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Feature Article
November 2002

Will Carriers Change Or Die?


For years, vendors raising capital to build �next-gen� equipment for the carrier infrastructure told Wall Street that service providers would simply have to change the way they did things -- fast -- or die.

Ironically, those trying to drive change have died first. Seemingly every week for two years, the bell tolled for a CLEC, or a next-gen equipment maker, or a forward-looking initiative within an incumbent. And finally, the poster child for competition, the icon now known as WorldCom, imploded like a house of cards.

Still, the mandate remains: surviving service providers must change, or die. 

But let us, as an industry, align expectations with reality and realize that change will come as it always has in telecom: slowly. And it will come, as many now deceased companies have claimed, in the form of broadband.

There�s an old philosophy in business that says you can have things better and faster, or faster and cheaper, but not better, faster and cheaper. Two years ago, the telecom industry appeared on the verge of overturning this adage as the onset of broadband networking promised to deliver an unprecedented three out of three: Services, speed, and savings.

But like the rest of the industry, broadband has been stymied. Service providers have already invested millions in VoIP, VoDSL, and other alternatives to traditional circuit-based infrastructure technologies. Customer demand for services, speed, and savings is off the charts. But still we are a major overhaul away from realizing the full promise of broadband. 

The problem is that amidst the current morass of market dynamics, broadband services, IP-based enhanced voice services in particular, are still being implemented as a defensive strategy by market leaders. The traditional incumbents now pretty much own the broadband market, but basically use the technology to safeguard dwindling margins on traditional services so they can still make money as they continue slashing prices. 

This is too bad, because the lapse into commodity pricing poses a far greater threat to incumbents than cable, wireless, satellite, or any other newcomers. With wireless services offering land office all-you-can-eat deals, the bread-and-butter of telecom -- PSTN minutes -- is becoming something many consumers can go without. Premium offerings are needed to reclaim margins and broadband can deliver it.

Broadband holds great promise for resurgence in pricing, and profits, by virtue of enabling new, premium services along with the lower-cost commodities; i.e., three out of three. Shame to use it simply for cheaper pipes, and the industry, slow as ever, is in fact realizing this.

The ultimate broadband evolution will be two-fold. First there must be a strategic shift, then a retooling of the infrastructure. The fundamental industry shift that must ensue has three components:

  • Acknowledgement of broadband as the savior not the enemy;
  • Commitment to change in service provider marketing and business models; and
  • Adoption of true customer focus.

For starters, carriers must commit to the true potential of broadband -- voice-over-packet (VoP) in particular -- and acknowledge it as their own ace in the hole, not a defensive competitive strategy or marketing banner to be waved every time they get accused of being antiquated.

Next, service providers must acknowledge that, even without any competition, certain aspects of the old business and marketing models no longer work. For example, under the current model, carriers still spend months rolling out new services and quilting together bundles and pricing plans. Marketed as �flexible,� it�s essentially still �take it or leave it.� Success relies on costly marketing efforts -- ad campaigns with celebrity endorsements, statement stuffers, giving services away for free trials. The hit and miss nature of these launches has augmented the erosion of margins and helped to hamstring CapEx to the point where bringing new services to market seems unjustifiable, even career-limiting.

There is an implicit challenge to vendors here as well. Service provider spending will continue to be driven by the dual need to obliterate CapEx and OpEx while also representing investment in the future. The technology needed to bring new profitability models to fruition will have to meet carriers� current, very stringent spending criteria by immediately improving the balance sheet.

For example, to get into the network in the first place, technology designed to facilitate open service creation has to do something else -- switching, routing, aggregation -- to improve existing service margins. New equipment needs to work with what�s in place, and do something that�s already being done better, faster, and cheaper, as well as move carriers forward. This is no small task at a time when the �God box� proposition has been shown to be fatally ambitious to many vendors during the past two years. 

The final necessary shift on the �strategy� side is a far greater embracing of true customer focus. VoIP hasn�t lured the bulk of voice minutes off the PSTN yet, but it has changed the mindset of customers to one that desires more control, greater ability to self-serve and customize, and probably the most dramatic change, the expectation of instant gratification.

Providers preach customer focus but their businesses haven�t been modernized to sustain it. From the security fortresses at the network edge to the billing systems based on fixed pricing, the network precludes interactivity. In many regions, it still takes a month to get DSL. 

Not only does �take it or leave it� feel archaic to users, it literally inhibits consumption. For example, untapped opportunity exists in simply allowing customers to dynamically provision an increase in bandwidth capacity for the duration of premium services that already exist, such as videoconferencing or distance learning. In many cases, if customers could try these services without a lot of upfront hassle or a long-term commitment, they might use enough to generate more revenues than they would on a subscription basis.

While we have focused here on the philosophical changes the industry must implement, which are clearly formidable in and of themselves, it is worth taking a brief look at the technological requirements.

If the recent expiration of countless start-ups hyping �next-gen� products has taught us anything, it should be that the metamorphosis of the telecom infrastructure will be far from simple, and far from sweeping. What comes next will need to work with what�s gone before, and what works just fine, thank you, today. 

That said, there are some requirements that will involve change and a move toward greater interworking and a more unified infrastructure providing quality assurances across a wide array of technologies -- ATM, IP, TDM, wireless, cable, and the like. Carriers will begin the shift toward a more versatile, customer-driven network by implementing platforms that improve existing profit models while beginning to introduce the new network model. 

For example, any investment in new technology will be expected to improve upon the economies of scale and the densities of incumbent platforms. The platforms that move us toward more interactive, service creation oriented business models must take QoS to new heights. Increasingly, ATM and IP interworking and traffic management will be united on one system ensuring performance and dynamic configuration for multiple underlying technologies. Open APIs will need to offer greater control of all parts of the network involved in defining, provisioning and delivering customized services. Finally, new systems will allow greater user control through Web application servers.

The specifics may vary, as they often do, from network to network, but at the end of the day, we will something like the next-gen network the experts prophesized.

High as the hurdles might seem, we are making progress as an industry. The FCC reports that there were 12.8 million broadband Internet connections in the U.S. at the end of 2001, 11 million of which were residential and small business. So dotcom Millionaire Syndrome survivors, carriers, and vendors alike, able to march to good old-fashioned five-year plans, can expect to start seeing more change and fewer deaths; and maybe -- just maybe -- that elusive three out of three.

Stephen Gleave is vice president of marketing at net.com. Net.com builds service creation platforms for broadband, IP telephony, and multiservice networks. For network service providers and operators, net.com platforms enable a fast return on investment, lower operating expenses, and profit from rapid creation and delivery of new services to end users. For more information, please visit the company online at www.net.com.

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