After the dotcom hype comes the consolidation

For a while, the expression 'you can never have too much bandwidth' seemed to be the dotcom equivalent of 'you can never be too thin or too rich'.

However, US government intervention in the recent sale of Global Crossing is a useful reminder that the telecoms market is far too complex to view as a simple commodity.

Having collapsed under the weight of its own debt in a market where prices had crashed and demand for premium services evaporated overnight, Global Crossing appeared to have been saved by a joint bid from Hutchison Whampoa and Singapore Telecom. Until the deal was blocked.

The boom of the late 1990s focused attention on the possibilities, rather than the deliverables, of telecoms technology, so it's no surprise that the market is now undergoing a profound reorganisation.

Although analyst Ovum is still concerned about what it sees as over-confident business plans from some companies coming out of bankruptcy protection, most observers feel either that the market has already bottomed out and is turning the corner, or that it's only a matter of months away.

That doesn't mean a return to accelerated growth, however. Although optimists think that the market could grow by five to 10 per cent, and BT Wholesale is talking about double-digit growth in its own business, most think that any growth will stay below five per cent.

That's the kind of performance you would expect from a mature market. It demands a different kind of management, which is why we're seeing experienced managers taking over from technology leaders at many telecoms companies.

The likes of BT, Deutsche Telekom and France Telecom were large enough to weather the storms, but have still spent the past 18 months retrenching, consolidating and spinning off problematic areas to raise cash.

The smaller companies which have survived are those offering alternative, better-value niche solutions that can change quickly enough to keep up with the market, or which target specific needs.

It is also surprising to see how many virtual providers there are in the UK market. Researcher IDC puts the number at about 200. Some 15 per cent of mobile traffic and 10 per cent of fixed-line traffic in the UK involves a virtual operator which sells a service but doesn't manage its own network.

These range from simple resellers to system integrators and virtual network operators such as Vanco and Song Network, which combine services from multiple suppliers to offer a range of managed services.

Most analysts see this as a positive trend for the industry, steering away from the massive vertical integration of companies such as BT which do everything from laying fibre to selling phone lines to consumers.

Ovum's Julian Hewitt describes telecoms as "a crazy industry", and most analysts expect to see the market organise itself rather differently in the future.

Predictions that global conglomerates will all die out or retreat to their home countries may be wishful thinking, but it seems likely that we'll end up with a handful of global data network operators, two or three specialist regional players on each continent, and many more retailers, service providers and companies specialising in dealing with customers rather than running networks.

A period of transition
The telecoms market is currently in a state of flux, moving away from simply offering access and instead looking at providing value-added services and features.

Welcome as improvements in quality of service and service level agreements are, this shift is more than just cleaning up a tarnished image. Telecoms is becoming more like IT, with the emphasis on services rather than physical infrastructure, and displaying the same shift to managed services and outsourcing.

This is partly because corporate customers, faced with managing increasingly complex business communication systems and choosing between more than 30 carriers in western Europe, are looking less for a supplier and more for a partner.

There's also some hype from carriers and providers keen to move up the value chain and differentiate themselves with reliability, service level agreements, integration experience and back-office systems, because they have essentially the same product as a competitor.

That can be good news for companies that want to talk about their business and communications problems, rather than end up with a storeroom full of equipment they've been told they need. Providers are waking up to the fact that companies care about the service rather than the technology on which it's based.

"Quality demands are skyrocketing because telecoms are no longer just a dumb pipe carrying minutes of voice conversation," said Bruce Lynn, director of Microsoft's Network Service Provision group.

"The pipes are very strategic and complex pieces of network that also have sophisticated requirements for integration with systems and considerations such as security."

Whether you're looking for voice lines, data lines or bandwidth, the new buzz phrase is 'core competency'; let the business concentrate on what it's good at and outsource areas where it doesn't have expertise.

Providers are also fostering more realistic expectations about what outsourcing will achieve. "The value proposition of co-location is infrastructure: IP networks, cooling, racks, raised floor, and diesel generators. You still need brains and systems to run your hardware, security and applications," explained Claus Kristensen, regional market manager at hosting provider Estructure.net.

Rather than putting in separate sub-networks for new systems and projects, companies want a flexible telecoms infrastructure on which they can build.

Aaron McCormack, vice president at BT Global Service, thinks that IP is leading the way. "A fundamental shift I have seen in the past year is that everybody has now decided that having a good, agile IP infrastructure in your enterprise is a fundamental foundation for doing all the fancy enabling that people want for IT services now," he stated.

Outsourcing and services that are tailored to work with the business imply long-term strategic relationships, which are naturally reassuring for telecoms providers. But after various disasters in the telecoms market, businesses are wary of too much commitment.

Buyers want shorter contracts with get-out clauses and contract flexibility in case their supplier starts to look less attractive (or less likely to survive).

Some companies are starting to take control of their IP ranges for hosting and bandwidth to simplify moving from provider to provider, but that means a lot of extra work.

Others are looking for dynamic bandwidth on demand, with audit controls and management tools that let them increase and decrease capacity on the fly, although some operators aren't sure that the extra cost to them makes it worth supplying these kinds of services.

Dealing with costs
With many IT departments trying to cut budgets year by year by about five per cent, there's still an expectation from businesses that prices will continue to fall and service levels will keep on improving.

The cost of data connections is hundreds of times lower than in 1996 and, while the bargain-basement prices down to which Worldcom and Global Crossing were driving the market were not sustainable, there are still economies of scale to be achieved.

Phil Male, chief operating officer at Thus, points to optical technology developments such as dense wavelength division multiplexing, which add capacity to existing networks at a fraction of the original infrastructure costs.

Value-added services may appeal to organisations that view communications as a key part of the business, but many companies still see communications as a utility and a commodity. If investing in communications doesn't help their business performance, they're going to keep looking for low prices and cheap bandwidth.

The SME market isn't going to be an easy win for telecoms providers either; there's not a lot of money to be had from individual customers, many of which need a lot of support and consultancy.

Small and medium-sized businesses simply aren't ready for new, more advanced services. They're more interested in offerings that simplify things, such as wholesale line rental that lets them buy their line from the same company that supplies voice minutes, rather than having a separate BT bill.

Life isn't much easier for the mobile operators. With saturated subscriber markets, declining voice revenues and the growth of mobile data, they're looking to SMEs for growth. But high prices and confusing tariffs mean that companies don't want to roll out services when they don't know how much they'll be paying.

Mobile operators need to offer targeted voice and data packages that include basic tools they can provide themselves (such as email and messaging) and more sophisticated data services bought in from vendors and systems integrators. They also need to move to fixed-rate data tariffs such as Orange's Office Freedom (although the client tools still have flaws).

Mobile operators are still struggling with the development issues in service network architecture, which has to get simpler if they're going to manage new services that rely on subscriber information locked up in vendor-specific systems.

The telecoms market has become complicated because customers are catching up with what the operators have been working towards, and demanding that the industry grows up.

There's still a surfeit of bandwidth, but demand is growing. More and more companies are investing in IP networks and hosting services, and they're genuinely interested in using networks for more services such as instant messaging, virtual private networks, voice and videoconferencing.

They want good prices and good service from suppliers that are going to be around for the long haul. If they're getting value from a complete solution that they can buy rather than build, they'll pay for it.

Businesses don't really care about the next big thing. What they care about is long-term value in a sensible market.

If the dotcom era hype of the telecoms industry was the emperor's new clothes, the message today is one of pragmatism, professionalism and sensible shoes.

Where business broadband is heading
Business broadband has taken off slowly in the UK, compared with take-up by consumers. To get a real boost, the enterprise market needs DSL products with better service levels and better connectivity, which have been slow to emerge.

ADSL is a good way of connecting branch offices to head office without the complexity of managing dial-up connections or the high costs of leased lines. To extend network services such as conferencing and remote database access you need a service such as synchronous DSL (SDSL) with lower contention and consistent high speed in both directions.

SDSL isn't widely available yet, but several smaller providers offer services in limited areas, and BT plans to launch a commercial service in August.

With bandwidth of up to 2Mbps in both directions and contention of 10:1 it's suitable as a low-cost leased line replacement (wholesale costs will be about £200 a month) but without the same service levels. Providers which do offer service level agreements on their SDSL connections charge £400 to £600 per month, but that's still cheaper than £6,000 to £15,000 a year for an E1 leased line.

Who knows the secret of VoIP value?
The telecoms industry is divided on the value of voice-over-IP (VoIP), and, if it has any value at all, on when we'll see a significant product making use of it.

Certainly most companies setting up VoIP now are still early adopters and are using the system experimentally rather than for business-critical systems. Companies are rationalising and simplifying their networks, rather than adding a new sub-network for every new project. There is also little demand for new services just for the sake of it.

That said, the building blocks for IP services such as voice are sneaking in as part of other projects, be it establishing a new site or replacing legacy networks. Even these installations are risky, however, because the standards for voice remain undefined.

Phil Male, of Thus, predicts that it will be 12 months before we see VoIP as a standard product that telecoms providers will be marketing to customers.

BT Global Services vice president Aaron McCormack is much more positive, seeing customers installing VoIP already and predicting that, in perhaps five to 10 years, no one will have a PBX any more or even a soft switch of their own, because we'll all be using giant soft switches outsourced to vendors' networks.

This enthusiasm may not just be because voice has been the telecoms cash cow for many years.

Bill Gates has been referring to voice as the ubiquitous interface and, while the forthcoming .Net Speech development kit is bound to have some rough edges, it's going to increase interest in the kind of voice-enabled applications VoIP can support.

FURTHER READING:

IDC's views on telecoms:
www.idc.com/en_US/browse/browseRes.jhtml?id=cat10093

Microsoft Service Providers white papers:
www.microsoft.com/serviceproviders/whitepapers

Meta Group's infrastructure page:
www.metagroup.com

Ovum on next-generation telecoms services:
www.ovum.com/research