Size Isn’t Everything

The latest edition of ATLANTIC-ACM’s U.S. Wholesale Long Distance Carrier Report Card reveals megamergers are set to drive shrinkage in the segment. Assuming the SBC Communications Inc./AT&T Corp. and Verizon Communications Inc./MCI Inc. combinations are completed, total wholesale long-distance voice and data revenue will decline from 2004 revenue of $24.5 billion at a compound annual growth rate (CAGR) of -1 percent through 2009, to reach $23.5 billion. This shrinkage will be driven by reductions in the wholesale voice segment, which is expected to decrease from $15.7 billion in 2004 to $12.5 billion in 2009 as the two largest Bells, which have been significant wholesale buyers with rapidly increasing long-distance market shares, roll the two largest national networks on-net in order to achieve cost savings of 40 percent to 45 percent.

Figure 1: Products Most Likely to Be Purchased Within 12-18 Months

Figure 2: Resellers’ Anticipated Contract Length Modifications

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Since industry contraction will be driven by blockbuster network deals and the flow of demand at the network level, as opposed to market demand, competition for wholesale revenue will remain fierce. In fact, the 1,000-plus ratings of carriers by their customers for U.S. Wholesale Long Distance: Carrier Report Card 2005-2009 showed an increasing number of ratings exceeding the seven-point mark on a 10- point scale when compared to 2004’s edition. Further, a record number of providers earned ATLANTIC-ACM Wholesale Excellence Awards for topping individual categories. Nonetheless, the vast majority of carriers’ individual category ratings were in the five-to-six-point range, signifying plenty of room for improvement across the wholesale spectrum.

Demand for wholesale services will remain solid, with pricing and network - the only factors assigned importance weightings of eight or higher (10-point scale) by respondents to this year’s study - being the top two criteria when telcos make wholesale purchasing decisions. Importance ratings below the eight-point threshold are provisioning, billing, customer service and products, in that order. None of these factors was weighted below a rating of seven, indicating that carriers must continue to focus on improvement in all areas to effectively compete for wholesale revenue.

When looking at product-specific demand, domestic and international voice, as well as private lines and IP products, top the lists of products telcos indicate they are most likely to purchase in the next 12 to 18 months (see Figure 1).

The average length of a carrier-reseller relationship increased, reversing both a downward trend and exceeding peak relationship averages established in 2001. These deeper relationships are driving changes in contract terms, with a majority of resellers anticipating increases in contract lengths. Perhaps the most noteworthy finding in this area is that nearly one in five resellers anticipates significant increases in contract length of six months or more, with a full 10.4 percent anticipating significant increases exceeding 12 months, compared to just 3.8 percent anticipating reductions of the same amount (see Figure 2).

While megamergers incorporating the two largest LECs and the two largest longdistance players will make overall industry revenue contraction inevitable, the wholesale long-distance segment will remain healthy and highly competitive. It is noteworthy that these deals are happening at a time when wholesale carriers customer satisfaction levels, relationships and contract lengths are on the rise. In addition, prices are slightly on the rise, hence improving margins. These mergers likely will create renewed energy in wholesale marketing departments as competitors seek to exploit real or perceived integration challenges such as stagnation or service problems, and the overall industry realigns itself to the reality of four giants becoming two, with new leaders at the helm of major wholesale operations.

Taher Bouzayen is a senior analyst and vice president at ATLANTIC-ACM. He may be reached via e-mail at


AT&T Corp.
MCI Inc.
SBC Communications Inc.
Verizon Communications Inc.

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