Dig deep enough into carriers' financials and you uncover a grim reality: Revenue from once-lucrative wholesale telecom services has shriveled up over the past three years. If Tier 1 operators want to recover the billions of dollars that those units used to reel in, their approach to wholesale will have to mirror their consumer and enterprise strategies -- focus less on access and more on services.
"Our business is very different than what it used to be. I would say in the past, we were like every other traditional wholesaler. We looked at excess capacity in our network operations, priced it per bit and took it to market, and if somebody was interested, we'd gladly provide it to them and say, 'Have a good day,'" said Mike Smith, director of business development for Sprint Wholesale Solutions. "But we are clearly looking to grow this part of our business and … have consciously transformed that model."
The numbers show just how well that traditional strategy worked among the top three US carriers.
- According to its annual reports, Verizon's wholesale business raked in $10.75 billion in 2007, amounting to about 12% of its total revenues. Last year, it reported $9.64 billion in wholesale revenue -- a 10% drop. Wholesale fell to 8.9% of total revenue in 2009.
- Sprint Nextel Corp. suffered dramatic losses to its wholesale revenues, which plummeted 49% from $1.06 billion in 2007 to $546 million in 2009, according to its annual reports. Wholesale telecom services made up 3.3% of total revenue in 2007 and dropped to 2.1% in 2009.
- AT&T's wholesale revenue has remained somewhat flatter, according to Paris Burstyn, senior analyst at Ovum. The carrier accounted for revenue from its wholesale telecom services in the same category as revenue from "government, education medical solutions" in 2009, which totaled $18.5 billion together. Ovum estimates $14 billion made up wholesale revenue, Burstyn said. AT&T accounted for wholesale revenue separately in 2007, reporting the unit made $14.06 billion. Over that period, the unit went from constituting 11.7% to 11.4% of total revenue.
Although some of those losses can be chalked up to the economic downturn over the past year, the wholesale drop-off reflects the same problems carriers are facing in their consumer and enterprise units, according to Cindy Whelan, principal analyst at Current Analysis.
"They're still losing a lot of access line revenue … as customers move to VoIP and other technologies," Whelan said. "That's still aligned with wholesale."
Leasing network access will continue to be inherent to wholesale telecom services, but it will be the value-add products that play a starring role in reviving wholesale revenues, according to Whelan.
Service providers are "looking toward offering higher-valued services, managed services and things they can offer their wholesale customers at a higher value and a higher margin -- instead of just providing access," she said. "What we're seeing is a transition right now.
They're developing these unique services for wholesale but still having to contend with losses on legacy wholesale [telecom services]."
AT&T recently announced it would open up its Intellectual Property unit to wholesale customers, who will be able to license some of AT&T's proprietary, in-house business management systems -- ranging from customer relationship management (CRM) to network monitoring -- within their own operations.
Sprint CEO Dan Hesse has said strengthening his company's wholesale telecom services will be "a strategic priority," according to Smith, who said the unit has focused on working closely with cable operators, competitive local exchange carriers (CLECs) and mobile virtual network operators (MVNOs) to offer more creative and individually tailored wholesale packages.
"[Customers] have told us point-blank that there are plenty of wholesalers that approach the business the old way: 'Here are the options we have. Take it or leave it,'" Smith said. "We are very consciously trying to break that model and break that mold because we think that's what's going to unlock the value of what this wholesale business can bring…. If you don't have that deep, collaborative relationship with your customer, you're never going to achieve that goal."
Sprint's wholesale unit recently worked with i-wireless, a MVNO reselling prepaid access to Sprint's CDMA network and using the Kroger grocery chain as its sales channel. Kroger customers earn 20 wireless minutes for every $100 they spend at any Kroger-owned store.
"We're enabling [i-wireless] to deliver a unique solution to a marketplace that gives their customers something different than they might buy from Verizon or AT&T because it's not just another wireless service and we haven't just provided a dumb pipe," Smith said. "We've taken [our] assets and collaboratively integrated [them] with the asset of our partner to create something new and different that gives them a competitive advantage."
Are wholesale services customers competitors?
Why should carriers bother to enhance their wholesale products when they could just go after the customer's market themselves? The reasons range from maintaining diversified portfolios, tapping no-frills and marketing-free revenue streams, needling the competition, and good old regulation-phobia.
Even in wholesale telecom services, the enemy of your enemy can be your friend. Sprint's wholesale relationships with cable operators help buttress formidable competitors to AT&T and Verizon in markets in which Sprint doesn't play, Smith said. The cable operators can offer Sprint's wireless service under their own brands as part of a larger quadruple play.
"We share common enemies -- Verizon and AT&T," he said. "We felt there was more net opportunity for us to enable the cable companies with wireless and enable them to more effectively compete with AT&T and Verizon because [the cable operators] will take more share from them than they ever would from us."
Although they've taken a dive in recent years, wholesale telecom services have been a reliable source of income for Tier 1 operators, Whelan said. Service providers enjoy being able to use their existing infrastructure to reap the rewards without having to spend money on sales and marketing in those regions, she said.
Under the Telecommunications Act of 1996, incumbent local exchange carriers (ILECs) are required to wholesale network access to new CLECs. Any attempt to stifle wholesale offerings may attract the attention of federal regulators, Whelan said.
"[ILECs] don't want to come down really hard because it's not in their interest, from a regulatory perspective," she said. "As long as they can negotiate a deal [with CLECs] … it's still a viable and potentially strong business for them."
Jessica Scarpati is news writer of SearchTelecom.com
This article originally appeared in SearchTelecom.com