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Sunrise, Sunset


Wholesale telecommunications services
contribute more to overall industry revenue than most people realize. Defined as the sale of voice or data services by one carrier to another carrier for resale or for use in its own network, or the sale of the same services to a pure reseller, wholesale revenue makes up 28 percent of the entire $206 billion U.S. wireline market. All retail segments added together (enterprise, small and medium business, and consumer) make up the remaining 72 percent. Wholesale comprised only 20 percent of the wireline market in 1998, and its percentage has increased every year since.

Because no carrier’s network is ubiquitous, there always will be a demand among carriers for wholesale services. Because companies such as systems integrators focus on information technology and professional services, rather than running a network themselves, they also will continue to purchase wholesale. Yet the kinds of wholesale services they buy, and consequently the revenue opportunities different services offer to vendors, will change over the next several years in important respects.

By grouping the various voice and data services into classes of products, and then forecasting their growth, we clearly see a market evolution away from traditional voice services and toward data and IP services.




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Exhibit 1 depicts wholesale market revenue from 2003 to 2008, excluding revenue categories such as pay phones, wireless minutes, and Universal Service compensation. The total wholesale market can be divided into three major categories. First, wholesale data includes private line (metro and long haul), frame relay, ATM, Ethernet, and wavelengths (metro and long haul). Second, wholesale voice includes both local and long distance (call-based and recurring revenue). Third, wholesale IP connectivity includes dedicated Internet access and wholesale IP VPN services.

Wholesale traditional (PSTN) voice services, both local and long distance, will contract over the next several years. As Exhibit 2 shows, the compound annual growth rate (CAGR) for local recurring revenue, local call revenue, and long distance call revenue are -5 percent, -6 percent, and -7.4 percent, respectively. Carriers like the RBOCs (out of their regions) and wireless carriers will increase their purchases of these services in 2004 and 2005 at a rate of 5 percent or more, as other buyers increase their volume of demand by 2 percent to 3 percent. But while demand has increased, prices have plummeted in all three traditional voice categories.

Add to steep price declines the nascent incursion of voiceover- IP as a cannibalizing force - particularly of long distance - and the wholesale voice market declines by a CAGR of -6.4 percent from 2003 to 2008.

By contrast, wholesale data services will grow steadily, achieving a 3.1 percent CAGR over the same period. Exhibit 2 shows the high-growth services: Ethernet (58 percent CAGR) and metro (22.9 percent) and long haul (19.2 percent) wavelength services lead the way, though all three start from low revenue bases.

Traditional private line, particularly in metro services, will experience slow, steady growth until 2008. Legacy services ATM and frame relay will grow, in part because they will serve as access technologies to MPLS-based IP VPN services. In the short run, a poor capital expenditures environment and a desire to achieve true physical route redundancy will give these wholesale services a boost in revenue. Over the medium term, RBOC demand (from an increased base of enterprise customers) and exponential data traffic demands bolster wholesale data revenue.




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Wholesale IP connectivity services, perhaps unsurprisingly, will experience the highest growth rate in the wholesale sector through 2008. Dedicated Internet access (DIA), sold by many wholesale providers in wide varieties of capacity, already exceeds the entire wholesale long-haul private-line market today. By 2008, it will rival wholesale frame relay in absolute terms, having achieved a 5.7 percent CAGR from 2003 to 2008. Wholesale IP VPN services, particularly those that are network-based, experience a strong CAGR of 15 percent. Most of today’s wholesale IP VPN traffic comes from international sources, particularly from Canada and Europe; only a handful of vendors even sell IP VPN services wholesale. This will change, as systems integrators, CLECs, and other carriers purchase IP VPN services (and particularly MPLSbased services) from a wider variety of carriers. While DIA is a commodity service, IP VPN offers many performance- and feature- based paths to competitive differentiation. All told, the wholesale IP connectivity market will grow by a CAGR of 6.7 percent from 2003 to 2008.

Overall, the U.S. wireline wholesale market will decline by a CAGR of -1.9 percent from 2003 to 2008. Taken as a single data point, its decline is deceptive, however. The precipitous decline in traditional voice services will be nearly offset by growth in wholesale data and IP connectivity services. Wholesale buyers like ILECs, CLECs, cable MSOs, wireless carriers and systems integrators will all require services with specific geographic, service level agreement and capacity specifications. Wholesale vendors have the opportunity to invest in high-growth services like Ethernet and IP VPN while managing their portfolio of sunset products in the traditional voice arena. In 2008 and beyond, wholesale services will remain significant contributors to overall U.S. wireline revenue.

J. P. Gownder is a senior analyst with the Yankee Group’s Wholesale Communications Strategies advisory service.

Links

The Yankee Group        www.yankeegroup.com


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