July 2001

The Emergence Of The Wholesale Services Provider

BY JEFF HARRISON

THE MARKET DYNAMICS
Demand for additional IP services, such as voice over internet protocol (VoIP), virtual private networks (VPN), fax over internet protocol (FoIP), and tandem access is growing exponentially. Compound the demand for IP services with the sheer magnitude of Internet users and it's easy to see why wholesalers must expand their infrastructure and incorporate new technology in their networks.

In order for wholesalers to meet this increasing demand they must invest in next-generation, multi-service, carrier-class access switches to deliver high-performance, high-volume network access and to optimize seamless integration of dial, VoIP, FoIP, VPN, and other IP services.

IP IS EVERYWHERE
Probe Research indicates that there were 127 million global consumers and small office/home office dial access connections in the year 2000, representing 75 percent of all Internet connections. With the Internet explosion just beginning in some countries, the global demand for dial up connections is forecasted to be more than a half billion by 2005.

This Internet user community has come to expect always available and extremely reliable service, like dial tone, from their ISP. In addition, ISPs and enterprises are searching for new services and performance levels to differentiate themselves in an otherwise price sensitive, commoditized market. These market forces have joined and created the existence of a new service industry referred to as wholesaling.

Instead of an ISP or enterprise owning and managing their own modems, they outsource to their service or network provider. Wholesaling addresses the needs of the Internet subscriber by leveraging the reliability and operational efficiency of the network service provider's infrastructure while enabling the ISP to focus on differentiating themselves through content, marketing, and customer relationships. ISPs and enterprises are expected to further derive the following benefits by outsourcing to a wholesaler:

• Reduced investment outlay;
• Increased geographical reach;
• Network and port scalability;
• Carrier grade reliability;
• Protection against technical obsolescence;
• Quicker time to market; and
• Reduced interconnection costs.

The business of outsourcing to a wholesaler is growing exponentially, with industry estimates reporting up to 50 percent of all enterprises and ISPs outsource all or part of their dial access to a wholesaler. IDC reports that the demand for wholesale services will increase substantially, with the wholesale market growing from $3.1 billion in 1999 to $13.4 billion in 2004.

INDUSTRIAL EVOLUTION
Service providers have traditionally focused on providing dial-up access between the Internet subscriber and their ISP or enterprise. However, to enable these future revenue predictions will require leveraging the existing dial-up infrastructure to provide revenue generating, enhanced services and next generation capabilities. Thus, the birth of a new services industry, the wholesale service provider.

Let's not ignore another motivation for wholesalers to rapidly move up the value chain -- to differentiate themselves from their competitors.

WHOLESALE SERVICES
The most fundamental of these services is a managed modem offering, wholesaling connectivity, between the PSTN network and the IP network, on a shared platform, coupled with 24/7 support. The savvy wholesaler can also provide managed bandwidth and Quality of Service (QoS). These services allow the ISP to subscribe to a set number of ports, or specific amount of bandwidth, given the time of day or day of the week. The wholesaler can also offer different service level agreements, ranging from "best available" to guaranteed, dedicated ports.

The reality is IP services are becoming commoditized and subscriber churn is further eroding margins. The ISP has the opportunity to outsource these operations to a wholesaler who can more efficiently and cost effectively host these services to a greater number of customers, leveraging a single financial investment. Examples of these services include e-mail, news services, and Web page hosting. In hosting these services, the wholesaler begins to progress up the value chain.

The enterprise and ISP customer needs assurance that their messages -- packets of data, targeted for an end point -- reach their destination through a secure network, also known as a virtual private network (VPN). This service is largely driven by the need for corporations to securely network telecommuters and mobile employees to their corporate offices. Benefits include:

• A new revenue stream for wholesalers;
• Same level of security as ISPs; and
• Lower cost IP connections for the enterprise.

An alternative to voice switching is Tandem access -- which is simply a remote access server (RAS). Tandem access offers the service provider the ability to switch both voice and data calls received on incoming inter machine trunks, directly on the RAS platform, sometimes referred to as switch grooming. Benefits accrued to the service provider include:

• Fewer translation tables to create and maintain;
• Cost effective alternative for offloading PSTN network congestion onto the IP network; and
• Ability to increase access termination revenues.

The convergence of voice and data access has created a host of new revenue possibilities for service providers. Leading the charge for applications is VoIP, the ability to alleviate PSTN congestion by offloading voice calls onto the packet network. Both the service provider and the Internet subscriber stand to benefit, resulting in the emergence of a win-win application. Service providers will benefit through deploying voice services free from the burden of tariffs and regulations. Internet subscribers will likely trade long-distance toll charges for the low cost, flat rate pricing of the Internet. However, with today's technology, the most promising markets for VoIP remain corporate intranets and the Internet hobbyist.

Will any of these services become a "Killer Application?"

VoIP is the most significant service, measured in market size. Probe Research estimates that voice over packet networks carried approximately eight billion minutes of use in 2000. By 2005, VoIP is expected to carry more than 75 times that amount. TeleGeography, a Washington, DC based research group, suggests service revenue will grow from $1.6 billion in 2000 to $18.7 billion in 2004.

According to Probe Research, VPN services will have the next highest level of growth at 91.9 percent CAGR, with revenues reaching $7.4 billion by 2003.

With statistics like that, you may be wondering: What technologies are required to migrate from traditional modem wholesaling to these value added services? And, more importantly, how does a service provider get there without a "wholesale" replacement of their RAS investment?

The largest enabler of VoIP, FoIP, and modem technologies is Universal Port. Universal port is an integrated multi-service platform, which enables VoIP and tandem applications on the same platform and uses the same software load as the RAS application. A universal port provides the following added value to the wholesaler:

• Lowers operational costs because the modem and voice termination is on the same port thus reducing space, heating, and cooling requirements;
• Protects the wholesaler's existing infrastructure investment as they expand to voice; and
• Eliminates the need for expensive TDM switches to split voice and data traffic.

The universal port also has the ability to create the illusion of a virtual point of presence (VPOP) which enables wholesalers to partition their RAS equipment into a series of mutually independent access switches, each of which has its own authentication method, database, billing system, and management interface. This technology enables:

• ISPs and enterprises to "virtually" locate their POP within the wholesaler's network;
• Isolation of subscribers; and
• Re-use of physical facilities for maximum return on investment.

THE CHALLENGES AHEAD
Many factions contribute to the end users experience, the wholesaler, the equipment provider, and the ISP or enterprise. Each will need to collaborate and
contribute to resolving the challenges in deploying future services that resonate with Internet subscribers while generating a profitable return on their investment. A few examples include:

• Provide users with an experience equivalent to the PSTN;
• Affordably and economically deploy enabling technologies on incumbent RAS platforms;
• Improve interoperability across equipment manufacturers;
• Increase backbone bandwidth capacity;
• Generate profitable applications that resonate with Internet subscribers; and
• Protocol standardization.

By upgrading the incumbent RAS technology with these newer enabling technologies, offering profitable value added services, and joining forces to overcome the inevitable challenges, the wholesaler will truly obfuscate the boundaries between the PSTN and IP networks, public and private networks, residential and commercial markets, and voice and data technologies.

Jeff Harrison is senior manager, CVX Product Marketing, for the Wireless and Core Networks line of business at Nortel Networks. Nortel Networks is a global Internet and communications leader with capabilities spanning optical, wireless, local, personal Internet, and eBusiness. 

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