Where they’re spending and how to cash in

Following providers’ money trail: where they’re spending and how to cash in

Bob Wallace

The mile-wide river, flush with rapids, emptied into a calmer, slower-moving stretch. This fast became a thinning flow and eventually a stream that all but vanished into its wooded surroundings.

Such has been the case for the service provider money trail that once attracted and supported as many dollar-driven parties as the gold rush.

To stay viable in a fiercely price-competitive services market, carriers at first focused on reducing operational costs and avoiding capital spending. Efforts that embodied this strategy were easiest to sell to cost-conscious CIOs, CFOs and COOs.


But carrier spending is once again on the rise, as service providers face menacing business, technology, organization, marketing and competitive challenges–all at roughly the same time. Market differentiation, mergers and acquisitions, the onset of IP, fixed/mobile network convergence, video-driven bundled services and expansion into global markets are driving new spending beyond ongoing efforts to flatten operational costs.

So where exactly does the money trail go?

Among others, it leads directly to areas such as back-office billing and OSS and long-haul fiber transport: segments that have received far less attention than deserved, or were among those cut first when spending dropped years ago.

The money trail also leads to turnkey offerings such as storage and security services that directly address the needs of corporate America in light of regulatory mandates and the need for business continuity. Carriers are also boosting spending on hosted IP services and customer-facing portals that reduce the cost of ordering, provisioning and supporting wired and wireless services.

And let’s not forget potential spending beyond fiber transport to the home, when it comes to telco TV inside the dwelling. Expect big spending on home networking, set-top boxes, software and user interfaces: items that collectively comprise the customer experience.

Provider Perspective

“While the rise in carrier spending is far from a spending spree, we’re seeing providers focus on areas that truly add to the bottom line, because they realize the important old adage of needing to spend money to make money,” explains Daniel Briere, CEO of TeleChoice. “They’re quickly realizing that the business of telecommunications means going well beyond transport to creating–and acting on–new business opportunities with corporate America and consumers.”

Business case in point: WilTel Communications.

The progressive provider, which long ago created a network subsidiary, Vyvx, to address the needs of the broadcast TV industry, has been spending aggressively to drive its managed storage services and a portal through which customers control much of their services.

“Transport is the foundation, but what we do with it by offering services at target verticals and focused business needs–such as secure storage for enterprises–is where the real money is made,” explains Jeff Storey, CEO and President of WilTel. “The phrase ‘addressing business needs’ is horribly overused, but by the same token, under-addressed. Simply providing the most advanced transport services you can for mass consumption is not nearly enough. Focus is the key.”

In June, WilTel launched a portfolio of wide-area storage extension solutions for business continuity and disaster recovery that offers businesses such as Lava Trading, a leading technology firm in the financial services industry, a flexible, economical way to extend storage area networks over Ethernet.

The product line is anchored by WilTel’s StorageXtend storage over SONET service, which is available in 50-Mbps bandwidth increments and targeted at enterprises’ need for data retention, backup/recovery, storage consolidation, and compliance.

Around the same time, Vyvx enhanced its broadcaster-focused HD VenueNet service to carry HDTV feeds for Major League Baseball just months after it carried the Super Bowl broadcast live for the 16th year.

Boosting the Back Office

When are new and enhanced services, along with tons of interested customers, a really bad thing? When your billing and OSS systems and staff aren’t equipped to handle them. “If you can’t bill for it, it’s just a hobby,” has become a popular–and serious–saying in back-office circles.

The seemingly constant reports on mergers and acquisitions that focus on headcount reductions and cost savings from spending synergies nearly obscure the fact that most carriers are spending more, and more quickly, on billing and OSS products and integration services, as well as hiring skilled staff.

BT’s announcement earlier this year that it signed a mega-deal with Convergys to replace 50 systems in 16 countries drew sorely needed attention to the back office, where veterans implore that the key to success in selling new and enhanced services is being able to provision them, bill for them, and support them in a coherent manner.

Anyone who thinks back-office related spending isn’t booming should think again. Further proof that all service provider categories are upping the ante in this core space takes the shape of Amdoc’s announcement last month that it is spending $238 million to acquire DST Innovis, which provides billing-related services and products to cable and satellite operators such as Cablevision, Comcast and DIRECTV.

Core Network Evolution

Enriching and extending core networks outward appears to be job one at AT&T, as the carrier is in the process of working on its 2006 investment plan.

“Extending capabilities on the IP MPLS core as well as on the edge will continue to be an investment,” says Eric Shepcaro, vice president of business strategy and development at AT&T. The carrier is amid an effort to make its infrastructure software-based by adding middleware to enable offerings through its deal with Microsoft to apply the vendor’s Connected Services Framework.

Like many providers, AT&T is interested keenly in, and already spending on, infrastructure to provide hosted IP communications services. The carrier has been working with Sylantro Systems for the platforms needed to support these hosted offerings.

“Word that AT&T is increasing capital spending is big news, because I recall them dropping it a bit for at least the last few years,” says Tom Nolle, president of CIMI Corp. “A positive change in spending habits from a major incumbent is solid news for the U.S. supplier industry.”

“The other areas where we’ll continue to invest are in customer-facing tools,” AT&T’s Shepcaro explains. “Today we have our Business Direct portal into which we’ll build more functionality and capability. We do about 25 million transactions per year on the Business Direct portal and have about 650,000 users.” The customer experience in general will be a continued area of investment.

WilTel is continuing to focus funds on its customer portal, dubbed DNA, which is linked to the provider’s homegrown back-office systems Additional components will enable the operator to track and report service usage to customers through DNA.

Next-Gen=Next Round of Spending

Perhaps the most eagerly and widely anticipated carrier spending news of the year was BT’s announcement in late April of the primary suppliers for its five-year, 10 billion pound, next-gen public network project called 21st Century Network (21 CN).

The multi-year effort represents a buying bonanza on the part of BT and something of a stable commitment of spending to the primaries.

Fujitsu and Huawei were chosen in the access segment to link BT’s current net to the 21 CN, while Alcatel, Cisco and Siemens will provide metro nodes. Cisco and Lucent will provide the core nodes for connections between metro nodes.

Ericsson was selected in the so-called i-node domain, which, in essence, means providing the intelligence that controls the services. Ciena and Huawei were chosen in the transmission category.

The project is a clear boon for the preferred providers but will also allow dozens of smaller and innovative subcontractors to become involved in the next-gen network project, according to Matt Bross, BT Group’s CTO.

“21 CN is a key infrastructure that will fuel the U.K. economy and provide a flexible way for consumers to use new services,” Bross says. “[It] will also radically reduce BT’s cost base, with identified savings of around one billion pounds a year.”

Craving Carrier Ethernet

In the meantime, domestic operators are pounding away at the challenge of delivering rich Ethernet services to the masses and spending accordingly.

WilTel is using equipment from Cisco, Riverstone Networks and Overture, among others, to support its family of EWAN services, which it plans to evolve to higher-speeds over time. Industry experts expect Atrica, Ceterus and Covaro to figure prominently in the carrier’s evolving Ethernet service portfolio plans.

Worldwide Ethernet services revenue topped $2.5 billion in 2004 and is expected to more than double in 2005, then jump to $22.2 billion in 2009, according to a recent Infonetics Research report.

And when it comes to supporting every access type, including Ethernet, over any network core, carriers are spending big on pseudowire technology, with the prime beneficiaries being Axerra and Hammerhead Systems. RBOCs keen on this technology include AT&T, BellSouth and SBC, for starters.

The Cable Guys

To buy into the stereotype of cable operators focusing only on providing better reception for local channels, HBO and ESPN would be a gigantic mistake. This industry features such innovators as Time Warner Telecom, which has gone far beyond cable programming to meet the needs of enterprise users.

Several months ago, Time Warner raised many an eyebrow when it announced a partnership with storage infrastructure vendor Arsenal Digital to provide a managed, turnkey storage service aimed squarely at security and archive-conscious corporations. Secure storage-related services are seen as a huge business opportunity for all service providers, according to experts such as Doug Chandler, program director for storage software and services at IDC.

But Time Warner Telecom is not stopping there. The company spent about $171 million in capital last year and expects to spend $165 million to $175 million this year to become a facilities-based provider, according to Michael Rouleau, Time Warner Telecom’s senior vice president for business development and strategy.

Pressing Providers

“The first [emphasis] is on building the infrastructure that gets out to the customers,” Rouleau says. “We typically will build our own central office and maybe two or three hubs in the area depending on the size of the market.”

Time Warner Telecom puts Class 5 switches in place and deploys media gateways and softswitches for VoIP Ethernet infrastructure. “Then we’ll build a big backbone of fiber throughout the market. We build a big ring that is generally about 256 strands of fiber and then build distribution rings off that,” Rouleau explains.

The 44 markets Time Warner Telecom is in today have the basic footprint in place, Rouleau says. “Where we’ll spend the majority of our money is on ‘success-based capital,’ where we’ll actually get a customer and will build our fiber infrastructure out to that end-user building.” He estimates that half to two-thirds of the company’s capital spending goes to acquiring customers and building out to the end-user building.

Rouleau groups capital spending into three areas of investment: short term, long term and internal. Short-term spending is targeted at building out the network to bring new customers aboard and delivering the services they desire.

Long-term investment focuses on specific product lines. “For example, last year VoIP infrastructure deployment was a fairly big spend for us. We spent about $18 million investing in media gateways and softswitches that got us ready now for the services we’re going to roll out this year.”

The third category focuses more internally on things like back-office capital improvements, Rouleau says. “It’s a much smaller portion of the spend when compared to our investment in networks to reach customers. We added about 1,000 buildings to our network last year, so we have nearly 5,300 buildings on FiberNet. It’s our fiber going to these buildings–and that includes electronics–that gets the services out to customers.”

What Wireless Wants

In a pedal-to-the-metal rocket ride to provide customers a wireless experience that may some day equal wireline, Cingular is spending big–as in $6.2 billion–to improve network quality and coverage.

Most of this huge sum will be invested to integrate the Cingular and AT&T Wireless networks, an effort that calls for building about 4,000 new sites, decommissioning and relocating cell sites to areas where coverage is needed, and adding mobile switching centers, according to Ed Reynolds, Cingular’s president of network services, who’s referred to as the $6 Billion Man.

“Another chunk of this spending will drive the deployment of UMTS/HSDPA in 15 to 20 markets, with specific plans to spend about $1 billion deploying UMTS/HSDPA into about 100 top markets between 2005 and 2006,” Reynolds says.

Cingular’s top five supplier buddies are Ericsson, Lucent, Nokia, Siemens and Nortel, with the UMTS/HSDPA piece of the mega-spending pie split among Lucent, Ericsson and Siemens. The GSM is split among all five.

Cingular realizes there’s more to spending than signing purchase orders.

Just last month, the wireless operator announced that technicians and other third-parties will drive test its network nearly 30 million miles in the next year to improve the coverage and quality. That’s the equivalent of more than 50 round trips to the moon to ensure customers receive the best possible wireless experience in the United States.

So while suppliers are not yet awash in service provider dollars, the money trail is once again clearly visible, making it possible for enlightened vendors to stay on track to bigger paydays.

Bob Wallace is Editor-in-Chief of Telecommunications[R] magazine. (bwallace@telecommagazine.com)

Jim Barthold is the magazine’s Senior Editor. (jbarthold@telecommagazine.com)

COPYRIGHT 2005 Horizon House Publications, Inc.

COPYRIGHT 2005 Gale Group