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The State of the Channel

ASK THE AVERAGE TELECOM consumer business or residential to name a telecom agent/channel partner and its response is likely to be, Channel Who?Youre likely to get the same response if you pose this question to most of the federal or state regulators charged with creating or executing policy in the telecom industry. Approximately 30,000 agents, who are responsible for delivering nearly 20 percent of the $310 billion network services market, perform their jobs in near obscurity. This leads to the questions: what is the anatomy of a channel partner and what value does this group provide in the industry?

A team of researchers from the Houston Technology Center and Texas Southern University set out to answer these questions in a State of the Channel market study by first defining what a telecom agent or channel partner is, and where would we find this army of 30,000 distributors. By all accounts, the broadest definition of a telecom agent is any company that sells telecom network services (local, long-distance, data, IP, wireless, etc.) for commission income. For the purposes of this study, the focus was on those companies that generated at least 25 percent of their revenue from telecom commission income.

Profile of a Typical Agent
Median Number of Employees 10
Median Annual Commission Income $500,000
Direct Carrier Contracts 4
Revenue by Carrier Type LEC 63%; CLEC 35%; Wireless 2%
Median Transaction $1,800/MRC

Source: Texas Southern University

Aggregate Respondent Profile
Employees 3,250
Annual Agency Revenue $175 million
Annual Telecom Sales $1.2 billion

Source: Texas Southern University

In attempting to determine where to locate a channel partner, the regulators were not of much help, nor were the providers because most of them wanted to protect the names of their partners. As best we can determine, the aggregate number of direct provider contracts is less than 10,000 (excluding wireless and residential-only agents); however, the aggregate number of indirect contracts by master agents far exceeds this number. Many of the channel partners currently have a core technical competence (voice, data, and/or video integration, cabling, etc.), while others have consulting backgrounds (network design, bill review, auditing, etc.). However, as this segment of the telecom industry has evolved through its initial life cycle, a number of the companies have specialized exclusively in selling network services.

In looking at the history of this industry segment, there is limited evidence to suggest that it exists in any measurable form prior to 1984. From 1984 to 1996, it grew, but still remained relatively small with the majority of the players selling for IXCs and resellers of long-distance services. However, after 1996, the channel experienced tremendous growth, according to the U.S. Department of Commerce. This was driven by the growth in the CLEC market and the launch of many of the LEC partner programs. Given this brief history and limited tools to identify channel partners, we found there is no single source of channel partner names for the telecom industry. We ended up creating a list of 5,000 companies from a variety of proprietary sources. Next, we screened this list by verifying that each company (a) currently sells network services as either a master agent, direct agent or subproducer, and (b) that one of its key revenue generators was the commission from selling network services. From the screened list, we interviewed and/or surveyed more than 300 companies to develop a general profile of a channel partner. In addition, we also talked to more than 25 of the top carriers to understand their partners and partner programs. Finally, we talked to a number of state and federal regulators (PUCs and the FCC) as well as federal agencies that measure economic data.

A profile on the surveyed group along with confirmed research data reveals that most channel partners are still relatively small businesses (see table: A Typical Agent Profile). However, in aggregate, partner companies may employ as many as 300,000 people and may influence as much as $40 billion in annual telecom revenue (see table: Aggregate Respondent Profile).

When we examined the revenue-generation methods of these companies, we discovered there were three primary business models used by wireline channel partners. They included direct sales using outside employees, call centers using inside sales employees, and master agencies utilizing independent individuals or companies to sell for commission only. A number of the agents used a combination or hybrid of more than one business model. It will come as no surprise that pure call centers tended to have more employees; however, they are not significantly larger (in terms of revenue) than are master agents. Most of the hybrid companies tended to be smaller; leading our research team to conclude there may be some value in specialization. Yet, when we compared reported cost structures, there were no noticeable differences across the business models. As an interesting side note, the most common business model used by wireless agents is a single retail store or multiple ones. Less than 5 percent of the wireless dealers used direct sales, call centers and/or the master agency platform; however, those that did, were significantly larger than the retail store agents.

MEASURING VALUE?

To assess the value of the channel to the industry, you have to first look at whats taken place in the industry over the last 20 years. Many of the early IXCs and resellers that came into existence after 1984 credit their sales agents (as they were referred to at that time) with the market share gains they obtained in competiting with AT&T. After 1996, there was tremendous growth in the number of carriers, employees and money flowing into the industry. Almost every significant CLEC developed a partner program and received 30 percent to 40 percent of their revenue from partners. This telecom bubble was followed by some severe and well-documented industry challenges beginning in 2000, reducing the number of competitors and the amount of new investment in the industry. However, total revenues did not decline as rapidly as total employees (see table: Revenue vs. Carrier Employment). Revenue declined by less than 2 percent in the wireline market, and overall revenue declined by 2.4 percent due to the growth in wireless; however, total carrier employment declined by almost 20 percent. Many of these displaced workers became sales agents. Almost 100 percent of the surveyed channel partner companies are led by, or have managers and employees who, worked for carriers prior to joining or starting agency. This reduced the economic impact of the carrier staff reductions.

In addition to playing major roles in the IXC and CLEC market expansions, other critical impacts the channel has had on the industry are in improved profitability, enhanced customer service and increased competition. These results come about because the channel is a less expensive method of distribution; these smaller organizations are more efficient at servicing end-user customers and providing them with more options.

As the channel continues to evolve and grow, it will become an even more critical and more stable segment of the telecom industry. This will increase the attention that it receives from not just carriers, but also from policymakers and regulators, especially in light of the recent megamergers. The latter two groups have a vested interest in understanding the impact on end users of utility services and small businesses as the larger players consolidate. This creates a great window of opportunity for the channel to not just shape its image, but also to protect and grow its interest. During the upcoming Fall 2006 Channel Partners Conference & Expo in Washington, D.C., our researchers will discuss this point in some detail, and provide more details about the survey results along with how you can participate.

Dicarlos Davis is an adjunct professor at Texas Southern University. Chetan Mehta is a consultant for Houston Technology Center.


Looking for More Information?

Discover the status and outlook for the communications indirect channel in the General Address: State of the Channel, 2:45 – 3:15 p.m., Wednesday, Aug. 23, at the Fall 2006 Channel Partners Conference & Expo. www.channelpartnersconference.com

Links
FCC www.fcc.gov
Houston Technology Center www.houstontech.org
Texas Southern University www.tsu.edu

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