Telecom Consolidation Sets Aggressive Growth Agenda For Master Agents, Partners

Patrick Oborn, co-founder of master agent Telarus, said the early days of his 15-year-old company were tough. Oborn and CEO Adam Edwards, two IT pros with no telecom experience, started Telarus with no back office personnel, no channel mangers, and two carrier partners. Today, the master agent has 91 employees in nine states and partnerships with 101 suppliers.

The growth has been incredible, but Oborn still worries: It might not be enough.

"There always has to be this ratio between how big a partner is in relation to your supplier," said Oborn. "As the ratio moves in favor of the supplier, the channel is less a percentage of their total sales, and that's where there starts to be a grave concern for master agents."

[Related: ScanSource-Intelisys Deal Could Kickstart More Master Agent-Distributor Partnerships]

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The job of a master agent is to aggregate high volumes of business for their supplier partners – the service providers – by working with their partner community of telecom agents, MSPs, and VAR partners. Master agents also maintain relationships and contracts with suppliers on behalf of channel partners.

But as telecom companies grow larger by acquisitions, or jump into new markets by snapping up companies outside of their core competency, the channel runs the risk of contributing to a smaller percentage of the carrier's overall revenue.

"Channel [business] is growing at a good 20 to 30 percent clip per year across all carriers and masters, so it's definitely a rising tide. However, we're not certain that the tide is rising fast enough to keep up with the girth of these suppliers and all these mergers," Oborn explained.

The telecom market is evolving as the large, incumbent providers branch out from their core connectivity and communications businesses. Verizon completed its $4.4 billion acquisition of AOL in 2015, and has since turned its attention to acquiring Yahoo $4.48 billion to make headway in the mobile content and digital advertising space. In a similar move, Dallas-based AT&T announced its intent to acquire entertainment and media powerhouse Time Warner for $85.4 billion.

In addition to expanding their portfolios to include new services, some carriers are simply looking to get bigger to better compete in the crowded telecom space. Charter Communications acquired Time Warner Cable in 2016 for more than $60 billion. CenturyLink announced its intent to acquire fellow service provider Level 3 in a $24 billion deal that's expected to close by the end of Q3 2017. Verizon's CEO Lowell McAdam suggested in April that he'd be interested in a potential tie-up with cable giant Comcast.

"Master agents need to step up and grow. The main reason for that is because their revenue commitment levels are possibly getting higher as service providers come together," said Vince Bradley, CEO of World Telecom Group (WTG), a Malibu, Calif.-based master agent.

When giant carriers combine, they reconcile channel programs and often become more selective, working with fewer, larger master agents. This requires the rest of the channel – other master agents, agent partners, and VARs – to forge an agreement with the select group of masters to sell the new carrier's services, Bradley added.

"That trend is now on steroids with the carrier consolidation," he said. "I think it's going to be tougher for the smaller [master agents] to have success with the biggest carriers as they are consolidating."

And the bigger the master agent, the better the contract with the carrier can be, Bradley said.

"There's more space for getting a better contract or better relationship for masters that are able to grow quickly, and as the revenue thresholds [between masters and suppliers] grow," he said.

Some discretionary funds, such as marketing development funds (MDF) and quarterly growth incentives that master agents have come to rely on from their supplier partners, can also start to dry up following a large-scale merger or acquisition. Budgets set aside for the channel can be negatively impacted if another side of a carriers' business is doubt or in flux, Sandy, Utah-based Telarus' Oborn said.

As a result, M&A activity between service providers is starting to "force" merger conversations between masters to scale quickly, according to Oborn.

Sandler Partners, a Hermosa Beach, Calif.-based master agent acquired Mokena, Ill.-based master agent X4 Solutions in July. IT distributor ScanSource in August took on Petaluma, Calif.-based master agent Intelisys. Seven months later, Intelisys, now a ScanSource company, bought Verizon-exclusive master agent Kingcom.

Intelisys said that the goal of its merger with ScanSource and its acquisition of Seattle-based Kingcom was to continue to help its sales partners grow their businesses, and that telecom M&A activity is illustrating the importance of forming a relationship with a stable master agent that can protect contracts between suppliers and solution providers.

Mike Baur, ScanSource's CEO said that acquiring Intelisys will help more partners – VARs, specifically – resell telecom services. At the same time, the Kingcom acquisition gives ScanSource and Intelisys partners direct access to Verizon for the first time, which will help partners sell more Verizon contracts, Baur told CRN.

The telecom consolidation trend is showing no signs of slowing down. But consolidation won't just mean master agents consuming other master agents. M&A activity will more likely include IT distributors – like ScanSource – getting in on the action, according to Jeff Newton,vice president of enterprise sales and engineering for Telecom Brokerage, Inc. (TBI), a Chicago-based master agent that got its start in 1991.

"I do think there will be more alignments and acquisitions made between folks in the channel. It's an absolute no-brainer," he said.

ScanSource already started the ball rolling, but the other large IT distributors that have historically focused on hardware sales will need to turn their attention to services and the recurring revenue that solution sales generate, Newton said.

"If you look at other indirect channels, like hardware distribution, I think there are a lot of synergies there for these [distributors] to look at what the telecom and cloud channel has built, and they want to replicate that," he said. "If you can't replicate it, you buy it."

CRN Associate Editor Michael Novinson contributed to this story.