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The Great Consolidation
One byproduct of the convergence is that the telecom service provider space is in the midst of a massive M&A wave, from blockbuster deals -- AT&T’s proposed ac-quisition of T-Mobile USA, CenturyLink’s Qwest buy, Verizon’s nabbing of Terremark, last year’s three-way combo of MegaPath, Covad and Speakeasy -- to smaller, but hardly insignificant acquisitions.
And it isn’t just service-provider-to-service provider deals: Various players up and down the telecom channel food chain, from master agents to regional service providers to VARs, are also acquiring each other with greater frequency.
Master agent Micro Corp.’s late June acquisition of New Smyrna Beach, Fla.-based Five Star Communications, a top Qwest VAR in the Southeast, is one example. Tokyobased Nippon Telegraph and Telephone Corp. (NTT) buying integrator giant Dimension Data last year for $3.2 billion is another.
Another active M&A participant is Fairport, N.Y.-based service provider Paetec, which has acquired several solution providers in the past decade and in the past year made two big investments that raised a few eyebrows among its channel partners: a June 2010 acquisition of Folsom, Calif.-based Quagga, which gave it a broader footprint on the West Coast, and this past February’s $61 million buy of Broken Arrow, Okla.-based Xeta Technologies, which upped its stake in the Midwest.
Both Quagga and Xeta were Avaya Platinum partners, and both had themselves been acquiring smaller VARs before becoming part of Paetec. Donna Wenk, senior vice president of sales operations at Paetec, said she does understand that Paetec owning those VARs means it also competes with its VAR partners, but said the rules of engagement for the Paetec channel are pretty clearly defined.
“We definitely get some complaints,” she said. “Little alarms ring out and they want noncompetes and there’s a lot of worry. The answer’s been simple: As long as you’re bringing us in for the network, we promise not to compete against you for the equipment. We bought VARs in 1999 and 2000, and I wrote the letters to the VARs then. Many of them are still with us.”
Even as it acquires, Paetec has also been growing its stable of data networking-centric VARs. Solution providers can be referral partners for Paetec or full-blown services resellers, the latter of which earn higher residuals, as high as 20 percent in some cases, she said.
“We need more data-savvy partners helping us push our products,” Wenk said. “It’s a tough knowledge set to find out on the street. We’re definitely recruiting.”
Committing To The Cloud
At the end of the day, channel observers agree, the driver for carrier services among VARs is about being able to say, “Yes, we can do that,” and offering what the VAR down the street can’t. According to channel observers, that means having a clearly defined services strategy that addresses the cloud. Telecom agents, too, are going to need to adapt their businesses to better compete against VARs taking more of their business.
“I do think they need to have a broader book of business. Longer term, they will need to bridge out,” MegaPath’s Foster said of carrier agents. “I think near term, what they do is continue to enable those integrators and VARs. If you’re a large master agent and the VARs you’re attracting do $300 million and $1 billion, you’re talking about the future of the distribution channel.”
The great VAR migration into carrier sales is still very much in its infancy, however.
“Everyone, especially in the agent world, looks at the VAR [channel] as the next best thing and in most cases it is,” said XO’s McNamara. “But VARs are used to the P.O. being written, the customer signing it, the product being shipped out, and moving on to the next sale. They’re not used to a T1 order than can take six months to install and another two months to receive commissions.
“If you grow up on the hardware side, it’s harder to understand telecom,” McNamara added. “If you don’t commit to it, you’re not going to be successful. You can’t be half-pregnant.”