Wholesale Market Caught in Cyclone of Innovation

Posted: 03/2000

Wholesale Market Caught in Cyclone of Innovation
By David Laughland

The next few years will be driven by a cyclone of innovation and a surge of new
business models that will fundamentally transform the telecom wholesale market. The
Internet protocol (IP) wholesale demand will present new opportunities for wholesale
providers and transform how they serve this emerging market.

A recent The Phillips Group-InfoTech (www.phillips-infotech.com) study of market
drivers for the U.S. wholesale telecom services concluded the factors creating this boon
in the wholesale market are:

These three forces have driven new and existing telecom players to invest significantly
in fiber optic networks and have led to falling prices for bandwidth and traditional
telecom services.

The Internet has resulted in a continuous demand for excess speed, which has created
bandwidth pressures on local access Internet connections and backbone facilities. The
Internet also has created a stampede in the creation of new concepts and e-commerce
applications.

Transformation of content into multi-media forms has required even higher speeds and
greater bandwidth in the network. The Internet also has stimulated new business models
with new players seeking bandwidth to provide web-hosting services for consumers and
businesses.

Supply Side

On the supply side a growing number of new telcos, as well as existing players, have
constructed additional capacity, which has grown the number of fiber route miles to an
estimated 245,000 miles.

AT&T Corp. (www.att.com) is the largest single
player with 40,000 route miles and significant wholesale revenue, as it looks for ways to
utilize its entire network.

With the anticipated merger of MCI WorldCom Inc. (www.wcom.com)
and Sprint Corp. (www.sprint.com), however, the new
company will have almost 30,000 more fiber route miles than AT&T. It also will become
the dominant telco in the wholesale segment.

Graph: IP – Driven Wholesale
Network Services Forecast

New startups–such as Qwest Communications International Inc. (www.qwest.net), Global Crossing Ltd. (www.globalcrossing.com), Broadwing Inc. (formerly
IXC Communications Inc., www.broadwing.com), Level
3 Communications Inc. (www.level3.com), Williams
Commun-ications Inc.-Network Unit (www.wilcom.com) and
Cable & Wireless USA (www.cw-usa.net.com)–make
up another 80,000 fiber miles. They also will become significant competitors in the
wholesale marketplace. Many of the new entrants have built capacity with a wholesale model
in mind.

Some CLECs, such as GST Telecommun-ications Inc. (www.gstcorp.com),
McCleod USA (http://mcleodusa.com), ICG Commun-ications
Inc. (www.icgcomm.com) and others, have built more
than 35,000 fiber route miles and have found a significant opportunity to wholesale much
of their capacity to Internet service providers.

In addition, the RBOCs have pursued the wholesale opportunities in local access in each
of its respective geographic areas.

Demand Side

While the supply side of wholesale telecom services is growing rapidly, the demand side
is experiencing even faster growth as a result of new applications and the demand the
Internet has created.

Among these applications are e-mail, Internet usage, unified messaging, e-commerce and
Internet telephony.

In 1998, the total revenue for current wholesale telecom services was approximately $37
billion. The Phillips Group-InfoTech study forecasts this figure will grow to $100 billion
by 2003, when 30 percent of the revenue will be from AT&T, MCI WorldCom and Sprint.

The other IXCs will capture 13 percent of the revenue in 2003, growing by a factor of
four from their current earnings. The CLECs will experience the largest growth
rate–growing by 1,000 percent, but still will represent 2.5 percent of the total revenue
for the wholesale services by 2003.

According to the study, RBOCs will make up the largest piece of this revenue-generating
pie. They will represent 43 percent of the total wholesale market in 2003.

Independent telephone companies will represent 8 percent of the revenue by 2003,
doubling their 1998 revenues. Finally, cable television companies will represent 2 percent
of the wholesale revenue. Today they are virtually nonexistent as wholesalers.

Transformation

The currently structured wholesale market will transform itself during this five-year
period. It is expected to become a market that is dominated by IP architecture
applications and new business models.

MCI WorldCom predicts that 90 percent of all retail traffic will be IP by 2003. The
Phillips Group-InfoTech conservatively estimates only 50 percent of retail traffic will be
IP by then. This will triple wholesale service revenue to $116 billion in 2003, thus IP
wholesaling will add $16 billion to the forecast for current wholesale services.

Wireless service providers, driven primarily by demand for IP services, will achieve
almost $5.5 billion in wholesale revenue by 2003. The second biggest IP wholesale growth
rate will be the CLECs, which still will represent only a small percentage of the total
wholesale marketplace in 2003.

The new major driver for IP wholesale will be the packet/cell-based network service
providers, which offer application in the network and IP telephony, and will grow from $2
billion in 1998 to more than $20 billion in 2003.

The aggregators and toll resellers will represent $3.6 billion of revenue by 2003,
which represents a $1.2 billion growth from $2.4 billion in 1998.

This unprecedented demand for wholesale services and the rapid deployment of new
networks, which generate greater wholesale supply, will result in the creation of a whole
new business model in the telecom marketplace.

The network service providers furnish network services and hosting centers that enable
the creation of new applications by application service providers (ASPs). Various content
delivery providers will deliver a broadband Internet content that goes beyond the
Internet’s capabilities by delivering rich web content in the Internet applications.

ASPs will offer applications to businesses and consumers that will be more cost
effective than owning the application, thereby serving small to medium-sized firms that
can’t afford a full-time information technology staff.

Broadband content providers will link broadcasting events with web hosting in hotels
and in other multicasting forms while charging advertisers and sponsors.

The wholesale service provider market will generate new challenges for the telecom
industry in managing various channels, developing complex relationships and increasing
revenue, while more choices will place greater demands on the industry.

At the same time, new entrants and new business models virtually will change the
industry’s structure and require that existing wholesalers transform themselves to respond
to increasing demand for whole-sale services.

This cyclone of innovation and new business models will present an unparalleled
opportunity while it challenges the industry to keep up with the changes.

David
Laughland is Senior Executive Officer of The Phillips Group-InfoTech, a division of The
Phillips Group (www.thephillipsgroup.net).
He joined the company in 1999 after a 33-year career with AT&T and Lucent Technologies
as a marketing vice president and in-house legal counsel. He can be reached at [email protected].