VARs, CLECs, Big Carriers Mull Telecom Industry Flux

At CTIA, David Tews, vice president of Indigo Wireless, a diversified service provider in Mansfield, Pa., said VoIP now accounts for 60 percent of Indigo's overall business, a fivefold increase in just one year. But such growth may not be sustainable, he said.

"Next year, we may see [VoIP sales] go down because carriers like Sprint and others are reducing rates to compete with VoIP," Tews said.

Though in the short term businesses may be slow to adopt VoIP, consumers are snapping it up, according to Greg Praske, CEO of Association Resource Group, a telecom solution provider in McLean, Va. "We are just getting started with VoIP," he said at the Channel Partners Conference. "It's like when local service opened up in the late '90s. A whole lot of people are marketing [VoIP] services right now, and in the next several months the market will flush out whoever can't perform." Last fall, Association Resource Group completed MCI's largest VoIP sale over a private IP network, he added.

The reason for the difference in commercial vs. consumer adoption of VoIP is network complexity, Praske said. "For consumers, there are fewer obstacles to VoIP. But for businesses, there are more quality-of-services issues because VoIP can have a huge impact on your bandwidth," he said.

At both events, big carriers expressed dissatisfaction with user price rates and the regulatory climate, which down the road could affect the growth of the VoIP and wireless spaces.

"The industry needs the same set of rules for all communications technologies. It's wrong that we have to pay local and state taxes on one type of service when we don't with another," said Scott Ford, president and CEO of Alltel, during a Wednesday roundtable discussion at CTIA.

Panelist Stan Sigman, president and CEO of Cingular Wireless, said carriers have "become the tax agency" for many states. "In some states, 18 percent of our revenue is taxed," Sigman said.

Sprint President and COO Len Lauer, another roundtable participant, agreed that carriers remain a tax target. "We have a big bull's-eye on us because of our huge revenue. We are easy to tax, and it hurts us as an industry, hurts our employment, everything," he said.

To offset revenue losses from taxation and other regulatory developments, carriers may add more metering to VoIP services, which essentially are free to many consumer VoIP customers, said Claude Richard, sales agent with Bridgewater Systems, Roanoke, Va., at CTIA.

"[Carriers] have the technology to meter VoIP right now," Richard said. And even though the capital expenditure of deploying networkwide metering of VoIP traffic could be considerable, "the big carriers won't just stand by and let some service happen for free," he said. One CLEC at CTIA, Thornton, Colo.-based Air Cover, has found a way to offer VoIP via high-speed Ethernet, a method that avoids much of the mess in dealing with big carriers because "it severs the connection to the central office," said company President and CEO Angus Dougherty. Using patented technology, Air Cover can beam a microwave signal into a neighborhood that repurposes the copper for high-speed Ethernet, he said.

"We drop microwave into their fibre and distribute the signal. Then we come back in behind and sell VoIP and other services," Dougherty said.

Every major carrier is looking at Air Cover's technology as a way to drill holes in competitors' territories, primarily in business districts paying too much for T-1 lines, according to Dougherty. "We can jump right over the Baby Bells," he said.

Coinciding with all of the business, regulatory and technology developments in the telecom space is a hotbed of merger and acquisition activity, headlined by the pending SBC Communications and AT&T merger and the Verizon-Qwest battle for MCI. Such actions led Samsung Telecommunications America President Jeong Han Kim, in his CTIA keynote speech Tuesday, to describe the current state of the industry as a "hypercompetitive carrier environment."

Illustrating Kim's view, some VARs and CLECs at the Channel Partners Conference said that because analog voice service has become commoditized, moves by the major carriers to hike wholesales rates could be an effort to squeeze out CLECs that don't provide value-added IT services.

The Telecommunications Act of 1996 requires that carriers give CLECs a wholesale discount so they can resell voice services competitively. But the executive vice president of a major Southeast CLEC said he has seen wholesale rate increases as high as 30 percent in the past year from carriers such as Qwest Communications and Sprint. The reason for the hike is twofold, he said: to take the profitability out of reselling private-label voice service so the big carriers can fill the void, and to focus on VARs as the main route for providing next-generation telecom services, which will cause non-value-added CLECs to exit.

"It has gotten to [the point] where the carriers are now going to compete against the wholesalers who private-label, say, service from Qwest," said the Southeast CLEC executive, who requested anonymity. "If the reseller is buying Qwest service for 1 cent a minute, and Qwest is selling direct to customers the same service for 1.6 cents a minute, the wholesaler is getting hurt if that margin gets thinner," he said.

Even higher wholesale rate increases could be expected "about a year after the M&A activity cools down," the CLEC executive added. Spokespeople for Sprint and Qwest said it's company policy not to disclose details about wholesale discounts. However, the Qwest spokesperson confirmed that Qwest adjusted its wholesale rates in the fourth quarter to recalibrate its wholesale discounting according to the current competitive landscape. "Some rates went up, others went down," the spokesperson said, adding that Qwest has wholesale agreements with more than 90 CLECs.

Praske of Association Resource Group said he has noticed the wholesale rate increase and thinks it's a long-overdue adjustment. Still, he noted that he's not overly concerned about the rate increases because he can make up for lost margin by selling services and solutions, not just voice minutes.

"We are very aware of the increases, and I think it started prior to the mergers," Praske said. "Global Crossing increased rates to wholesalers, then Qwest followed suit, and now the other carriers will do the same. It was overdue. The wholesale market overheated."

By increasing rates and possibly squeezing CLECs out of the market, the big carriers may see an opportunity to fill the void left in front-line voice service, Praske said. "I think we are seeing a compression between retail and wholesale. The carriers are set up to do what the wholesalers were doing: credit, billing, first-line customer service," he said. "They realize they have all those resources in-house, and they want the margin."

While analog voice accounts for only 5 percent to 10 percent of a typical solution sell from Association Resource Group, the service is still important, Praske noted. "Every company still has an analog requirement prior to fully adopting VoIP. You still need some backup analog line, and then there are the fax machines," he said.

The commoditization of voice traffic has made any squeeze on the margins of CLECs offering limited valued-added services all the more painful, said Dana Topping, president of Campbell, Calif.-based Resource Communications, which sells IT services wrapped around everything from local to long-distance dial tone to VoIP. Topping said he has even seen the price of frame relay rise from one of his carriers, MCI. But unlike pure-play CLECs that survive almost solely on the markup from the wholesale price, frame relay access is sold by commission, a more consistent revenue stream, he said. That means voice is becoming so commoditized that it's nearly unprofitable for CLECs, he noted.

Over the next 12 to 18 months, channel players should keep a close watch on the VoIP front, because the big carriers "are going to try everything to make more money from it," Praske said. "Whether you are paying for minutes, bandwidth or an application, you are going to be paying for something," he said.