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February 2015

The Shifting Winds of Wholesale: Building Systems that Adapt to Business Change & Greater Partnering

The Shifting Winds of Wholesale: Building Systems that Adapt to Business Change & Greater Partnering

The hero is not fed on sweets,
Daily his own heart he eats;
Chambers of the great are jails,
And head-winds right for royal sails.
   R. W. Emerson, Heroism: Essays First Series, 1841

It’s the nature of telecoms to be unsung heroes — to solve tough technological, regulatory, and partnering problems that other industries stay a thousand miles away from.

Even the much-idolized Apple, Google, and Samsung have a much easier go of it.  Free to focus on analyzing web traffic or building a few mobile devices, they are largely unconstrained by the ugliness of physical infrastructure, government mandates, or the problems of globally delivering — and getting paid for — a real-time, high-QoS electronic service.

So cheer up and tighten your belts, heroes!  Another day brings new problems and a hundred fresh ways an operator’s business could be marginalized if it’s not careful.

Wholesale, of course, is not immune to telecom’s larger issues.  In fact, wholesale is radically transforming itself today to support the retail and enterprise wings of the business as they greatly expand their portfolio of digital and partner-supplied services.

And here to make sense of wholesale’s future — and the heightened role that wholesale systems will play in the drama — is Hassan Iftikhar, Vice President of Product Management at CSG International.

With close to 300 wholesale and interconnect customers worldwide, CSG is one of the premier suppliers of rating, billing, settlement, and routing solutions, serving carriers from the very largest to some of the smallest, too.  Many of the insights and data Hassan shares in the following interview are gleaned from the special access CSG has to wholesalers around the world.

Dan Baker:Hassan, what’s your perspective on the wholesale market?  What are the chief challenges operators face?

Hassan Iftikhar: Dan, the challenges are many.  It’s the business equivalent of an earthquake.  Some major ground shifts are shaking the foundations of the wholesale business, so let me walk you through some of CSG’s thinking on what’s occurring.

First off is international voice.  Historically, this market has experienced predictable volume growth in the range of 10% to 13% per year (CAGR).  As international calls get cheaper, the lower rates are offset by greater volume: that trend has been consistent for a decade or more.

Recently, however, this predictability in international voice has started to change.  If you look back at 2013, for example, instead of the steady 10% to 13% growth curve, the international voice market grew only about 6% or 7%.  And in 2014 this sector actually saw a revenue decline for the first time: it fell 1.4% in 2014, a very troublesome trend, especially for international voice carriers.

International Voice Traffic Trends

So what does your research suggest as the cause of international voice revenue decline?

A number of factors are causing the change.  We think carriers face pressure from three primary directions: 1) regulatory mandates; 2) OTT competition; and 3) disruption from network technology advances.

First and foremost, a very large percentage of international voice calls are now terminated on mobile networks, and those have very high interconnection charges.  And those charges are under increasing regulatory pressure.

Second — and a very important factor — is the impact of over-the-top players.  And the predominant one is Skype.  A couple of years ago many carriers scoffed at the notion of Skype being a serious competitor.  But today Skype has become a major and growing revenue threat.  In fact, last year Skype’s traffic grew 30% — more traffic growth than the international traffic of all international carriers combined.

Skype traffic grew by about 350 billion minutes last year.  And here’s an interesting fact: if you had routed Skype’s traffic through traditional international networks, the aggregate voice traffic growth would be back to the historical levels of 13% annual growth.

So how are these revenue and margin pressures in international voice influencing where CSG is going as a wholesale solutions vendor?

The revenue shortfall is forcing carriers to ask: how do we maximize our margins in this business?  And if volumes are flat, how can I make the most of that situation and maximize my margins?

So this is, in turn, is causing us to direct much of our development efforts toward trading, routing, and service quality solutions.

Now routing and trading has traditionally been an in-house effort for carriers.  But over the last six to eight years, carriers have increasingly relied on companies like CSG to supply them with optimal routing, trading exchanges, and systems to assure the quality of voice services they are getting from partners.

What about the regulatory pressure you talked about?  Where is that having an impact?

Well, I talked about mobile carriers and how they carry a large portion of international call termination.  Well, as you’ve no doubt heard, the European Union has exerted pressure to bring some of those rates down in Europe.  And other regulators around the world will probably adopt similar measures.

The positive side of this regulation is it can only help international roaming revenues to rise.  In fact, international roaming revenues are predicted to grow from about $54 billion today to about $90 billion by 2018.  And by that time, they will represent 10% of overall operator revenues — some very significant growth.

International Voice Traffic Trends

So roaming is a major revenue driver for carriers, and we think the key growth is going to come (and is coming) from data services that are projected to grow at a 28% to 30% CAGR clip.

The key driver of data services growth is no surprise: it’s the iPhone and Android handsets that are expanding very fast.  And as they increase their global penetration, the consumer expectation will be that — whether I am in the U.K., the U.S. or anywhere else in the world — I will have access to the same sort of data services I enjoy in my home network.

But there’s a problem, of course.  And that problem is the very large group of “quiet roamers” — folks who, when they travel abroad, hesitate to turn on their data services for fear of bill shock.

Now the need to win over these quiet roamers and handle the growth in data services roaming has forced operators to look at innovative ways to get greater cost efficiencies and boost revenue.

So over the last five to seven years carriers have come to us and said, “Look, we want more control over our traditional roaming business than we’ve had in the past.” And as you know, the billing and settlement is largely handled today by two clearinghouses, Syniverse and Starhome Mach.

The goal, then, is to in-source a portion of the roaming settlement into their operations using the 80-20 rule.  If 80% of revenue is being generated from 20% of their partners, then they aim to strike a bilateral relationship with those key carrier partners.  And this would include launching special marketing campaigns and programs to promote network use in the markets where their customers roam.

So we think this growing trend will fundamentally change the roaming business because when you are looking at an all-IP network or an LTE network, roaming behavior will fundamentally change where the business will become much more settlement like.

How will the global roll out of LTE affect the interconnect business?

Dan, already there are more than 300 networks across the world on LTE.  It’s a technology that fundamentally explodes the use of data and IP networks, so it unleashes great opportunity — and great risks — in the wholesale market.

I think the next big thing in LTE will be the roll out of voice over LTE and that, of course, enables HD voice, it enables HD video, and it enables RCS, Rich Communication Services where you can mix the voice, video and other content.  LTE also enables a full range of other content related services, such as M2M.

As an underlying technology, LTE is affecting each of the segments I talked about: roaming, digital services, and international wholesale voice — all of these areas are changing because of LTE.

Finally, I’m curious where you feel wholesale sits in the larger scheme of a telecom operator’s business?  And in that bigger picture, is wholesale is declining or growing in importance within telecom?

Dan, I think wholesale is clearly becoming more strategic, especially as wholesale gets transformed in the years ahead.  As you can imagine, we work closely with some of the leading global players to help them transition from TDM to SIP networks.

And I will typically go in and talk to the CEO about their implementation of LTE and casually ask what they think of wholesale’s role in LTE deployment.

Usually they draw a blank when I ask that question because wholesale is an area that’s not top of mind: their main concern is deploying the network and the retail billing of the content.

But as we discuss the topic further they start to recognize that, yes, there is indeed a big role for wholesale capabilities in terms of the partnership mechanisms wholesale specializes in.

Now I mentioned Skype before because it’s probably the most visible OTT for wholesalers since they compete for international voice.  But there are plenty of other players out there like Facebook acquiring WhatsApp, plus Apple and Google who are having a big impact.

Yet here’s the interesting thing: the ecosystem has evolved to the point now where a lot of carriers are transforming themselves from traditional carriers to digital service providers.  So if your objective is to deliver digital services to end-consumers, it’s no longer a question of competing against the OTTs.

You’re better off asking: what sort of partnerships should I strike up with this OTT to boost my revenue and add value to the end business or consumer customer?  So in the future we’re going to see deeper partnerships with OTTs — with the big movie houses, music brands, and content aggregators.

And this is exactly where CSG is spending a lot of time and effort in future strategy and roadmaps.  We are preparing ourselves for the new partnership era that’s starting to take off.

Good stuff, Hassan.  Thank you for this enlightening perspective on where wholesale is headed.

Copyright 2015 Telexchange Journal

 

About the Expert

Hassan Iftikhar

Hassan Iftikhar

Hassan Iftikhar is Vice President, Product Management, WBMS at CSG International.  Hassan has over 15 years of experience in the Telecoms Industry covering a broad spectrum of disciplines from network management and operations of fixed and mobile networks to prepaid charging, partner billing and settlement.

Prior to joining CSG, Hassan was the general manager of Ericsson’s Interconnect business unit where he worked in a variety of management and strategic roles.   Contact Hassan via

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