Mergers Ring Hollow

VARs said they're providing more innovative converged voice/data solutions without the help of the large telecommunications carriers, which seem more interested in encroaching on solution provider territory than in working with partners.

This situation only stands to worsen as there is further consolidation in the industry, which is expected this year, they said. Last week, on the heels of the SBC-AT&T deal, reports surfaced that Qwest Communications has made a $6 billion bid to purchase MCI. Amid all this industry upheaval, solution providers are turning to competitive local exchange carriers (CLECs), cable companies, hosted VoIP companies and other alternative providers of Internet access to drive VoIP and networking solutions to end users.

"Why would I want to engage a Baby Bell in my account when they're trying to provide the same services as integrators?" said Chris Vincent, senior vice president of Global Data Systems, Lafayette, La. "I can go to Time Warner and get a wealth of services and guess what? They don't want to play in my space."

Companies such as Littleton, Colo.-based Time Warner Telecom, Beaverton, Ore.-based Integra Telecom, Vancouver, Wash.-based Electric Lightwave, Fairfield, Ohio-based PowerNet Global Communications, Denver-based Level 3, San Jose, Calif.-based Covad Communications and a slew of others can provide data services, high-speed Internet access, even a dial tone, comparable to what the carriers offer.

While their services may be riding on lines that are ultimately owned by a large carrier such as SBC, Verizon or Sprint, they handle the service delivery, and so eliminate the need for VARs to deal directly with large service providers.

Though these alternative carriers, most often called CLECs, have weathered tough times alongside their larger competitors in the embattled telecom industry, further consolidation among the large carriers spells an opportunity for them to forge ties with VARs that would much rather leverage them than an SBC or Verizon for IP lines.

Cable providers such as Comcast and Cox Communications also are positioned to work with VARs to circumvent the carrier for the high-speed lines needed for IP solutions. And hosted VoIP providers such as Vonage and Nuvio are building relationships with VARs to package together next-generation voice/data solutions for customers.

"[These companies] have a tremendous opportunity right now to come to us and say, 'How do we start working together? How do we work with you to compete with these [carriers] who want to put one foot in every one of the squares?' " said John Freres, president of networking VAR Meridian IT Solutions, Schaumburg, Ill.

Freres said it's not uncommon for Meridian's telecom practice engineers to assess a customer site and discover a carrier such as SBC has been receiving payment for years for lines that no longer carry traffic. That type of situation poses a new opportunity for Meridian and other VARs to suggest alternative offerings to the customer that will not only save them money, but also allow them to upgrade to IP-based telephony and other new technologies to help them advance their businesses.

"The real opportunity here is for companies to start figuring out creative alternatives [to working with major carriers] so they don't have to deal with this bureaucracy," Freres said. "Service providers have really preyed on the ignorance of the customers. We are coming up with interesting ways of architecting [solutions] around SBC."

In this context, carrier consolidation such as the deal between SBC and AT&T ultimately doesn't matter to solution providers, said Pat Scheckel, the Cisco practice director for Madison, Wis.-based Berbee Information Networks, a $250 million solution provider that competes against carriers like SBC in the VoIP space.

"SBC acquiring AT&T doesn't really affect what is going on at the ground level with VoIP," Scheckel said. "What you are seeing is that CLECs and hosted service providers are teaming up to offer more innovative solutions. And VARs like Berbee are developing solutions tailored to specific vertical industries. That is not innovation that is coming from a Ma Bell or a Baby Bell."

All of this competitive activity could serve to thwart the efforts of the combined SBC-AT&T to offer more VoIP and next-generation network services, which AT&T Chairman and CEO Dave Dorman said was one of his company's reasons for going forward with the deal, according to an e-mail to AT&T employees viewed by CRN.

Dorman wrote in the e-mail that the timing was right for the deal because both SBC and AT&T are at a point where "we're fundamentally redefining ourselves."

"In AT&T's case, [that means] moving our focus away from traditional consumer services and toward the enterprise market and new VoIP and wireless offerings," Dorman wrote. Several VARs, who did not wish to be identified, said the layoffs and confusion that come with such a deal make it less likely they will sell AT&T network services. SBC has already stated it will lay off 13,000 employees after the merger.

"As a partner, I really don't want to resell anything that doesn't have a support system behind it," said one AT&T partner. "There are a lot of people inside AT&T worried about their jobs."

In a conference call with partners last week, Celine Azizkhan, vice president of AT&T Indirect Sales Channel, attempted to ease partner concerns about the future of AT&T's channel after the buyout. Azizkhan stressed that channel partners are a significant part of AT&T's revenue plan, and said it was "business as usual" in terms of the company's commitment to partners.

"Business as usual" for AT&T partners in the past several months has included the carrier unceremoniously cancelling more than 500 agent contracts and changing the compensation plans of those remaining to eliminate up-front bonuses. These moves infuriated partners and caused many to reconsider partnering with AT&T at all.

An SBC spokeswoman said that aside from the desire to capture AT&T's enterprise customer base, SBC recognizes it must better compete against the CLECs. The spokeswoman added that courting VARs that might opt to work with a CLEC will be part of SBC's strategy.

For their part, alternative service providers said they're willing to do what they can to help steer VARs away from working with large carriers, especially since more telecom consolidation is likely on the way.

The SBC-AT&T merger, and the speculated subsequent mergers of other large carriers such as Qwest and MCI, empowers smaller telecom providers that can offer more customized, agile telecom services to VARs than large carriers can, said Jason Talley, president and CEO of Nuvio, a VoIP MSP in Overland Park, Kan.

"VARs are uniquely positioned to be the conduit for the next generation of voice services," Talley said. "VARs are looking for somebody reliable who can deliver next-generation telco services today, and are more in touch with the customer. Frankly, SBC doesn't know how to sell into [the VAR] space. They are buying AT&T for their enterprise customers."

Mike Shaw, vice president of product development at PowerNet Global Communications agreed that the more consolidation seen within the ranks of the large carriers, the more competitive the smaller telco providers become.

"Being able to provide a niche solution will be harder as the larger organizations consolidate together," Shaw said. "As far as offering next-generation solutions like VoIP, high-speed Internet on top of long distance and wireless services, I think companies like PowerNet Global are in a solid position to keep growing. We aren't weighed down or slowed by a lot of capital investments and legacy systems. We can continue to partner and utilize our network to any target customer base."

Distributors, too, are getting a piece of the action. Distribution executives said SBC's acquisition of AT&T is a mere sideshow to the VoIP revolution being driven by their VAR partners, who in some cases are even providing the telecom services themselves.

"The VARs themselves are very pragmatic entrepreneurs who are opportunity-driven," said Paul Cunningham, vice president of the technology solutions group for Tarrytown, N.Y.-based distributor Westcon Group, which is working closely with its VARs to provide converged voice/data solutions. "They are no longer reliant on traditional, long-established relationships with carriers."

Cunningham said VARs are hardly limited in the number of service providers they can partner with to provide the service component of voice and data solutions. "They can still work with [large] carriers, but they can partner with players like Vonage, Covad and Level 3," he said. "There are a lot of very attractive business front ends for a converged solution that VARs can deliver to small and medium businesses or even large enterprises."

However, Cunningham cautioned that the legacy carriers themselves are also trying to move fast to address the challenges from new-age telco competitors. "They are not standing still waiting for their share to decline," he said.

It stands to reason that partnerships between VARs and alternative telecom providers will continue to increase, especially once the industry feels the full impact of the SBC-AT&T deal. Until then, solution providers said they will continue to do what they do best--provide customers with the most cost-effective, next-generation IP-based solutions available, with or without the help of the legacy telecom carriers.

STEVEN BURKE and DAN NEEL contributed to this story.