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Whats Ahead for the Channel?

Mergers between the countrys largest telephone companies have driven the indirect sales channel uncomfortably close to familiar and frightening territory a place in the past where they were ignored and undervalued. The path toward consolidation is likely to continue, analysts say, but where will it stop? Is the AT&T Inc.-BellSouth Corp. deal a foregone conclusion? Will Qwest Communications International Inc. be a target? What will happen to Sprint Nextel Corp. or XO Communications Inc.?

The channels primary concern is how the surviving entities handle the agent relationship? But will a shrunken supply pool inherently have less need for an indirect sales force? In that case, how do partners retain their value? And, how do they choose which tractors big and small to hitch their trailers to?

MERGE AHEAD

Of course, the megamergers of AT&T Corp. with SBC Communications Inc. and, especially, Verizon Communications Inc. with MCI Inc. have partners concerned. Proposed changes, such as the insistence on exclusivity, to the newly combined Verizon Solutions Partner Program have been criticized by partners speaking off the record in private conversation and in the trade press. Verizon has told PHONE+ it is seeking input from each of its agents before rolling out its final policies sometime this summer, but not likely later than September. Agents, again anonymously, have said they are optimistic about the progress of those discussions, but that they have been slow.

In contrast to Verizon, which gained a thriving MCI channel, AT&Ts new program has elicited few grumblings. Perhaps this is because ACC Business, an AT&T brand serving the commercial market using AT&Ts facilities, has continued its partner program business as usual. It also might be because AT&T did its major channel cutting effort in late 2004, when it canceled an unspecified number of agent contracts on 30 days notice as specified in their agent agreements. The company claimed at the time still to have 800 agents on the rolls. For SBCs part, it also has had its share of ups and downs with the agent community with many major changes occurring around the telecom downturn in 2001.

Nevertheless, PHONE+ has been unable to secure an interview about the details of the combined AT&T-SBC program after months of repeated requests. AT&Ts presence at PHONE+s Spring 2006 Channel Partners Conference & Expo a first for the company seemed to send partners a hopeful signal.

A possible reason for the delay in public release of information is that AT&T is seeking regulatory approvals to acquire BellSouth. The deal is likely to go through, despite vocal opposition (see sidebar on Page 31). It is recognized widely by analysts, such as Victor Schnee, president of Probe Financial Associates Inc., that the pairing is designed to consolidate ownership of Cingular Wireless despite all the other assets that come with the deal. While the wireless strategy may have merit, the companys growing girth raises concern.

There is a clear problem in that AT&T and Verizon are not delivering value to shareholders, says Schnee. The reason, in our opinion, is they dont make sense as business entities. They are so complex. They are in so many businesses. They have so many offsetting, and sometimes contrary, business interests within the same organizations that they are suppressing and destroying value.

Schnee says this is likely to trigger some deconsolidation among the larger companies, e.g. splitting off the local business the way Sprint Corp. did with EMBARQ Corp., now the fifth-largest local communications company in the country with 7.4 million access lines in 18 states. While the market still is trying to figure out how to value the local telco spinoff, Schnee says its possible that it could be worth more than it was as part of Sprint.

In a similar way, he says, Verizon could spin off its local or wireless businesses and create greater value for each. I think their stock would jump if they ever said they were going to split the company up, he says.

Without a strong wireless business like Verizon has, AT&Ts breakup is less clear, but Schnee says the complexity of the combined operation, especially after BellSouth is added, makes its successful operation implausible. We wouldnt be surprised to see them uploading part of their holdings, he says.

How this deconsolidation might impact agents is purely conjecture; however, one scenario involves a consolidator that might absorb shed lines of business. Schnee points to EMBARQ or Qwest as potential consolidators. The trouble with Qwest, however, is its debt load, which makes it very difficult for the telco to get financial backing to make a big acquisition, says Schnee. At the same time, its also a deterrent to its being acquired another concern agents have voiced.

In response to a question about its likelihood as an acquisition target, Qwest Chairman and CEO Richard Notebaert was quoted in a May 20, 2006, New York Times article saying the company was not unattractive based on its decreasing debt load and profitability.

Its hard to see who would buy them, Schnee says, dismissing the idea of AT&T or Verizon buying Qwest with its current balance sheet. He also is unmoved by the suggestion of a foreign PTT coming in, saying they are largely uninterested in U.S. ventures at present.

However, its not too hard to imagine that Deutsche Telekom (DT) could find value in Qwest since the German carriers U.S. presence, T-Mobile USA Inc., is exclusively wireless. Buying a local and/or long-distance wireline network could have appeal unless DT fears devaluing its wireless business with wireline assets.

Yankee Group Analyst John Romagnoli says a PTT acquisition is a possibility, but he questions the value of the companys long-haul presence. In this day and age, its not how big your network is but how deep it is how many buildings you have on your network, how many customers you have on your network and how much revenue it generates, he says.

NEXT EXIT

Aside from Qwest, the agent community has expressed concerns over the futures for Sprint and Global Crossing. To me, those three are the most critical to maintaining some type of competition in our industry, says Ernie Kelly, executive director of the Agent Alliance consortium and former executive director of competitive industry association ASCENT, which merged with COMPTEL in fall 2003. If those guys get sucked into something bigger, what does that mean?

Sprint, less its local business, is focused on its wireless services, making it an unlikely candidate for acquisition by either of the top carriers, which likely would be barred from paring down the already small number of wireless carriers. Its deal to provide wholesale wireless services to the cablecos also could stave off advances from the MSOs.

Global Crossing Ltd., on the other hand, faces the network depth problem. And, says analyst Schnee, the company like most interexchange carriers has a lot of assets and little business, making it difficult to attract a buyer. He suggests a combination of the remaining IXCs Global Crossing, Level 3 Communications Inc. and Broadwing Communications LLC could be better off.

Control of the network and pricing is whats underlying the big Bell-IXC pairings, says Romagnoli. But, he says, if you look at the second- and third-tier carrier consolidation efforts, they are designed to increase metro penetration. The list of metro network providers reads like a veritable shopping list for interexchange carriers. Level 3, for example, has purchased a spate of them, including Progress Telecom LLC, TelCove Inc., ICG Communications Inc. and Looking Glass Networks. If you look at Level 3, every acquisition they make is pointed at getting their product closer to the end user, Romagnoli says.

He expects carriers like Level 3 and XO to continue to make such strategic purchases. Of course, each is also a possible acquisition target, he concedes. XO, he says, has positioned itself to be bought when last fall it separated its wireless assets, which it now calls Nextlink Wireless Inc. If anyone comes in to buy [XO] it would be a cableco or ISP or a nonfacilities-based player who needs a network, Romagnoli says.

The same could be said for Level 3, which is rumored to be a good match for a Google Inc., which could be seeking an insurance policy against its advertisers content being blocked or slowed by network providers unencumbered by net neutrality mandates that are having a hard time making their way in to Congress telecom policy rewrite.

Among the smaller CLECs, there is likely to be more consolidation. The most recent match-up being TelePacific Communications with Mpower Communications Corp. both channel-friendly companies. The surviving entity, TelePacific, already has stated that it will continue to support the channel once the deal is finalized later this summer.

Terry Barnich, chairman and president of consulting firm New Paradigm Research Group Inc., has been following the CLEC market for the past 10 years. He says CLECs are still in survival mode. Some will try to stick it out; some will forge partnerships and some will exit, he says.

Eventually, they are going to execute on some exit strategy, says Kelly. The biggest issue there is valuation. I dont think the valuations have returned yet six years after the telecom and dotcom industries began to have problems, he says, noting that chances of a deal falling apart are very likely in his experience.

While CLECs contemplate their next lane change, a speedy newcomer may be bearing down on them. Barnich points to the potential for new VoIP-based entrants to leapfrog CLEC network technology. With the big carriers looking at offering wholesale Ethernet in the metro, it makes it less difficult to offer VoIP, he says, noting the CLECs tied to network investments must achieve operational density to support them while a VoIP provider is not similarly constrained.

The dependence of VoIP providers and most CLECs on incumbent facilities, however, remains a major vulnerability for a varied supply pool. The concern is there is no longer at least not here and now any regulatory protection; its pure business, says Romagnoli, noting that CLECs can count on increases in the wholesale rates they pay under commercial agreements for the former UNE-P or special access services. If they cant find a creative way to bypass the incumbent local network through technologies like wireless, their only other option is to grow revenue and stay in front of anticipated increases.

CURVED ROAD AHEAD

So where are we headed? We are not going to end up with a neo Bell system, says analyst Schnee. Nevertheless, all of this wheeling and dealing is likely to result in a smaller supply pool for channel partners. The more the options disappear, the less leverage you have in your negotiations, says the Agent Alliances Kelly.

Dan Baldwin, president of TelecomAssociation, a member organization for agents, also observes that with fewer carriers, it is easier to drive end users to telco inbound call centers and in-house reps, reducing the value for the typical agent.

Bill Power, president of the Agent Alliance and president of ARG, an agency based in Virginia, says that there is not much partners can do to prevent consolidation, but it is incumbent on them to start pleading their cases as soon as the pairings are known. Agents have got to proactively get involved in educating the survivor so their needs and value are understood, he says.

Jim Butler, president of California-based master agency TeleCHOICE, adds when companies do due diligence for an acquisition, they sometimes overlook the indirect sales channels contribution to making a service provider a good acquisition target.

The call for diversity, which rang loud and clear following the deluge of bankruptcies following the telecom downturn, also bears repeating. Most every agent has a tale of contracts rejected and commissions lost during that period of time.

Thats one reason we are so concerned about contractual language, says Power, speaking of a long-term Agent Alliance initiative to develop carrier agreements with protections for the agent in the event of bankruptcy or sale. Negotiating inclusion of that language is going to be the next challenge, but developing it is our highest priority.

Agents have not expressed outright concern that XO might be bought, said Jim Delis, president of XOs Indirect Channel. Instead, he says, their concerns are implied by the protections they are seeking in their contracts. Some agents who got caught off guard with the changes in the big carrier programs are either gun shy or more careful in their conversations with XO and other carriers, he says.

XO, says Delis, has been a beneficiary of the uncertainty agents feel over the future of the top carriers programs. We have had 10- to-12 new contracts with partners in the last two months, he says. Our prospect funnel is two or three times bigger than it has been in the past.

Delis says XO has been focusing on ways it can improve its channel support. XO is maturing the way we run our program, he says, noting that XO has set more realistic sales targets that keep in mind the growth in an agents book of business.

This approach helps agents who are working to achieve diversity by lowering the percentage of their base thats tied up with one carrier.

Moving business away from a Tier 1 carrier with agentunfriendly policies remains a possibility for agents. However, there are drawbacks beyond having to wait until their customers carrier contracts end. One of these is the type of customer that can be served. If we were no longer able to use the big name providers, we would have to move our business downstream, says ARGs Power, noting multilocation and international clients typically prefer name brands.

Power says he doesnt lose sleep over this prospect. As agents, we have no investment in plant and equipment, he says. We can adapt as the industry changes. While we have minimal impact on the way the industry evolves, once it starts, we can turn on a dime.

Baldwin says its incumbent on agents to focus on enhanced service offerings, such as VoIP for SMBs, which are still at the beginning of the marketing bell curve and that rely on the commodity carrier network services as part of an overall solution.

Agent Butler agrees. He says consolidation presents an opportunity for smaller players to come in and get into the gaps and look for marketing companies, such as agents, to partner with them.

One of these companies is Aptela Inc., which develops and offers a Web-based communications platform. CEO Howard Friedman says in light of consolidation among the top transport players and the encroachment of IT into the telecom space, agents are looking for other ways to provide value to end users and be compensated. We are offering them a highly discriminating service, says Friedman, saying that it provides agents meaningful differentiation.

Short of philanthropy, lending the support of an agents marketing muscle to an innovative provider like Aptela or an alternative last-mile provider like RCN Corp., which has residences and buildings on-net, or companies that are investing in wireless access networks like Covad Communications Group Inc., also can help to ensure a diverse supply pool.

Finally, partners must look inward at ways they can increase their value to suppliers. For some, this means investing in a backoffice to offload carrier tasks. For others, this means taking ownership for the customer relationship and servicing its needs with a consultative approach. For that, there could be a substantial payoff. Delis of XO says his company recognizes the range of value that an agent could provide and has proved willing to provide compensation plans accordingly.


Groups to FCC:
Deny AT&T-Bellsouth Merger



By Kelly M. Teal

In the face of the proposed merger of AT&T Inc. and BellSouth Corp., companies and associations are uniting more tangibly than they did when AT&T bought SBC and Verizon Communications Inc. bought MCI Inc. in 2005. Those mergers went through too easily, the groups say, and now they have joined to oppose such rubber stamping. One of the first steps was to file comments with the FCC, urging the agency to deny the AT&T-BellSouth combination because of irreparable harms to competition and consumers.

However, the FCC is not likely to bar the merger and, in light of that, Cbeyond Communications, COMPTEL, Grande Communications, Media Access Project, the National Association of State Utility Consumer Advocates (NASUCA), NuVox Communications Inc., the Organization for the Promotion and Advancement of Small Telecommunication Companies (OPASTCO), Supra Telecommunications & Information Systems Inc., Talk America Holdings Inc., XO Communications and Xspedius Communications all asked the agency to impose a number of conditions, more than were put on SBC and Verizon.

For example, the entities are seeking provisions including continued access to AT&T-BellSouth UNEs, with rates capped at current levels; continued access to AT&T-BellSouth special access services at rates capped at current levels; requirements that AT&T keep offering wholesale private line services at current rates in BellSouth territory; access to copper loops decommissioned by AT&T and BellSouth; divestiture of AT&Ts metropolitan network assets in BellSouth territory and BellSouths wireless assets, including licenses in the 2.5GHz range.

The groups contend a merger between AT&T and BellSouth will only create a larger monopoly that thwarts competition. They also are concerned that net neutrality assurances will be eliminated by a Bell monopoly.


Looking for More Information?

Join the discussion about the changing competitive landscape during the session titled, Executive Roundtable: Surviving Consolidation, on Wednesday, Aug. 23, at 1:15 p.m., at the Fall 2006 Channel Partners Conference & Expo in Washington, D.C.

Links
ICG Communications Inc. www.icgcomm.com
Level 3 Communications Inc. www.level3.com
Looking Glass Networks Inc. www.lglass.net
Media Access Project www.mediaaccess.org
Mpower Communications Corp. www.mpowercom.com
NASUCA www.nasuca.org
New Paradigm Research Group Inc. www.nprg.com
Nextlink Wireless Inc. www.nextlink.com
NuVox Communications www.nuvox.com
OPASTCO www.opastco.org
Probe Financial Associates Inc. www.probefin.com
Progress Telecom LLC www.progresstelecom.com
Qwest Communications International Inc. www.qwest.com
RCN Corp. www.rcn.com
Sprint Nextel Corp. www.sprint.com
Supra Telecommunications & Information Systems Inc. www.supratelecom.com
Talk America Holdings Inc. www.talk.com
TelCove Inc. www.telcove.com
TeleCHOICE www.telechoice.net
TelecomAssociation www.telecomassociation.com
TelePacific Communications www.telepacific.com
T-Mobile USA Inc. www.tmobile.com
Verizon Communications Inc. www.verizon.com
XO Communications Inc. www.xo.com
Xspedius Communications www.xspedius.com
Yankee Group Research Inc. www.yankeegroup.com

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