May 2001

Service Carriers: Poised To Deliver Value And "Cash In"

BY CATHY GADECKI

[Go right to Merging Networks? Merging Network Management Systems]

Today's broadband service providers own the two most critical assets in the communications supply chain: the broadband connection and the billing relationship with the customer. As a result of these assets, providers can establish a broad distribution relationship with the customer to include content and application services, and therefore more than double the current broadband service bill. In the key role as the distributor, the service provider keeps 30 to 50 percent of the revenue for these new services. It's time to start cashing in!

BEYOND THE BASICS
The service provider market has rapidly grown and matured, and providers agree that basic services no longer provide competitive differentiation and, most important, strong growth opportunity. It's time for service providers to recognize the full financial potential of their customer connections and relationships by becoming distributors of fee-based content and applications.

The Premium Internet, where businesses and consumers want, and are willing to pay for a personalized, premium experience, opens the opportunity. By offering new application and content services from many different partners, carriers can offer the latest, hottest subscription-based entertainment and software services, strengthening both brand and top line growth as a new form of provider -- the service carrier.

ENTER THE SERVICE CARRIER
So where to from here? As we move beyond access, the need has never been greater for providers to generate incremental, high margin revenue -- it is time they identify and adopt a profitable business model. These new world "service carriers" must leverage their valuable assets -- and fast!

The greatest opportunity for the service carrier to cash in comes with the market shift to a subscription-based Premium Internet. Service carriers can pursue the opportunity of application and content distribution channels, thanks to new network and back office technologies that enable the delivery of these applications and services to the desktop of the end user. The Premium Internet delivers its value through the customization of media-rich and interactive application and content services, newly enabled by broadband access such as DSL, cable, and Ethernet.

As the Internet and broadband connectivity blend, the lines that have traditionally separated information, entertainment, communication, and commerce dissolve. The players in the Internet service supply equation are struggling to add value, differentiate themselves, and make money. The Premium Internet establishes a business model that seamlessly integrates multiple disparate application and content services to deliver a valued experience to providers, disparate applications, distributors that add real value, and of course, business and residential customers.

This subscription-based Premium Internet model calls upon one trusted source for access, delivery, and billing of new services such as advanced messaging, Web-enabled communications, PC support, business management applications, interactive gaming, music delivery, and for-fee content.

The Premium Internet will transform the largely free, mass-market World Wide Web known today into targeted application and content services worth paying for. This transformation parallels changes in the television industry, commenced with the introduction of subscription-based cable television services. Similar to cable television, the Premium Internet delivers a wide range of high-quality services that users can select and control on their own, such as virus scans and firewall protection, single-click unified messaging, Web conferencing, and collaborative workgroup applications.

Better yet, there's a precedent upon which the Premium Internet can build and flourish.

Analogous to the history of cable TV, where subscribers pay a flat rate for basic service and a higher rate for premium services, the for-fee services and applications that will be available to end users with the subscription-based Premium Internet will provide them more selection, better quality, and more control. As cable TV service providers have built their local delivery networks, they've bundled pay services in various ways to entice their customers to move beyond the basic service package. Digital music, premium movies, and global pay-per-view events have increased per-subscriber revenue. More importantly, they've also created business relationships among content producers, wholesale bandwidth providers, cable system operators, and customers.

EFFECTIVE DISTRIBUTION
The Premium Internet is poised to build on that with substantial new additions. Today's Internet experience is complex and confusing for users who must navigate among a diverse group of application service providers (ASPs) and Internet portal operators. As application and/or content providers quickly move forward with new business models based on subscriptions, the complexity will increase, only discouraging user adoption at a very critical time. The Premium Internet brings together these disparate activities into a valued, easy-to-use service experience.

This distribution method permits the existing "service carrier" to remain in the revenue stream by adding unique value. How? In its distributor role, the service carrier maintains control of the network and systems, the confidence of and billing to the customer, the ability to tie applications performance to a specific user, and a network that treats traffic based on subscriber ID and application type.

Service carriers working with the Premium Internet have three major challenges they must address:

1. They must be able to activate services quickly and securely and bill for them in a way that doesn't require an expensive systems overhaul.
2. They must be able to look at and identify traffic types and handle them on a personalized, customized basis.
3. They require a customer interface that permits easy, rapid, self-servicing of applications, services, user profiles, and account policies.

The platform for such integration must be flexible and intelligent, such that each time a new application or service type is added to the mix, there's no time-consuming integration ordeal that precedes it. The Premium Internet has to be able to roll out services rapidly and personalize them for users on a global basis.

ACCOMMODATING REAL DEMAND
This is not a case of technology pull trying to excite customer push. According to consultancy TeleChoice (Denver) and the Association of Local Telecommunications Services (Washington, DC), broadband Internet adoption will outpace all major preceding services, achieving 30 percent penetration in its first five years. That is in contrast to 7 years for dialup access or 17 years for broadcast television to achieve that same level of penetration. And according to industry estimates, broadband Internet now counts 24 million workplace users, 12 million college student users, and nearly 9.4 million residential users utilizing various connection types, including DSL, cable modem, and T1 lines.

As broadband access makes the Web experience easier and better for businesses and individuals, the more businesses and consumers will be drawn to access richer content and take advantage of services ranging from customer relationship management (CRM) Web collaboration applications, to home banking and video services.

There's another reason the Premium Internet model is poised to take hold. The average amount of time spent online daily will increase to more than 130 minutes by 2005, up from roughly 40 minutes in 1999, according to investment banking company Robertson Stephens, growth that it attributes directly to broadband penetration.

Consider as well that the average household with Internet access spends between $200 and $500 per month on communication and entertainment services. That includes telephone ($60-$150), cell phone ($40-$100), newspapers and magazines ($20-$50), video and DVD rentals ($12-$30), cable TV ($40-$100), and Internet service ($20-$50). These line items contain enough elasticity and demand for service carriers participating in the Premium Internet.

Recent business headlines provide sufficient caution against delivering basic access services that compete solely on price. DSL providers Northpoint Communications (Emeryville, CA) and Flashcom (Huntington Beach, CA) have faltered based on that model. To add value to their portfolios, service carriers must offer application and content services to help offset the cost of deploying broadband services, given that a single DSL customer costs nearly $900 to provision.

THE BUSINESS PERSPECTIVE
Then there is the issue of customer churn. AT&T reports an annual churn rate of between five and seven percent, while the industry average in cable TV runs between 15 and 18 percent, according to EDventure Holdings, Inc., a New York-based research house.

On the other side of the market, businesses are exploring ways to save money and reduce the demands on their IT departments, such as the rent-an-application model where a small, medium, or large business pays on a per-seat, per-month basis for accounting messaging, human resources, or storage and database management packages, to name a few.

For many organizations, it's cheaper to outsource such application requirements rather than make the capital investment in software, storage, and other gear to support the application, not to mention the increased burden on the IT department, which in most instances is already overtaxed. Robertson Stephens projects companies can save anywhere from 25 to 35 percent by outsourcing to an ASP.

Jason Gorezic, senior vice president of Mail.com, an ASP that handles e-mail, collaboration, and messaging, says his company can provide mailboxes via the Web for $5 per mailbox per month. In contrast, large IT shops running traditional solutions in-house can spend as much as $150 per month per user. While an enterprise must absorb all the associated costs -- servers, software licensing fees, proprietary development, administration, maintenance, and related networking issues -- an ASP can amortize these costs across several customers. That significantly reduces the total cost of ownership and permits Mail.com to offer attractive monthly subscription fees.

MOVE UP OR LOSE OUT
Service carriers must expand into new markets to survive in this broadband era. "You need to move up the value chain, or you'll lose out," warns Annelise Berendt, senior consultant at research and consulting company Ovum. She recommends that service providers consider expanding into the application and content business, noting that worldwide service revenue in the ASP market will total $132 billion by 2006.

Service organizations that will be the likely catalysts for the Premium Internet are already forming, in high-growth sectors such as network security, multimedia communication, IT and Web management, and outsourced productivity applications. Their pricing models reflect each sector's unique characteristics and permit multi-party business relationships among those providing local, Internet, cable, or multi-tenant services. As each shares in the revenue derived from these value services, they jointly unlock the potential of the Premium Internet. That development will ensure future shockwaves rolling across the communication, entertainment, and software industries, to the benefit of business users and consumers.

Cathy Gadecki is vice president of strategy and solutions at Ellacoya Networks, which provides service platforms for service provider and carrier markets. For more information, visit the company's Web site at www.ellacoya.com.

[ Return To The May 2001 Table Of Contents ]

BY MICHAEL COMBS

When ASPs merge, the consolidation creates new technical challenges for network management, particularly in back office integration. Network operations personnel suddenly find themselves with duplicate operations support system (OSS) components, different vendors and services to manage, and network operations centers (NOCs) in different time zones. To continue to deliver reliable services to subscribers, these disparities must be resolved quickly.

The most obvious challenge is that each network is likely to be composed of different technologies and vendors. The element management, service activation, and network monitoring solutions may be from the device vendors themselves, unable to manage devices from other vendors. If so, a new network management system (NMS) is needed to provide visibility and control across all the resources of the combined networks. An integrated NMS is an essential part of the OSS for realizing economies of scale derived from combining networks, and to deliver services to customers without interruption and confusion. While implementing a new multi-vendor, multi-service NMS might seem only slightly less difficult than combining an Airbus 300 and a Boeing 777 in mid-flight, the key is to avoid the major pitfalls.

First, select tools that are inherently multi-vendor and multi-service, and that provide a rich set of APIs for integration into OSS systems. There are solutions that can leverage the vendor-specific management tools already in place. To separate marketing literature from reality, check out the flexibility of data transfer to and from other systems. Many of the leading OSS solutions are built around an Oracle database that will ease integration efforts.

An often-unforeseen complication will be the different conventions used by the merging organizations for naming services and resources. Without resolution, OSS operations like activating a service, data collection, billing, and fault management will remain disconnected. For example, the NOC teams may need resources named and sorted by their pre-merger subnet and geographic definitions, while the billing system may need to immediately use the newly designated naming convention. Look for solutions with flexibility in naming resources and grouping tags.

At the IP layer, conventions used to assign IP addresses are another point of network integration. To avoid routing traffic nightmares, network operations must avoid duplicate IP addresses, yet must continue to route their internal traffic. The NMS must be able to support more than one naming convention when integrating networks.

Firewalls, deployed to control and protect incoming and outgoing traffic, will have to be reconfigured properly to allow the networks to be combined while maintaining and monitoring security. Many ASPs use firewalls not only at the edges of their network, but within, for additional control when allowing the administrative network to talk to the production network. 

Finally, be sure to select scalable solutions, since this merger may be only the first of many to come. You will appreciate scalability when network data collection and report generation that performed well for 100,000 resources and 100 users will have to perform as well for 500,000 resources and 500 users.

Michael Combs is director of product marketing for Quallaby, a global provider network management solution for service providers. For more information, visit the company’s Web site at www.quallaby.com.