Carrier Channel: Fiscal Fallout

Posted: 5/2003

Fiscal Fallout

By Dr. Judy Reed Smith and Taher Bouzayen

Bankruptcies Have Lingering Impact on Wholesale Long-Distance MarketsUntil 2004, the wholesale long-distance market is anticipated to decline as a result of shrinking wholesale voice minutes and revenue. However, after 2004, the steady demand for wholesale data, including IP, will fuel the growth of the overall market. The total wholesale market is expected to grow at a compound annual growth rate (CAGR) of 1.01 percent from 2001 to 2007 and will reach $22.3 billion over the next four years.

First-tier companies AT&T Corp. and Sprint Corp. are among the few players in the industry to generate growth from wholesale voice activity. However, this growth is attributable primarily to market share captured from WorldCom Inc.'s wholesale customers. Qwest Communications International Inc., a smaller Tier 1 player (less than $5 billion in annual revenue), also is expected to capture a large portion of WorldCom's wholesale base by 2004 and will profit from IDT Corp.'s planned exit from the wholesale business.

Tier 2 (companies with annual revenue between $15 million and $100 million) wholesale switched-voice revenue also is anticipated to grow from $979 million in 2001 to $1.3 billion in 2007, at a CAGR of 4.8 percent from 2001 to 2007. Most of this growth also will come from capturing market share of companies still in bankruptcy, such as WorldCom and Teleglobe Inc.

In fact, the impact of last year's high-profile carrier bankruptcies continues to be felt in the wholesale long-distance market. Since many bankrupt wholesalers have continued to serve the market while pursuing reorganization, the industry remains highly competitive. There has been a bit of a shakeout that has stabilized spiraling prices over the last 12 months, but it is fragile as capacity could flood the market and prices could start falling again as carriers emerge from bankruptcy with much lower debt burdens and greater financial stability. Williams Communications Group Inc., for example, disposed of $6.5 billion in debts and emerged from bankruptcy as WilTel Communications Group Inc. with $525 million in debts. Global Crossing Ltd. listed $12.4 billion in debt in its January 2002 bankruptcy filing, but will emerge with only $200 million in 2005, according to its reorganization plan.

Atlantic-ACM's "2003 Wholesale Carrier Report Card" indicates wholesale customers -- facilities-based carriers and switchless resellers -- ranked price as the most important factor when choosing a provider. Atlantic-ACM's report, which the consulting firm has produced since 1996, is based on the results of a survey wherein wholesale customers are asked to rate their underlying carriers on a scale of 0 to 10 in the following categories: billing, provisioning, network, customer service, products and pricing. Respondents rated carriers only on their 2002 performance, and only if they used that carrier during that period.

Reversing last year's results, the overall (all carriers combined) score for pricing fell slightly in 2003's survey. With weighted scores (those considering the importance of the category on a scale of 0 to 10), "miscellaneous providers" other than the top six received the highest ranking for pricing. Regardless of weighting, the "Big Three" scored lowest in pricing for the third consecutive year.

Two of the Big Three -- AT&T and Sprint --- along with WilTel earned top marks for network, which considers quality, disaster recovery and network availability/installation intervals. To be fair, overall network scores were within a point of each other for all carriers ranked. Of the network subcategories, wholesale customers rated their carriers the strongest overall in quality.

The average industry score for customer service declined. It sits at 5.87, down from 6.22 last year. WilTel and "miscellaneous providers" claimed the highest score among all respondents. Among facilities-based wholesale customers, Sprint and AT&T tied for third. In contrast, WilTel, Qwest and AT&T earned the top three spots according to switchless resellers.

In the products category, AT&T dramatically improved its score and rank over last year to take top honors (see graph below). In 2002, AT&T scored below the industry median for products surveyed, including inbound 800, 800 origination, outbound 1+, 1+ termination, international, international toll free, private line, total access products, dial-up service, IP services, ATM, frame relay and wavelengths. Qwest and WilTel joined AT&T in the top three, according to switchless resellers responding to the survey. In contrast, facilities-based customers put Sprint rather than Qwest in their top three in this category.

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Source: Atlantic-ACM, 2003

Wholesale customers are more satisfied with current billing systems and processes than they have been in the past. This was a result of clear improvements by wholesale carriers in system flexibility -- the ability for wholesale customers to adapt the bill to their own way of categorizing costs -- and clarity. For the second consecutive year, WilTel continued to lead all carriers in the overall billing category, which considers flexibility, accuracy, timeliness, clarity and dispute handling (see graph below). AT&T, Qwest and miscellaneous providers all improved their scores in the billing category.

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Source: Atlantic-ACM, 2003

Wholesale customers experienced growing frustration with provisioning processes, which were rated based on the following criteria: intervals/speeds, automated support systems, service level agreements and customer interface systems. They were particularly dissatisfied with automated support systems and customer interface systems. However, AT&T dramatically improved its score in provisioning from last year, up nearly a whole point. Qwest increased its score to lead all providers in provisioning (see graph at right). Customer satisfaction with WorldCom's provisioning continued to wilt for the second year in a row.

Wholesale carriers will continue to improve their customer interfaces, expand markets through acquisitions of distressed assets and customer bases, and compete heavily for customers. 2002 offered stability in prices in spite of the shrinkage of companies and bad debt. For 2003-2004, we fear the cutthroat competition could reemerge if currently bankrupt players with clean balance sheets aim for share through deflation pricing.

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Source: Atlantic-ACM, 2003

Dr. Judy Reed Smith is CEO and Taher Bouzayen is an analyst for Boston-based Atlantic-ACM, a provider of strategic research and consulting services serving the telecommunications and information industries. Information for this article was excerpted from Atlantic-ACM's report, "2003 Wholesale Carrier Report Card."