The Wholesale Years
Market assessment and what should be focused on going into 2006

The carrier world at the end of 2005 has changed significantly. Over the past year, M&A values in Europe alone now exceed €40 billion (source: Telecom Finance). Experts are predicting that more of the same will occur again next year, and is a critical context for wholesale businesses.

Navigating successful strategies in a more turbulent environment is challenging for any wholesale business. We have noted that major operators have sought very different approaches for growth, ranging from merger, consolidation, operational alliances, seeding POPs to harvest traffic in regional markets, insourcing what was outsourced and vice versa, and combinations of some or more.

A worrying question is whether these strategies address any of the fundamental financial problems facing the international data and voice wholesale business?

The true open market value of the international voice wholesale business we estimate to be US$ 7.257 billion for 2004, a decline of 2.5% on 2003, excluding the mobile premium over fixed. Without the European mobile market price premium, some of the major operators would be seriously exposed on P&L. A further concerning question: how long will this anomaly be allowed to continue?

The international wholesale data business is continuing to see 40% price declines year on year and is rapidly heading in the same direction as voice, and negative real net margins. International data has been failing to deliver a positive ROI for some years.
In addressing these issues, over the past year it has been noticeable that much effort has been devoted to strengthening regional marketing positions.

Yet of the carriers focused on selling services to international and global enterprises – added to which an internationalisation process for SMEs is occurring in Europe, Middle East and Asia - many still need to create a footprint in other regions or globally. The question is whether this ambition matches their competencies and financial resources. For those who have considered this argument, one conclusion is to seek alliances, joint ventures, mergers and in some cases acquisitions. Foreign Direct Investment (FDI) rules are also gradually beginning to change in the emerging markets of China and India.

In 2006, the industry we believe wholesale businesses should consider the following:

1. Re-assess the original rationale for international wholesale businesses and begin to constrain the flaws in the current P&L

2. Deploy IP based application based services for which they can offer economy of scale advantages to their customers

3. Take a greater interest in the increasingly strategic role of Data Centres

4. Extend service portfolios and global offerings

This will be no mean feat, given the propensity to avoid structural issues. The problems will not go away.

What may be inevitable however is the re-emergence in the market of smaller and leaner wholesale operators in voice and data.

Have you also seen our other consultant comments?