Year End Review and Predictions for 2008
By Hank Levine and Jim Blaszak We believe that average enterprise customers did not do as well in telecom procurements in 2007 as in previous years. Our assessment is based on our observation of carrier conduct in procurements and regulatory decisions. And 2008 only promises to further separate smart, tough customers from 'the pack'.
By Hank Levine and Jim Blaszak We believe that average enterprise customers did not do as well in telecom procurements in 2007 as in previous years. Our assessment is based on our observation of carrier conduct in procurements and regulatory decisions. And 2008 only promises to further separate smart, tough customers from 'the pack'.Growing concentration in the telecom industry made significant rate reductions for enterprise customers harder to come by in 2007. Rates certainly moved down, but our sense is that it "took more" for enterprise customers to win significant price concessions. Enterprise customers often fail to use a genuinely competitive procurement process - they 'negotiate' with their incumbent carrier, who promises market rates and then delivers reductions that do not in fact meet the market and are accompanied by a variety of 'take backs' and restrictions. As the industry gets more concentrated, the gap between deals like this and well done, competitive deals will only grow. The rates of customers who take this route will fall further behind market leading rates, and carriers will be successful in clawing back contractual concessions made years - sometimes decades -- before.
Our experience in 2007 suggests that the rates for long distance service with dedicated access at one end are 15-20% higher for not-well-done deals than for those that are negotiated by customers who went to the market. For access and data services, the differential between well done deals and not well deals is even greater, ranging in our experience from 30-50%. Some enterprise customers won significant cost reductions in 2007-- the biggest price drops were obtained on newer services like MPLS, by customers whose carriers believed that they were willing to move traffic. That will be the case in 2008 as well.
In many transactions, customers will only seriously consider Verizon or AT&T (whichever is their primary incumbent), and the carriers know that. In many other cases, only Verizon and AT&T submit serious bids. Getting a good result in a telecom procurement is a lot easier when more than two vendors seriously compete for business. Too often in 2007, that was not our experience. Sprint and Qwest at times seemed not committed to winning business, even when opportunities were significant. In part that is because their account team resources are more limited, and in part (at least for Sprint) they have a business focus that values wireline enterprise customer business less than AT&T and Verizon.
We hope that will change in 2008, but can't be confident that will be the case. Sprint seems to have its hands full with wireless problems, including the rollout of WiMax. Qwest has never quite cracked the top tier of enterprise customer service providers and now faces growing competition from cable television companies who are winning high speed Internet access and basic voice business from telephone companies. If Qwest and Sprint don't become more effective competitors to AT&T and Verizon in 2008, enterprise customers who are not committed to genuinely competitive procurements will continue to fall behind.
Federal regulatory decisions in 2007 contribute to the emergence of less, not more, competition for the business of enterprise customers. The FCC, for example, granted AT&T and Verizon regulatory relief that could facilitate price squeezes when the special access rate freeze conditions imposed in connection with the AT&T/SBC/BellSouth and MCI/Verizon mergers expire. If they are free to raise their competitors' special access costs, carriers with extensive special access networks, i.e., Verizon and AT&T, can squeeze their competitors' profit margins to the point where it is impractical for those competitors to compete for enterprise customer business. If the long distance market becomes a virtual duopoly because of price squeezes or other conditions, enterprise customers with dispersed locations will still have a fighting chance, but the bottom line is that duopolistic markets are far less competitive than markets with three or four competitors (if you doubt this, remember cellular pricing and terms in the 1980's and early '90s).
The wireless front brings better news and more cause for optimism. Verizon announced that it intends to open its network to devices and applications purchased from third parties. We don't think that the certification process Verizon has announced will be designed to be an obstacle to third party devices. Verizon seems to have concluded that wireless voice is, or is rapidly becoming, a "mature" product and that the future of wireless lies with data and converged applications. Neither Verizon, nor any other service provider, can trust itself to identify and develop the applications that will stimulate future non-voice wireless usage.
The rules adopted by the FCC in 2007 for the 700 MHz auction were also favorable. They require that the winner(s) of a portion of the spectrum allow third party devices and applications to run on the service using that spectrum. Although 2008 may be a bit early for significant changes in the wireless space, we are cautiously optimistic about the developments described above, particularly if a non-incumbent is the high bidder for the portion of 700 MHz spectrum that must be open to third party applications and devices.
In the long run, the best hope for wireline competition may well be the 'merging' of the wireline and wireless markets through new services like WiMax. But that's a 2009 story.