Profound change lies ahead for the international wholesale market. A very few may have detected its imminence and possibly its scale, which is likely to be equivalent in magnitude to the emergence of refile in the mid-1990s following market liberalization.
At the time, control of international wholesale and its pricing structures began to slip from incumbent carriers to refilers, call-back companies and aggregators. A period of realignment followed as carriers attempted to re-establish their authority and focus shifted to the builders of international bandwidth. However, even while building it, they did not come, and some $500 billion pumped into telecom ventures exploded in the dot-com bomb.
 Source: BroadGroup |
Appraising today's market finds a much different picture, and yet still retains some of the same. The results of a new BroadGroup survey of wholesale voice and data carriers from Europe, United States and Canada; Latin America and Asia Pacific, suggests most respondents forecast growth above industry estimates for international voice traffic but anticipate revenue would be static or even decline in the period.
If this is the case, the forecast undoubtedly will lead to oversupply in the market, further price reductions, increasing pressure on margins and the failure of many companies to meet their internal targets. It also is possible we will see the re-emergence of traffic "tromboning" with the same minute counted several times by several carriers.
Survey respondents represented approximately 50 percent of the total international voice traffic on public networks. For data services, half of the top 10 carriers were included, providing validity to the findings.
An analysis of volumes and routes conducted as part of the survey shows no substantive relationship between the retail voice business and the network infrastructure. Clearly, the original business assumptions supporting the development of a wholesale voice business - as a marginal cost operation over unused retail capacity - have fundamentally changed. A compelling conclusion, therefore, is that the voice business has arrived at a transformational point. Under these circumstances, the structural change in wholesale will be significant enough to warrant a fundamental change in strategy by most of the participating companies.
However the data business also is reaching a transition point, with respondents showing highvolume growth for IP but lower revenue growth. Overall, price per unit is declining. This is not surprising given the high levels of competition.
The competitive landscape for pure-play wholesale data operators is grim. Lacking the retail businesses to run over the infrastructure, and support a marginal cost financial model for the wholesale business, these players are driven to attract volumes to cover operational costs.
The situation is exacerbated for wholesale data operators when combined with downward pressure on pricing which is further compounded by the "sunk-cost" approach to capital infrastructure for many of the operators newly emerged from Chapter 11. The very challenging issue they confront is how to justify the capital investment that will be required to meet the very high volume growth, with prices in steep decline. Without restructuring, the data business, with its more horizontal structure, will destroy value.
The creation of value in the voice and data wholesale businesses has similarities, but they are structurally different in terms of the roadmap, execution and carrier dynamics. Both revolve around consolidation, and identifying higher margin activities, which are major concerns for forwardlooking carriers.
Nick Topham is associate director of wholesale practice for BroadGroup.
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