Landlords witnessed a continuing stream of new carriers, large and small, seeking access to limited space in telecom closets. In addition, building owners were required to pay for inside wiring for new buildings and found carriers unwilling to compensate them. At the same time, building owners have been faced with similar requests for access from broadcast distributors, using satellite or fixed wireless technologies, as well as data service providers seeking rooftop access for antennae. Other than with respect to broadcast distribution undertakings (upon which the CRTC has already ruled), the CRTC did not find any reason to address access by non-wireline carriers at this time.

Setting rules on access

In yesterday’s Decision, the CRTC has declared that:

• it is illegal for Local Exchange Carriers (LECs) to enter into exclusive or preferred access arrangements with building owners, although the CRTC has recognized that preferred marketing arrangements have consumer benefits and should be permitted.
• building owners have the right to manage the use of space and supervise the installation of wiring and equipment in their buildings. However, LECs that want to install or upgrade in-building wire should, subject to the building owner’s reasonable acceptance of the wiring plan, be given access to the any “pathways” required to do so. LECs that exercise this option will be responsible for paying the associated costs, including those reasonably incurred by the building owner.
• where there is insufficient space available to install additional in-building wiring, the building owner must either permit the carrier to construct additional risers, or allow upgrading or replacement of the existing in-building wire to make more efficient use of the riser space available.

Where a building owner and a LEC cannot agree on terms for access consistent with CRTC guidelines, or on a timely basis, the CRTC has indicated that it will take further action, including (depending on the circumstances) an order under Section 42 of the Telecommunications Act, which purports to provide the CRTC with expropriation-like powers concerning private property.

New Buildings

Since 1999, new building owners have been required to install and maintain responsibility for in-building wiring, often at high cost, and frequently without compensation by carriers. This Decision rescinds that requirement and permits building owners, either to install and retain control of in-building wiring or to enter into arrangements with LECs, whereby they would install and control the wiring.

Compensation

The CRTC recognized that some building owners have already incurred costs to acquire or install copper in-building wire (such as in new buildings), or have upgraded in-building wire in order to provide superior facilities, such as fibre-optic cable or shielded cable, and may not have had the opportunity to recover their investment. Accordingly, the CRTC finds it appropriate for building owners to charge a fee for the use of in-building wire to recover any capital costs reasonably incurred for in-building wire. By corollary, the CRTC considered it inappropriate for building owners to charge a fee for the recovery of costs of in-building wire where the building owners acquired responsibility and control at no cost.

While the CRTC acknowledges that carriers should pay for space occupied and the power consumed by telecom facilities in the buildings, it does not believe building owners should be compensated for the construction of utility infrastructure (equipment rooms, risers, wiring runways, etc.). This could become an issue for negotiation under the terms of master access agreements for builders.

Building owners will be allowed to recover costs incurred for provision, installation, construction and supervision where additional floor space, ventilation or other building facilities must be constructed, at the request of a carrier. While the CRTC does not approve of “admission” or “entry” fees, building owners can pass along costs incurred for providing the approval of plans, or for safety and security measures and similar services reasonably required for installing and operating telecommunications facilities.

Disclosure issues

The CRTC is requiring that the terms and conditions of all access agreements between a LEC and building owner must be posted on the LEC’s website. For safety and privacy reasons, no customer specific information, nor wiring diagrams are to be disclosed, but the financial terms, whether written or unwritten, are to be open to examination by other carriers. In addition, the CRTC is requiring that LECs disclose agreements to install wiring for buildings under construction, in order to facilitate other companies that wish to install their own facilities at the same time. It will be interesting to see the impact on construction timetables potentially caused by multiple wiring crews.

Summary

Builders may have received relief from the costs of installing the wiring, subject to successfully negotiating reasonable terms with at least one carrier – likely, the local incumbent. Existing building owners have an opportunity to begin charging all carriers, including incumbents, for the space and power being consumed in their buildings and the security associated with controlling access to their premises.

While incumbents have now won access to the few buildings that had signed exclusive deals with new entrants, they may find that there are monthly fees to be paid that had never before been part of their budgets. In addition, carriers will have to choose whether to pay upfront capital for wiring in new construction or pay recurring monthly fees to builders or riser management companies.

Companies seeking to use alternate technologies, such as fixed wireless access, or broadband services have been left in the cold, with no help for mandated access or guidance for negotiations with property owners.

In order for building owners to protect their private property rights, they should take a firm but fair approach to new requests for building access. LECs must resist the temptation to abuse this Decision by making unreasonable demands on building owners, such as establishing mini-switching centres within buildings, absent an appropriate lease.

At the end of the day, the CRTC regulates telecom carriers, not landlords. Some of the areas covered in this Decision may be open to a court challenge in respect of the CRTC attempting to overextend its jurisdiction. The timing of a court challenge will depend on the reasonableness of carriers and building owners alike – presumably, both parties operating with a view to providing quality service and value to their mutual client: the tenant.

Telecom Decision CRTC 2003-23, GT Group Telecom Services Corp. v. Aliant Telecom Inc. – Tariff violations and contraventions of the Telecommunications Act, and Telecom Public Notice CRTC 2003-4,Measures with respect to incumbent telephone company regulatory compliance both issued on April 10, 2003, demonstrate the increasing level of frustration that the CRTC has felt with regulatory mischief on the part of Canadian incumbent telephone companies.

Background

In April of 2002, GT Group Telecom asked the CRTC to investigate the Atlantic incumbent carrier, Aliant, in respect of off-tariff pricing for Centrex services for Memorial University of Newfoundland (MUN). Group Telecom asked the CRTC to investigate and take steps to ensure that Aliant conforms with its tariffs and statutory obligations. In the past six months, the CRTC has found violations of various Decisions, Orders and directives by other major Canadian incumbent carriers, in response to complaints by Call-Net and Group Telecom.

Finding Fault

In today’s Decision, the CRTC agreed with Group Telecom and found that Aliant knowingly contravened its own tariffs in all three areas that were the subject of Group Telecom’s complaint in order to maintain the MUN account. The CRTC took the unusual step of asking Aliant to show cause as to why the Decision should not be registered with the Federal Court. Registering a Decision in this manner makes continued violations the subject of contempt proceedings.

Inspectors

Until now, the CRTC has relied on competitors to launch a complaints process before the Commission took the steps to investigate a problem. Given the nature of the relationship between the telephone companies and their customers, competitors often do not have the ability to provide the Commission with concrete evidence of misbehaviour. In today’s Public Notice, the CRTC has announced that it will designate inspectors, for the purpose of verifying compliance with the Telecom Act and stated that inspections could begin any time after mid-June, 2003.

Summary

Throughout the past 11 years of significant telecom competition, a number of CRTC Decisions have been released too late to be of assistance to the original complaining party. With the history of new entrants launching complaints and then withering away into bankruptcy, the CRTC had to be feeling pressure to be more proactive. The signals for this aggressiveness have been coming since the summer of 2002. Competitors have much reason to celebrate. While Bell and Telus have likely been reviewing their major contracts due to earlier bundling decisions, there will be a renewed focus given the clear lack of tolerance for continued abuses.

Incumbent carriers that are seeking increased flexibility in pricing will have their work cut out for them to explain new ways that customers are buying integrated services and new pricing models that such accounts are demanding. As we noted last December, in the end, large businesses may be the losers, with less competition, reduced incumbent flexibility and higher prices from the major ILECs.

Telecom Decision CRTC 2002-76, Regulatory Safeguards With Respect To Incumbent Affiliates, Bundling By Bell Canada And Related Matters, issued on December 12, 2002 brings significant changes to the rules governing the way Canadian incumbent telecom carriers can offer services through their previously “unregulated” affiliates. While the Decision was issued in respect of Bell Canada and its Bell Nexxia affiliate, the other major incumbent carriers (ILECs) will have to follow suit. We expect the new rules to significantly hamper the flexibility under which Bell Nexxia has been able to operate until this point in time.

Background

Earlier this year, GT Group Telecom filed a complaint that asked the CRTC to investigate the activities of Bell Nexxia with the intent of implementing competitive safeguards for competitors of Bell and other incumbent carriers. Concerns existed that Bell had moved its Carrier Services Group (CSG) into Nexxia, adding a layer of process into the provision of services. In addition, there were concerns that Bell used Nexxia in providing single sourced services while avoiding CRTC tariff requirements.

Restricting Bell Nexxia

The Decision severely limits the ongoing operation of Nexxia, with significant implications for competitors, incumbents and large business customers. Until now, ILECs had been able to use their forborne subsidiaries to respond to customer requirements that cannot be served under conventional tariff terms. In most cases, these will now require tariff filings and approval from the CRTC. In addition, the terms under which services are provided by the ILEC to its affiliate will be subject to CRTC scrutiny and approval (including a price floor test), creating a layer of previously unseen inefficiency.

Major Accounts

Major accounts will likely see less flexibility in the way ILECs or their affiliates respond to their special needs. In addition, rates, terms and conditions of existing agreements will need to be tariffed (and therefore subject to public viewing). In the near term, customers should avoid signing agreements until these tariffs become public, in order to compare rates to those being offered under the previously private Nexxia deals.

New Entrants Win Significantly

Competitors, most significantly AT&T Canada, will be able to see the kinds of deals that have been offered to the biggest accounts in the country – the CRTC identified 111 contracts that may need to be made public. The incumbents will no longer be able to circumvent the tariff process in offering services through their affiliates. Any telecom services that affiliates buy from the ILEC will be available to competitors, including support services.

Summary

From one perspective, Christmas came early for competitors of the ILECs, although some may argue that these new rules are a few years too late for many industry participants. In the end, large businesses may be the losers, with less competition and higher prices from the major ILECs.

A teenager sits in front of his computer screen, engaged in an instant messaging conference with friends and relatives around the world. A cousin participates from his mobile phone, a girlfriend is in the school library. Questions are sent to parents about dinner plans. The teens agree to meet (on-line, of course) for a computer game while music files are exchanged in the background. Six people have been involved in this session, with six different network providers and terminal types.

Their choice of terminals was made without regard to the network; the network providers had been selected without even conceiving that such a messaging session could take place. The home-based teens used high speed internet access from their phone company in one instance and from their cable company in the other. The third teen connected via their own pre-paid mobile service in Europe. The parents were connected by office LANs and WANs and mobile PDAs.

These teenagers are unknowingly demonstrating the increasing irrelevance of the network: the evolution from Intelligent Networks to Irrelevant Networks. As terminal devices become smarter in their own right and networks evolve to a unified IP standard, users have less of an interest in the provision of network intelligence. Indeed, the migration of intelligence to the edge of the network means that user applications are finding increased levels of network transparency: the choice of network is expected to be irrelevant by most applications. Over the past five years, users began communicating without the active involvement of communications carriers!

A Brief Perspective in Time

The first telephone exchange, introduced into Hartford Connecticut in 1877, was the first implementation of centralized, intelligent routing. The central processor at that time was a bank of human operators. In 1891, the first automated telephone exchange began a move to put routing control into the hands of the user. With the invention of the rotary dial phone, users controlled each step of the call. Every click from every digit dialed moved the call closer toward its destination. User control reached its apex in 1951 with the introduction of Direct Distance Dialing – long distance calling without operator intervention.

In the 1930-1950’s, electromechanical, common-control switches were introduced, beginning the return of intelligence to the core of the network. The 1963 introduction of tone dialing allowed users to signal network processors in the middle of calls for advanced features.

The mid-1980s through year 2000 marked the pinnacle of centralized network intelligence. Voice networks began to offer services with routing decisions powered by centralized databases. Users traded private business exchanges for telephone company Centrex, in order to outsource the management of complex features and to automatically access the latest software upgrades. The core of the networks became the centres of power – not only were telephones made dumb, the primary local telephone exchanges do not even know how to route certain types of phone calls, such as toll-free “800” numbers or local competitors’ calls, without assistance from a central routing database.

Yet, regional and national control of routing and network intelligence was not seen as sufficient to meet their users’ needs, since high quality global connectivity was a rare commodity. At great cost, global alliances were created to leverage the premiums associated with the long-haul bottleneck. Most of these alliances have come crashing apart, as international cultures clashed. Global One, formed from Sprint, France Telecom and Deutsche Telekom, and Concert, anchored by AT&T and British Telecom, are two examples of failed alliances. In the case of Concert, $7 B (U.S.) was written down by AT&T and BT, coupled with 2,300 jobs lost. Other companies, from Worldcom to 360 Networks, Qwest to Global Crossing, chose to control their own destinies, with equally dismal results. Billions of dollars of investor capital have been lost in search of the elusive recipe to satisfy multi-national customers.

The Democratization of Network Intelligence

Partly due to the low cost of powerful microprocessors and in part due to very low cost global bandwidth, a return of intelligence to the edges of the network has been underway. Aided by a migration from various circuit switched protocols to a more uniform Internet Protocol (IP), networks witness a democratization of network intelligence, supplanting the supremacy of network providers. With self-actualizing interconnectivity, IP services will be able to more easily operate across disparate networks. This leads to an interesting ironic result: the emergence of a “network of networks” model of communications connectivity will lead to the supremacy of local access providers, rather than global network carriers.

The customer carrier selection criteria in the future will be in the provision of “on-ramps” rather than the highway itself. Once a user has gained high-speed access onto the backbone network, their bits will flow in blissful ignorance of the underlying carriers and infrastructure, with a presumption that the only other bottle-neck of interest is at the distant end of the communications link. A gigabit Ethernet access connection has very limited value if the ISP does not provide gigabit connectivity to the Internet cloud as well. Due to the low cost of long haul capacity, successful carriers will be able to meet expectations of highly available, robust interconnectivity at major internet exchange points.

While carriers are spending billions of dollars differentiating their global network solutions, customers are acquiring edge devices that encourage network transparency, enabling users to become more carrier-neutral. As customer premises equipment continues to be more intelligent, customers gain independence. In effect, Internet Protocol may be seen as a universal protocol. Electrical appliances are sold to consumers without knowledge of the supplier of electricity. The universality of IP allows communications based appliances to be used and “plugged-in” without knowing the supplier of telecom services.

To the dismay of the leviathans of the industry that created networks with vastly improved overall quality and with expanded and optimized connectivity, customers actually lose their need to be bound to their carriers. Instead, customers may be able to select local niche providers and turn to their supplier of IP terminal equipment for global one-stop support. It may be that carrier investment has led, not to a competitive advantage in possessing resources, but rather in the commoditization of the resource itself!

Service Provider Implications

For the purposes of this article, we look at an expanded definition of service providers. In the near future, we see the potential for systems integrators, network and business process outsourcers and customer premises equipment or system suppliers to expand their offerings to include communications services. In the near term, we believe opportunities exist to acquire massive long haul capacity from insolvent or nearly insolvent global carriers. A return to more traditional pricing models is likely to meet resistance caused by the current capacity glut and the debt burden that overhangs virtually all industry participants. Until these factors are resolved, the value of long haul infrastructure and bandwidth services will remain low, with a resultant diminished barrier to entry.

Commodity Bandwidth Services

The implications of the Irrelevant Network theory are far-reaching. Global carriers have invested billions of dollars expanding their own capabilities and capacities to serve multi-nationals. In some cases, global alliances have been built; in other cases, under-sea fiber optic cables have been laid. Thanks to advancements in opto-electronics, some estimates suggest that there is more than 20 years of global capacity already available. In effect, it is precisely the rush to build capacity that created an oversupply, which in turn has created the irrelevance of networks.

While carriers are wrestling with the danger of commodity pricing for bandwidth services, they have sought to move up the value chain and are increasingly facing the threat of non-traditional providers of managed services. Local access is now the critical bottleneck service in the provision of IP connectivity. Indeed, reliable and robust local access is the only communications service that clients typically find as a bottleneck in serving their requirements. Since local access services were rarely provided by the global carrier itself, many multi-national customers may have been frustrated in looking to a global carrier for provision of their integrated services. As a result, customers may become equally likely to look to their customer premises supplier (eg. router or IT infrastructure provider) for global communications support. Given the interaction between software applications and the communications protocols, customers may look to their systems integrators for one-stop shopping, further exacerbating the commoditization by aggregators and value added suppliers and bundlers of software and communications services.

Billing, Bundling and Single Point of Contact

The attraction of single billing may be somewhat mythical – while single billing sounds good in theory, it tends to provide less than ideal results when implemented.

Smaller customers, when receiving bills for their total communications services (e.g. local and long distance phone service, coupled with data and mobile service) begin to question the size of the bill and look for ways to lower their costs. Many small business and residential customers already have monthly charges applied to credit cards in order to write fewer cheques or benefit from the cash flow management of their bank in any case.

Larger businesses generally want their bills broken down by department or cost centre in any case – meaning that they want more bills, not just one. As certain customers buy on a global scale, there are limits to the usefulness of single points of contact for purchasing. Most often, billing is sought in local currency since charges must be accounted for as incurred by the local business unit. Such customers are as likely to want to know the local representatives for trouble escalation. Billing is likely required in local currency because the costs are incorporated into the local unit’s profit and loss statements.

So, while many customers are certainly after the discounting associated with spending more money with a single carrier (ie. bundling and bulk purchase discounting), it is not clear exactly who, if anyone, is asking for a “single bill.”

With low commodity pricing from a number of industry participants, increasingly, corporations are purchasing communications services in the same manner as other goods and services, with pressure on pricing and service performance.

The benefits of local network optimization may prove to outweigh any benefits of single billing. Coupled with the increased commoditization of communications services pricing that may remove specific financial incentives for bundling, other non-traditional channels may help customers to derive the lower costs with better overall control of service quality. The key differentiator may be found in customer service: providing points of contact to match the requirements of the buyer. Winning service providers, whether carriers or systems integrators, will be those that can match user requirements for supplier interaction – ordering, moves, adds and changes, performance monitoring, trouble reporting and billing. These interactions are captured under a banner of managed services.

Managed Solutions

Carriers are attempting to provide global managed services to their clients in an attempt to “move up the value chain” away from commodity bandwidth services. Such management includes single points of contact, service level agreements and guarantees, monthly reporting, storage and server hosting, among other services.

Customers may be somewhat skeptical about the carriers’ abilities to deliver on these services. In some cases, carrier sponsored data hosting is at odds with an ability to have diversity. Carrier diversity may be required for serious high-availability applications and in order to maintain leverage for service and pricing responsiveness.

In addition, applications continue to increase in complexity, which challenge the ability of a carrier to provide complete outsourced communications management. To the extent that applications interact with communications protocols, such as with non-IP based legacy networks, such as Frame Relay, SNA or ATM, carriers will be unable to fully diagnose failures, without the participation of the systems integrator. Complexity may paradoxically be increased during the transition to an IP network as formerly stable networks are reconfigured to adopt lower cost IP-based communications links.

As a result, customers may look to their IT infrastructure providers to act as the prime contractor for communications services. Carriers may find that their competition is coming from less traditional channels.

Summary

In the era of Intelligent Networks, carriers spent their resources developing and promoting the core network. Global alliances helped to extend these capabilities to provide “seamless” services to customers everywhere in the world. With the migration of intelligence to the edge of the network, core network capabilities may become less relevant: users will provide their own capabilities through applications resident on their own equipment. As a result, customers may have become more concerned about local service issues rather than global services.

The global telecommunications industry is in the midst of a painful restructuring, working through massive levels of long haul overcapacity and the burden of debt. Its traditional value chain has eroded and carriers are searching for new formulae for success.

In the coming era of Irrelevant Networks, service providers need to focus on achieving greater excellence in the provision of local access, rather than global services. Customers will challenge communications providers seeking excellence in customer support, excellence in network performance reporting, excellence in guaranteed quality access transport services, with measured availability and well-managed throughput and inter-connectivity to multiple major network backbones and interchange points.

It is possible that competition for carriers will come from providers of IT infrastructure, which may seek to provide managed network services as a means to increase the value they bring to their clients. Such challengers may serve as resultant opportunities for partnerships, extending the managed network service capabilities of carriers and providing development resources for customer and applications support technologies. As customers become more empowered to control their own networks, success will come from being seen as the very best local supplier, allied with similar minded technology providers.

In an era of Irrelevant Networks, the winners will be customers. Customers will be better served by competition to provide managed services. As intelligence increasingly migrates to the edge, customers benefit from increased empowerment and choice.

In the near future, will carriers recognize and respond to their potential for network irrelevance, in order to succeed in meeting these changing customer requirements?

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