Will service providers start trading places?

Many industries have developed trading exchanges to cut costs and enhance their offerings. Will the telecom industry follow suit? Deb Mielke finds out

E-commerce transactions worldwide are expected to generate revenues totalling hundreds of billions, or even trillions, of dollars by 2005. No matter which analyst or research firm you believe, the revenue possibilities associated with business-to-business e-commerce have spurred service providers to aggressively pursue the delivery of transmission, hosting, and managed services specifically designed to accommodate this burgeoning market. These e-business services have supplied the network, hosting, and often the application infrastructure that many public industry consortia, private exchanges, and hosted trading communities were founded upon.

Communities such as the aerospace, transportation, and freight industries are using exchanges to trim costs while in- creasing customer loyalty and business flexibility.

The most powerful emerging exchanges are those established and operated by industry consortia. Owens Corning used an exchange for suppliers to bid on corrugated packaging material purchased by the company’s 21 plants. The company then signed two-year contracts with 17 suppliers and saved 10 percent over current costs. And though Arbinet, Band-X, and Enron tout their ability to buy and sell bandwidth, service providers have been slow to adopt business-to-business and business-to-consumer transaction models that their services and businesses often support.

A huge opportunity exists for service providers to use their own network and back-office infrastructures to power telecommunications ‘service’ trading consortia. These consortia will offer more than pure bandwidth or minutes they’ll deliver services, hardware, software, and applications. But a number of factors are holding the industry back.

Middlemen and minutes

The telecommunications industry isn’t blind to the potential benefits of online business. Many third parties, vendors, and service providers are building or have already implemented business-to-business exchanges that range from service provider-to-enterprise transactions to service provider-to-service provider bandwidth/minutes buying and selling.

In addition, Cisco Systems has pioneered the use of e-commerce to reduce costs, improve product delivery, and tie enterprise and service provider customers to its hardware, software, and professional services strategies.

Cisco’s Configuration Express enables service providers to electronically custom-label Customer Premises Equipment (CPE) with information on the service provider’s customer support centre. It also enables service providers to configure hardware and software, provide custom documentation, drop-ship CPE to customer sites, and offer custom project reports for Cisco-enabled managed service offerings (Cisco 600, 700, 800, 1600, and 2500 series products).

Service providers say that Configuration Express helps them reduce service turn-up times (the amount of time between order receipt and billing), deploy larger, more complex managed networks, increase customer satisfaction, and save hundreds of dollars on each unit deployed.

Configuration Express emerged from Cisco’s initial efforts to supply service providers with an electronic, time-saving method of acquiring CPE rather than original paper-based order forms. The electronic procurement system’s success (for both Cisco and the service provider) resulted in the company extending the system’s capabilities into Configuration Express. Cisco shipped more than 135,000 units of CPE in 2000, although with limited system availability. In 2001, the program has aided them in maintaining market share in a tough economic environment.

Software start-ups have developed platforms for buying and selling IP flows, not just bandwidth or individual lambdas. InvisibleHand Networks’ Merkato platform can arbitrate the buying and selling of bandwidth and IP flows based on Multi-protocol Label Switching (MPLS) or DiffServ. This allows service providers and their customers to buy and sell application-specific services, with associated QoS parameters that can include latency, jitter, and reliability.

Platforms such as InvisibleHand’s Merkato pave the way for service providers to use their network assets more efficiently by increasing capacity utilisation, and to consider new approaches to service development and delivery. Initially, smaller ISPs might use the Merkato platform to bypass bilateral private peering relationships-connections freighted by transit fees imposed by larger service providers for unbalanced traffic exchanges. A Merkato implementation might also allow service providers to bypass problems such as network outages or select a ‘least-cost’ path based on factors such as time of day or network conditions.

In the future, a Merkato platform will allow service providers to buy and sell services, such as voice, streaming video, applications, videoconferencing, content, collaboration, disaster recovery, and back- up. All of these services will be delivered with the QoS levels they require.

These capabilities would allow the service providers to offer new services (applications, voice, and so on) more quickly, cost-effectively, and efficiently through service provider partners. They could share the revenue while simultaneously offering choices based on price, service quality, and availability. These trading platforms would enable service providers to rapidly extend geographical reach without capital investment, and to test the markets in new areas with little or no financial risk.

Finally, platforms such as the Merkato will allow service providers to bypass complex, rigid, PSTN legacy service provider infrastructures, architectures, and processes (including Local Service Requests (LSRs), Access Service Requests (ASRs), and Primary Interexchange Carrier Customer Account Record Exchange [PIC/CARE]). Carrier-specific EDI formats (especially for pre-orders, where many carriers use proprietary protocols such as Pacific Bell’s DataGate message protocol) could also be bypassed.

Leveraging the openness of IP-based networks and that of IP telephony and softswitch architectures based on SIP and Media Gateway Control Protocol (MGCP) will enable service providers that use platforms such as Merkato to easily exchange voice, video, and data service capacity, and revenue opportunities.

Business barriers

Even with Cisco’s success and the promise of platforms such as InvisibleHand’s Merkato software, the telecommunications

industry has yet to develop a public or private industry consortium that automates the exchange of the following:

• Transmission and fibre optic facilities;
• Co-location and Web hosting facilities;
• Application and storage backup services;
• The software, hardware, and professional services that telecommunications customers demand.

What’s holding the industry back?

The exchange of ‘more than minutes’ has been stymied by many regulatory, technological, market, and historical factors. Telecommunications competition is relatively new, and many issues require resolution. From equal access to taxes on e-commerce transactions, incumbents and newcomers are struggling to retain or attain market dominance through judiciary and legislative actions.

Additionally, the recent demise of numerous service providers in various access, long haul, and application and hosting segments has left the survivors reluctant to trust their service revenues to partnerships. They’re especially wary of fledgling service providers whose financial backing is dependent on the success of their hardware vendors.

Time-consuming and costly legal battles, market devaluation, bankruptcies, and shaky vendor financing have also left service providers wary of forming consortia that would include their competitors, and companies whose tenuous financial state could jeopardise the consortium as a whole.

As noted briefly above, the ITU, the Network Management Forum, and The Alliance for Telecommunications Industry Solutions have spent decades developing standards for the exchange of customer and order information. Built on platforms that were developed upon proprietary hardware and software foundations, service providers frequently resort to complying with the standards ‘edifice’ by either developing home-grown software systems or through manual, error-laden, people-intensive processes. Finding a way to an electronic future is fraught with massive capital investment, business process change, and a monstrous shift in corporate culture.

The existing plethora of ‘purpose-built’, separate voice and data (and even protocol-based) network infrastructures is another barrier to developing industry consortia. SONET, Dense Wavelength Division Multiplexing (DWDM), PSTN/ TDM, IP, ATM, and wireless networks all exist simultaneously. Additionally, a multitude of access technologies and delivery architectures has resulted in a confusing mix of management, provisioning, and billing systems that are rarely integrated, and that rely heavily on manual processes. And what of hosting, disaster recovery, and xSP services? Will they also require separate OSS systems, support, and operations personnel?

The result of this heterogeneous mix of platforms and architectures is non-standard services and back-office systems a- cross service provider boundaries as well as within single-service-provider portfolios.

With the voice/data divide not likely to disappear in the near future-and service providers upgrading their network platforms to embrace optical technologies that include Ethernet and Gigabit Ethernet services, SONET optimisation, and DWDM-the confusion can only increase. With billions of dollars of service revenues at stake, service providers must quickly reach a consensus on a telecom Extensible Markup Language (XML) exchange vocabulary, or invest millions more in the back office-with little to show for it.

The basics (product catalogues, naming conventions, and directory schemata) must be applied to consortia building, and a group of both public and private exchange points and products must be developed and implemented to aid service providers in linking up.

Finally, the recent drop in telecommunications stock values and a renewed focus on profitability (not market hype) have forced service providers to defend core markets and revenues. However, the pressures of increased competition and technologies such as Voice over IP (VoIP) on prices and profitability leave many service providers scratching their collective heads, wondering how to renew their business models for the future. Bandwidth trading and minutes exchanges do little to increase the profitability of existing business models. Instead, they tend to commoditise core services. And though existing revenues and services must be maintained, new capabilities are crucial to revenue growth and long-term stock value.

Consortia creation: Primed for profits

Service providers have much to consider for survival in an era of regulatory and market turmoil, technological change, and investor discontent. Why should they seek to develop and implement industry consortia in the near term?

Telecommunications service providers aren’t alone in facing dynamic change in markets and technology. Each of the industries discussed previously has recently experienced rapid disruption in its business models. However, they’re now using the power of public and private exchanges to optimise their infrastructure assets (save money!), as well as increase market share and brand recognition. In this phase of e-commerce, brick-and-mortar companies are discovering that their commerce sites often increase retail store sales.

Therefore, service providers must also rapidly invest in the development of public and private consortia partnerships, if they’re determined to survive and thrive in the emerging e-commerce environment. These partnerships will create foundations that can develop and deliver value-based services more quickly and cost-effectively. They will also be able to link customer business processes to telecommunications services more efficiently and flexibly, enhancing service ‘stickiness’. Finally, these entities will retain and expand market share through consortia partners and their partners’ products and services (in other words, brand extension).

Members of established telecommunications consortia will also be able to deliver e-commerce services to consortia established in other industries, as well as public and private exchanges worldwide. Companies could exchange goods and services electronically with customers and customer industries. Their experience in participating in and operating a telecommunications exchange would position them as leading candidates to supply tele- communications and applications services to participant non-telecommunications industry consortia members.

A successful telecommunications consortium could take almost any shape or form. Consortia would offer participants several benefits: First, they could extend service portfolios without extensive internal development and capital investment. Service providers could offer managed services, application services, hosting, content delivery, professional services, and more without building the infrastructure, back-office systems, and organisations normally required. Just put in the order and take the revenue/percentage off the top.

Service exchange would also enable the industry to develop into a more mature (less regulatory-influenced) wholesale/ retail business model. Participants could leverage core competencies or capital assets to deliver services within the industry ‘value chain’. Retailers might leverage local access assets and local sales and distribution channels to deliver wholesale long distance voice, data, and application services.

Second, consortia could expand customer bases by leveraging links to collective consortia customers. American Airlines extends its reach through mileage programs with credit card companies, long distance providers, and grocery stores. Similarly, service providers could leverage their brands and services through their application hosting, professional services, or network management partners-or vice versa.

Consortia would also offer reduced procurement, operations, and capital costs. Two-thirds of service-delivery costs for any service provider stem from their reliance on back-office people and processes. This is also due to their lack of automation, legacy systems, and manual billing and provisioning processes. Though automation is capital intensive in the short term, it will rapidly deliver the cost and service efficiencies critical to participating in the new ‘trading’ environment.

Increased flexibility in service offerings will also be a benefit. Need a new training service? Find a partner, or ask a current partner that specialises in training to develop it for you. The training specialist will likely develop it more quickly, cheaply, and efficiently than the transmission specialist could. For the service provider with local distribution and transmission assets, the benefit is rapid revenue. For the training specialist, the benefit is market expansion without massive increases in sales and customer support infrastructures.

Another benefit will be service differentiation based on price, quality, and speed of service delivery. Customers want service now. Availability and speed of service implementation are constant worries for enterprise customers. What if they knew that they could get a DSL service in 15 days anywhere in the United States? Would they pay $10 more?

And for service providers, the inability to deliver services quickly and efficiently has contributed to revenue and profitability challenges. For example, a service provider that takes six months to deliver a high-end DSL service priced at $75/month for 2,000 customers, as opposed to one month, loses $750,000 in revenue. If that doesn’t sound like much revenue, think of the implications for OC-x services.

Lastly, market dominance through integration of technology, markets, and systems will be another benefit. Brand domination is about constant brand expansion. What better way to consistently extend brands than through constant, and broad, service extension. If service providers themselves are unwilling or unable to develop their brand extension strategies, others are more than willing to step in and develop the electronic and brand ties in various market segments. The effort launched by OfficeMax in this direction is only one potential threat to service provider branding in the near term. In addition to reaping the benefits of online procurement, users can earn frequent flyer miles (from among eight major airlines) and apply for a credit card via OfficeMax’s affiliation with Citigroup.

Industry consortia could enable service providers and their partners to leverage intrinsic telecommunications resources and assets to address the regulatory, technological, and market pressures that currently besiege service providers. Consortia could also break down the industry barriers to success that are posed by legacy business environments, network infrastructure platforms, OSS standards, and manual processes.

Taking the plunge?

Industries in many market segments are establishing trading consortia to achieve cost savings, market expansion, and customer intimacy. These elements are necessary for such organisations to thrive in a world dominated by the Internet and the rapid market changes it has fostered.

Service providers, under ever-increasing pressure to deliver profitable services while technology and deregulation continue to commoditise established markets, must also rapidly develop industry consortia that will allow them to:

• Reduce service delivery costs;
• Develop and implement innovative, profitable services quickly and cost-effectively;
• Extend market reach, both geographically and into new, previously untapped market segments;
• And demonstrate leadership in product and service electronic exchange and packaging to enterprise e-commerce customers.

Service providers and their suppliers, partners, and customers that unite to establish a flagship telecommunications trading exchange will have the market advantage in the coming decade.

Their ability to link their products and services to participants in the construction, implementation, and delivery of telecommunications services-and those who use those services-will foster the development and procurement of networks and networking.

Other industries have made the move and realised the benefits. For the telecommunications industry, it remains to be seen who will lead the charge. Who will it be? And when will developments unfold?

In the near term, one of the existing players may come to the fore, especially one that’s already trading other commodities, such as energy. For telecommunications service providers, the time to get in the game is now. The sooner such efforts get underway, the sooner enterprises will reap the potential benefits.

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