International Wholesale: Increasingly regional, on the brink of change

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1 International Wholesale: Increasingly regional, on the brink of change The wholesale connectivity business, once dominated by giants such as voice carriers like Verizon, Tata or Deutsche Telekom and global connectivity providers like Level 3 or Cogent, is increasingly moving into the focus of smaller regional players. They have started to see wholesale as a new and lucrative playing field after many retail markets have reached saturation levels. Furthermore, there is a notable shift in international data connectivity markets, moving away from the content is king paradigm towards accessing the consumer as key value in the data connectivity value chain. Operators with a strong subscriber base have started to monetize access and service levels for their end-customers and thus challenging the market power of global data aggregators and content providers. This article investigates how market developments, niche propositions and innovative solutions provide space for smaller players in international wholesale. We make ICT strategies work

2 Getting Regional Formerly, the international data wholesale business model based on volumes and scaling was undisputed. Smaller players had no choice other than to subscribe to this business model. But, with diversification of demand and new emphasis on regional connectivity solutions, that pattern is about to change. New players, particularly from emerging markets, are entering the scene and attacking aggressively. They are building their own international connectivity, building a regional PoP infrastructure, offering cost efficient IPLC solutions or becoming IP Transit providers for their region. Global players still provide the core of international internet infrastructure. However, regional players have found their niche as subregional demand grows and diversifies. For them, international wholesale has become an important revenue contributor. The new business approach is driven by two main facilitators: firstly, good knowledge of regional markets and better insight into customer requirements. On the hardware side this is accompanied by deployment of cable systems, which are considerably more efficient regarding capacity and O&M. Secondly, by playing it smart by coupling attractive propositions of redundancy, efficiency, and quality with clever pricing or putting the international offering on top of a national proposition to get a customer lock-in. If, in addition, the domestic market of the regional player has something to offer in terms of subscriber base, economic growth or economic growth perspective, business prospects look even better. Global players will continue their dominance in global connectivity. However, the business diversifies and becomes more regional. This is the space for attack for ambitious and well positioned regional players. Play the Propositions Demand for redundancy propositions and provision of route diversity is a major driver in the regional connectivity business. Existing submarine cable systems provide ever larger capacities by technical upgrades and new cables are widely built and far more efficient than cable systems implemented only some years ago. However, most cable systems are running along the same few routes, increasing exposure to cable cuts that sometimes affect multiple cables blacking out entire operators, markets or even regions. Regional operators accommodate for alternative routes on their existing national networks: Russian operators connect China to Europe using their extensive overland network, MENA operators from e.g. UAE, Saudi Arabia, Jordan or Syria initiated two consortia building a land bridge from the Red Sea and the Persian Gulf to Europe via Turkey in order to offer redundancy solutions to sea cable systems bypassing the bottlenecks of Alexandria and Sicily. Oteglobe, Greece s incumbent s international wholesale arm offers an alternative overland route bypassing the bottleneck Sicily and providing fully protected routes to Western Europe. These players manage to gain significant traffic and revenues from their redundancy offerings, which are often being priced at a premium and are operating in market niches with little or no competition. The more business critical data transport solutions are being deployed for global business, the bigger the demand for redundancy solutions. Detecon International GmbH 02/

3 In addition, new submarine cable systems are exploring new routes exemplified by multiple companies looking into a crossing of the Southern Atlantic (SAEx, WASACE and others) a route that will allow for new propositions, alternative routes and enables new players in the dynamic regions South America and Africa. Thus, the dominance of global players is shrinking with alternative routes providing an attractive niche for various regional players. Figure 1 - Redundancy routes Middle East to Europe Building real IP Transit A second business driver for regional players is widespread market failure in many less competitive periphery IP Transit markets. Poor IP Transit sourcing strategies continue to be a major impediment for internet growth in emerging and developing country markets. Internet sourcing always has been cheapest at the core of the internet cloud, that is North America and Europe where price levels have now reached levels of down to USD 1 per Mbps / month. Every IP Transit offering in other parts of the world has to factor in the distance to the internet core on top of the local offering, as illustrated in Figure 2. Consequently, in parts of Asia, Australia or Southern Africa, IP Transit pricing can easily reach prices exceeding USD 100 per Mbps / month even for larger capacities. Of course, much of this difference has been kept as monopoly rent by incumbents and their international connectivity providers, but as markets have been liberalized and new routes and offerings have become available, alternative providers have discovered substantial IP Transit optimization potential, playing with prices, partners and routes. Furthermore, various markets are characterized by crippled IP Transit markets with IP Transit prices at a multiple of alternative routing via IPLCs to fully competitive internet hubs. Regional players thus bring efficient IP Transit markets to the periphery benefiting from the same scaling effects global players did before at major internet hubs. An example is Neotel, South Africa s second fixed line operator challenging Telkom, the incumbent, by offering not only fully redundant IPLC solutions via eastbound (Seacom) and westbound cable (WACS) systems but also bringing real IP Transit to the Southern African region for the first time. Detecon International GmbH 02/

4 Regularly, these markets are not properly covered by those global giants, which may even lack decent connectivity there. In many developing markets there is thus optimization potential in the IP Transit market that can be a lucrative and rapidly growing spot for regional players with suitable connectivity, where even smaller players can quickly achieve scaling advantages. Figure 2 - Median IP Transit prices for GigE ports in selected countries (per Mbps / month in Q4 2011) From Source to Sink? In addition to the developments outlined above, there are widespread attempts from retail dominated Telco s to change the entire set of rules that hitherto has dominated IP Transit markets: Global connectivity business is dominated by smaller providers paying global players for delivering content from the internet s core in the US and Europe to their PoPs. Increasingly, (even in emerging markets) attempts are being made to monetize the value of access to (growing) populations and their (increasing) purchasing power. Good economic prospects in many of those markets further facilitate the trend: the business model is shifting, putting less emphasis on the source but assigning more value providing access to the end consumer. This notion is by no way restricted to smaller players, but has even being sought out by Tier-1 carriers that are dominated by retail business. Furthermore, operators in developed world, e.g. from the EU are lobbying for regulatory action to introduce something like termination fees for internet content, which effectively means regulatory prescribed content delivery networks. These attempts are so far not widely successful, but there are players, who seek to change market rules fundamentally. It remains to be seen who can enforce their position in this arena: content providers or Telco s dominated by their retail business. Detecon International GmbH 02/

5 New Activities, More Players International connectivity is one of few remaining growth areas in telecoms where many market segments already have reached saturation levels. Its increasing share of the total telecommunications value chain from less than one percent in the past to almost five percent in the coming years makes it a highly attractive market for operators around the globe looking for remaining growth opportunities. While still largely a business based on volumes and scaling, there are several market developments providing space for regional operators and prudent attackers: Regional players need capitalize on customer proximity and find their space for redundant routes. Smaller players should investigate their IP Transit sourcing for improvement potential while large players, especially those global giants, need to prepare for increasing pressure towards a change in business model. Examples from various regions already show how smaller operators have recognized their space and built successful and lucrative business models around this while at the same time game-changers in the power balance are opening new opportunities. If played smartly, there is space in this business for many others. The authors Olaf Nielinger Olaf.Nielinger@detecon.com Richard Seitz Richard.Seitz@detecon.com Detecon International GmbH 02/