International Wholesale

Posted: 11/1997

International Wholesale

Market Boom Benefits Domestic Front

By Casey Freymuth

In recent months, PHONE+ has detailed the
developments of a 60-plus member buying alliance of third-,
fourth- and fifth-tiered companies seeking relief on
international rates by pooling their traffic and putting it out
for bid to wholesale service providers (PHONE+, June,
September, October). At this time, all signs indicate the bid was
successful, and traffic is being routed to the winning bidder,
Washington-based Facilicom International (FCI). The ultimate
fallout of this event remains to be seen, but the fact that these
lower-tiered players were successful in negotiating competitive
wholesale buy rates has generated considerable interest among
professionals within and outside the telecom community. The
accomplishments of the buying alliance are greater than the
traffic they put on the auction block–for every company
participating in the alliance, a dozen more were on the
sidelines, watching the development and taking notes. When they
sit down at the bargaining table with their underlying carriers,
they have a certain level of comfort in that they can always join
the alliance members when they submit their next request for
proposal (RFP).

The Demand for International Services

International telecommunications services are more important
to domestic-focused long distance providers than many executives
realize. Often considered incidental in the overall picture of
domestically focused long distance providers, international
services now account for some 18 percent of reseller revenues.
Additionally, ATLANTIC*ACM’s 1997-98 Competitive
Telecommunications Reseller Report: Trends and Opportunities
reports that by the end of 1998, 93 percent of facilities-based
carriers and 74 percent of switchless resellers will offer
international services–a statistic that places international
termination as important as 800 services, calling card services
and residential services.

In many cases, the significance of this revenue stream is more
important than its percentage of revenues. Shrinking margins in
core business traffic make the profitability of other revenues
critical to the long-term survival of smaller players. For
example, if 80 percent of a reseller’s core revenues offers a
gross margin of 25 percent, and 20 percent of its revenue in
incidental services achieves a gross margin of 40 percent, the
incidental portion will generate 29 percent of the company’s
gross margin.

Global developments such as the World Trade Organization (WTO)
Accord, which is certain to generate international communications
activity as retail prices are subjected to competition, indicate
that international services likely will play a critical role in
the long-term strategies of long distance providers second only
to the ability to provide local dial tone. Estimates on the
impact of the WTO agreement on total global revenues range from
25 percent to 100 percent (plus) over the next five years. Hence,
the outlook for providers of international wholesale services is
one of massive growth opportunity.

The Outlook for International Carriers

International wholesalers are a hot investment item–and for
good reason. According to Alex. Brown & Sons Inc., a
Baltimore-based investment banking firm, global
telecommunications deregulation is creating a $600 billion
revenue opportunity for international carriers. Forty percent of
this revenue will be captured by emerging multinational carriers
(EMCs) over the next 10 years (currently, EMCs hold less than 10
percent market share), which equates to carving out a $240
billion slice of the pie. With growth rates estimated at greater
than 80 percent, "buy" ratings go hand-in-hand with
investment analyses of EMCs.

As with all competitive telecommunications segments,
consolidation is planted firmly on the horizon for international
carriers. This likely will create inflated values for strong
players, and weaker players will fade away. Key marketplace risks
include the pace of deregulation and the Internet.

Other Carriers
There are a number of EMCs that are not in the top 10 list
that regularly provide wholesale services as part of their
overall product mix. These companies play a vital role to the
resale community, because larger carriers that have focused on
building their networks to fit certain traffic patterns don’t
necessarily meet the needs of smaller retail players. In fact,
the top 10 destinations for telecom companies that bill less than
$100 million in revenues and that have identified international
revenues also as being important contributors to the bottom line
differ from the overall patterns published by the Federal
Communications Commission (FCC) by 50 percent.

This may not come as a surprise, given that smaller providers
tend to be niche players, but it does demonstrate the overall
growth opportunities for carriers in areas that are largely
overlooked by mega-providers. Argentina and Brazil, for example,
which do not appear on the FCC’s list of top 10 terminating
countries, are prominent among smaller players–primarily because
of callback or other bypass services. This adds up to substantial
opportunity for carriers that serve players in niche markets.

Time to Go Shopping

If you’ve been treating your international traffic as an
incidental portion of your contract negotiations with underlying
carriers because of low volume, you should take a second look at
that traffic and its profit potential. A little extra shopping
effort can make a big difference in your margins. PHONE+
has provided a contact list of providers of international
wholesale services as well as a contact number for the Telecom
Buying Alliance, which represents some 60+ third-, fourth- and
fifth-tiered carriers that have pooled their international and
domestic traffic in order to receive more favorable wholesale
rates. (Traffic is pooled for bidding purposes only. Each member
is responsible for its own commitments.)

Casey Freymuth is a consultant on strategic and
operational issues affecting global telecommunications providers.
He also is president of Group IV–a consulting and publishing
firm to the telecommunications and utilities industries. He may
be contacted by e-mail at:

For more information or to receive a copy of
ATLANTIC*ACM’s report, call (617) 720-3700.

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