Service Providers In Transition
BY SAMEER PADHYE & DOUGLAS FROSST
Service providers are living in interesting times. Customers are
demonstrating an increasing desire for ubiquitous access to information and
communications. Increases in computing and networking speed and capacity
have enabled fundamental shifts in business and personal productivity.
Business models are shifting as people take advantage of opportunities
presented by these changes, in some cases building new companies oriented
around communications and rapid delivery of specific information.
At the same time, economic forces have service providers focused on such
near-term issues as revenue, debt reduction, and free cash flow. Virtually
all communications services continue to experience usage increases, but
changes in competitive intensity and buyer behavior have put service margins
and revenues under pressure. All of these factors, plus changes in the
telecommunications industry, have forced service providers to seriously
evaluate how they fundamentally manage their overall businesses.
There are three major industry forces operating now that are pushing service
providers towards a new way of doing business. And, while all of these
forces have occurred before in the communications industry, they have not
existed concurrently. These forces are changes in regulation, networking
technology, and customer behavior.
The first is the external and sometimes unpredictable force of government
regulation. Communications services back as far as postal mail in the 1800s
have had to deal with this phenomenon. Regulatory changes have been
responsible for some of the most significant changes in communications
services, such as the 1984 break-up of AT&T or the privatization of various
European telecom services. But most of these changes occurred during periods
when other industry forces were relatively weak.
The second major force is the global shift in networking technology. Over
the past few decades, communications networks have become increasingly
interconnected. These interconnections have strengthened the development of
networking standards in order to ease the connectivity effort. But the
proliferation and acceptance of these standards has also reduced the
proprietary aspects of networking services, affecting the inherent
competitive advantage for service providers. Technology changes have been a
major force in the past, such as the shift from analog to digital switches.
But again they have occurred during periods when other forces were weaker,
allowing them to be more readily digested.
In addition, the industry is currently assimilating significant
technological change. New technologies provide opportunities for new
services and considerable operational savings. Networks are being
transformed from circuit- to packet-based, consolidating multiple
communications services onto a single network. The pace of change has
increased as well, resulting in shorter product lifecycles and the emergence
of several potentially disruptive technologies. While providing
opportunities, this is also creating challenges to current operational
Perhaps the biggest force operating today is that of the customer. In the
absence of regulatory and technology forces, this would have far less
impact. But regulatory changes and a ubiquitous, increasingly interconnected
and standards-based network allow users to take apart the value chain.
Widely available services face rapid price erosion, while scarce and
essential services could command a premium, but also attract competitive
The Transition from ï¿½Time and Distanceï¿½ to ï¿½Bandwidth and Servicesï¿½
In order to increase revenue and profitability, the industry and market
forces described above have pushed service providers to consider a serious
change in their business models. In regulated telecommunications markets,
resources such as long-distance links were expensive and limited. Business
models based on time and distance were developed to manage these resources.
Calls were charged based on where you called and how long you talked. As
data services emerged, they naturally followed this time and distance model.
In fact, throughout the entire history of communications, the progression
has been to start as expensive and limited services. As a result of
economies of scale and technological improvements, prices dropped, the
addressable market expanded and usage increased.
While the time and distance model worked for many service providers,
customers did not really like it. Dr Andrew Odlyzko, Director of the Digital
Technology Center, and Assistant Vice-President for Research at the
University of Minnesota addresses this issue in a paper entitled The History
of Communications and its Implications for the Internet. According to Dr.
Odlyzko, users prefer simpler pricing models because it protects them from
suddenly large bills and reduces the need to calculate the value of each
As customer requirements change, service providers adjust to a new
business model built around bandwidth and services. For example, mobile
phone plans are now structured around blocks of minutes (the bandwidth) and
calling features (the services) as opposed to the ï¿½time of usageï¿½ and
ï¿½distance calledï¿½ model when they debuted.
Like any business transition, the shift from time and distance to
bandwidth and services has its challenges. The current economic situation
only increases these challenges. IT and telecom budgets are flat or under
scrutiny in many organizations. And, in the face of challenging marketplace,
service providers will need to look at delivering bandwidth and services
that move value from other existing expenditures. Doing this involves a more
vertical and niche focus than has been typical for communications services.
The Customer Value Chain
As we experience significant change in the telecommunications industry, as
well as a slowdown in the global economy, it is crucial to understand the
customerï¿½s problems from an economic perspective. Where do they spend their
time and resources? What is keeping them awake at night? By answering these
questions, carriers will identify the specific bandwidth and services that
can improve the customerï¿½s value chain -- translating to competitive
advantage and additional revenue for the service provider.
The telecommunications value chain can be deconstructed at various
points. The following is a look at three of these points and the resulting
service provider opportunities.
Some customers have sizeable bandwidth requirements and place a high value
on control of their network. This could be an engineering firm with large
amounts of data to transfer between sites, a financial company with high
priority, redundant storage needs, an organization looking for network
transparency across a local campus area, or a research and education
organization running grid-computing applications. An option for these
customers is to lease their own fiber. This could be in the form of unlit or
ï¿½darkï¿½ fiber, or specific wavelengths, also known as ï¿½dimï¿½ fiber. These are
referred to as customer-owned or asset-based networks. The benefit to the
customer is the ability to control all aspects of the network and have
ultimate flexibility with network characteristics.
The service provider also obtains significant benefits from this model.
In a time when capital expenditures are under a magnifying glass,
asset-based networks move most of the capital risk to the customer. The
service provider can focus on network operations and management, instead of
capital management. By reserving a few wavelengths for themselves, they can
continue to develop and offer value-added services. Or they can focus on the
bandwidth part, leaving the services to the customer or third parties, such
as content or application service providers. This model has been followed
with success in many other industries, such as transportation.
Virtual Private Networks
For many customers, the network is a foundation for the business itself.
But, operating the network is not a core competence. In addition, as a
result of outsourcing, globalization, and increasing reliance on
partnerships, organizations are no longer monolithic entities. Terms such as
networked virtual organization (NVO) are being used to describe these
relationships. These organizations may need to rapidly connect to new
locations or securely and selectively link to other companies. In addition,
communications is moving from traditional hub-and-spoke style to a mesh or
any-to-any format. These changes in organizational and application behavior
are creating pain points in the network that identify opportunities for
Utilizing the wide range of virtual private network technologies, service
providers can deliver targeted combinations of bandwidth and services to
alleviate these network issues. By focusing on customers with the greatest
potential for improvements, they can more readily manage the transition from
existing time- and distance-oriented solutions, reducing the impact of
Carriers can leverage this first group of customers, using these same VPN
technologies to consolidate existing networks in a step-by-step fashion.
Each step creates additional service opportunities, through geographic
reach, added service functionality, or reduced cost. Eventually, the scope
and economies of scale will provide the foundation for a broad set of
bandwidth and services across the entire customer base. This cycle of
targeted services followed by leveraged capital expansion has been applied
with success in many capital-intensive industries.
At first glance, IP telephony is just a technology transition. Voice and fax
communications across an IP network are indistinguishable from those across
a TDM network. But it is this interchangeable aspect that provides a
Voice communications are an important part of any business. Technology
advances in the recent past have enabled a greater connection and utility
between phone numbers and identity. Phone numbers are increasingly
identified with an individual as opposed to a location.
Service providers can use a variety of IP telephony services to connect
the various parts of an NVO, extending phone identity wherever itï¿½s desired.
Calls and voice messages can be seamlessly transferred between parts of the
organization, while appearing to the customer as a single company. Employees
can assume their telephone identity from anywhere a network connection
exists: their office, a conference room, hotel room, or client site.
Additional information such as phone directories, client data, or urgent
business notifications can be delivered directly to the IP phone, further
improving productivity. Rather than just a replacement for TDM voice
solutions, IP telephony enables significant revenue opportunities for the
The transition to a bandwidth and services business model provides enormous
opportunities for carriers. Historically, there was a strong economic
relationship between the flow of goods and the flow of information. The
spread of communications is unraveling this bond (see Blown to Bits, by
Philip Evans and Thomas S. Wurster, Harvard Business School Press). As the
prime movers of information, service providers are uniquely positioned to
explore the value chain of information flow, and to develop new economic
models that benefit them as well as their customers.
This article was written by Sameer Padhye and Douglas Frosst of Cisco
Systems, Inc. Cisco is a leader in networking for the Internet. Ciscoï¿½s
IP-based networking solutions are the foundation of the Internet and many
corporate, education, and government networks around the world. Cisco
provides a broad line of solutions for transporting data, voice, and video
within buildings, across campuses, or around the world. For more
information, please visit www.cisco.com.
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