To deliver managed telecom service, telcos must consolidate businesses

In this era of shrinking profit margins for basic connectivity services, network operators have to evolve into managed telecom service providers that can offer enterprises and consumers all their connectivity needs in one place and sell other services as well. Verizon Communications admitted to this inevitability when it recently merged its two wireline businesses into one unified operation, but Verizon and other telcos will have to evolve even further if they want to compete as anything other than providers of dumb pipes.

In this era of shrinking profit margins for basic connectivity services, network operators have to evolve into managed telecom service providers that can offer enterprises and consumers all their connectivity needs in one place and sell other services as well. Verizon Communications admitted to this inevitability when it recently merged its two wireline businesses into one unified operation, but Verizon and other telcos will have to evolve even further if they want to compete as anything other than providers of dumb pipes.

"If you're in the business of providing connectivity, you can't even talk about things like fixed mobile convergence if you have different groups that are focusing on different parts of the customer," said Mike Jude, program manager in consumer communications services at market research company Frost & Sullivan. "The future of service delivery is in integrated services. It's not enough to bring to the table 'I'm going to provide you with broadband functions.'"

If a network carrier truly wants to own a business telecom service like fixed-mobile convergence (FMC), it needs to simplify the engagement for enterprises. It must be ready to deliver FMC as a managed telecom service, where wired and wireless connectivity and the deployment of any third-party FMC technologies are integrated and delivered through one organization within the telco.

Telecom operators can no longer wait for customers to come to them with ideas on how each of the operators' services can work together to deliver value, according to Tom Nolle, president of CIMI Corp.

"We have viewed services in the telephone industry with a 'build it and they will come' Field of Dreams kind of mindset," Nolle said. "That's the way telephony used to work … but in this new world, basic connectivity services margins are already substandard and going down, so the real money and the real hope for profit growth is in specialized services [such as] cloud computing, VPN services or managed services."

Mindful of this shift, Verizon announced earlier this month that it would merge two historically separate wireline business groups -- Verizon Telecom and Verizon Business -- into one organization, Verizon Wireline. The global telecom giant has kept its wireless division, Verizon Wireless, as a separate unit. Following a merger with Vodafone in 2000, the British mobile operator still owns 45% of the Verizon Wireless business, so further consolidation would be complicated.

"As Verizon expands, we will resist the natural inclination to add complexity to deal with an increasing number of issues and interfaces. We will simplify how we work," wrote Verizon CEO Ivan Seidenberg in an email to employees. "These steps are attuned to where the market is today and is headed. The key is flexibility, and we are prepared to continually assess our structure and our ability to move into and create new markets."

For some analysts, Verizon's move also indicated that telecom operators will be consolidating to save money at the top levels. The move is expected to have little impact on telecom networks or technology.

"The huge service providers are kind of recognizing that a big chunk of their cost structure comes from organization, so I think all of them are taking a look at how [they] align these things so [they] don't need so much overhead," Jude said. "It just seems like cost reduction."

Merging products and services into one unit makes logistical and economic sense for telecom providers as the Tier 1 and Tier 2 operators move from "supply-side marketing" to "demand-side marketing," Nolle said.

"You've got to have all your people in the choir singing the same song, and in order to do that, you need some unification in management," he said. "In an opportunity-driven organization, you've got to have something that looks more like Apple, where you've got product management and you've got marketing and you've got sales. That's not how telcos used to be structured."

But why are the changes coming now? The recession plays a big part, Nolle said, as customers are less likely to make capital investments and more inclined to look to telecom operators to be their managed service or cloud services providers

"[Next year] is going to be the first year of a brave new world as far as how enterprises consume technology," he said. "It's not a year where you want to be behind the curve as a seller when these new buyer behaviors are confronted, so you make your change now."

Let us know what you think about the story; email: Jessica Scarpati, News Writer

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