The virtues of networking: running a network is expensive and can distract from customer service. Does that mean that dispensing with this chore altogether to become an asset-lite VNO is the way forward?

Virtual network operators buy in capacity that they treat as a commodity and sell it on as part of a--more or less complete--managed service.

Given this definition, and the fact that there is no shortage of cheap capacity, a key issue for VNOs is whether they can really offer the service that network-based operators do. According to the network operators, they cannot. "I would disagree that you don't need operational control to provide real quality of service," says William Priest, head of global products and solutions at Equant, which focuses on offering network-based managed solutions to multi-nationals. Equant is extending its services and capability beyond the network offer towards the whole communications bundle, including mobile, and, of course, it also has off-net services that are supported by leased capacity. "How does our service offer differ to that of VNOs? Our focus is on the CIO and CTO agenda; on business issues," says Priest. "We have a much more optimal customer experience; where we seek to play is as a trusted business partner."

"An advantage in owning a network? They are deluded," says Allen Timpany, CEO of Vanco, a UK-based VNO. "It is as naive as saying that Ford would have an advantage through owning steel mills. We buy in the most appropriate technology country-by-country and are superior because of that. We are absolutely at the cutting edge of every technical development."

Analysts are not quite as bullish on the VNO proposition as Vanco is. "It is not as value-added as that of the network-based service providers," argues Camille Mendler, an analyst with Yankee Group. "However, in terms of what they do, they do a pretty good job."

She points out that VNOs have the advantage of being able to take a 'just in time' approach, that they are 'less encumbered'. Ovum adds that Vanco can set up a 'typical' VPN product, 'under the right conditions', within 15-20 days, which is faster than some of the network-based global service providers. This, of course, could be seen to translate into a lower cost base.

Shackled or secure?

"You can argue that we certainly do have a lower cost base but we don't compete with the carriers on cost at all," says Simon Rogan, managing director of Sirocom, a UK-based VNO that resells iPass services. "We pick the most appropriate carrier for a service, which can be a huge cost-saving in itself."

Sirocom has, Rogan says, an overall operating margin of around 39-40 per cent. Both Vanco and Sirocom stress that their pricing is transparent for the client. "VNOs are a threat to the network operators because they are smaller organisations, with simpler business models and their pricing is very, very keen," adds Mendler.

Unsurprisingly, the network-based operators do not accept that being a VNO necessarily brings cost advantages. "By owning and controlling the network you can be much more cost effective than when trying to patch together multiple networks, which adds to the complexity," says Equant's Priest. "It is about mitigating and minimising risk, which also minimises cost."

A basic strand in the cost savings argument is that some network operators do have a topology that allows them to very closely match the needs of some customers--such as the major investment banks, which are present in big cities and close to hubs. However, the VNOs remain unconvinced. "Network-based providers are shackled by their network," says Rogan. "A major reason that the VNO base has grown is that very few people have their business operations in exactly the places where the network operators have PoPs. Further, customers want SLAs that meet their own requirements." This means that even the biggest network operators have to take a hybrid approach by buying in capacity to meet the needs of some clients, thus making themselves partial VNOs as they knit together disparate networks.

"Putting together a network of many sub-networks has its challenges," says Andy Zynga, vice president of business development at Telindus, a network integrator and VNO. "'Hygiene factors' include availability, bandwidth and jitter. There are also process-related SLAs that allow a VNO to work with the clients, such as ensuring that the client will be contacted when there is a fault."

Zynga does not see the main challenges as technical, but rather more based on business processes. "You have got to be quick, flexible and have excellent [network] designers. You also need a very good database of all the current network offers," he says. Like the other VNO providers, Zynga argues that carriers can suffer from being more focused on their networks than on the processes required to actually set up and run a service to clients. "It comes down to who is close enough to the customer to really understand his requirements," he adds.

Bells but no whistles?

Responsive customer service--vital though it is--is arguably only a small part of providing a network solution. Both VNOs and carriers have to grapple with fast-moving technology and increasingly complex customer demands.

"Vanco will be forced to face its challenges once the IP VPN migration boom is over," says Nikki Matkovits, an analyst with Ovum in a recent report. "The long-term disadvantage of the Vanco business model is that it lacks innovation in the IP services space compared to its peers. Being networkless means Vanco will be restricted, since it remains dependent on the capabilities of the carriers it leases capacity from," Matkovits adds.

This, obviously, is not a stance that Vanco agrees with. "[Following deregulation] all of the carriers got rid of their laboratories now all they're doing is reselling Cisco, Alcatel or Ericsson kit," says Timpany. "None of them is doing original development. That died away twenty years ago."

However, Matkovits is not alone in wondering whether VNOs can really cut the mustard on delivering applications that are heavily dependent on network performance. "VNOs do corporate connectivity solutions pretty well," says Mendler. "The issue is that in the future the connectivity and the application will be very difficult to separate. Hence the investment by network operators in the applications performance [and management] space. Colt, for example, has accredited Oracle managed services status."

What customers are paying VNOs for--and they could, after all, just go out, buy capacity and stitch a network together themselves--is removing the headache of ensuring that it will all work. It is not a model, Timpany argues, that is predicated on cheap bandwidth. He points out that customers were willing to go to VNOs before capacity was a commodity. Unsurprisingly, all of the VNOs pride themselves on monitoring performance carefully. "I wouldn't agree at all that VNOs are not able to offer [all the bells and whistles]. We monitor from LAN to LAN, we do a lot more than the network operator would," says Rogan at Sirocom.

Mobile considerations

Interconnecting networks is not just about fixed-to-fixed, however. Many corporate clients want mobile access into their VPNs as part of a package. Equant works with Orange on providing this, but it is still by no means a simple proposition. "There is still a lot of stuff that has to be solved the back-office integration area when it comes to mobile access into VPNs," says Zynga.

Corporates also face the issue of sourcing one, pan-regional mobile offer that enables their users to call internationally without racking up enormous roaming charges. DotDash, which aims to enable MNCs to have one supplier for mobile services on an international basis-and sees itself as offering 'mobile cost control for corporates'--focuses on voice services. "The big barrier is that mobile operators typically have a country P & L that acts as a natural barrier to buying services across boundaries," says Andrew White, the CEO of DotDash.

DotDash is due to launch its trial service in November this year, with five MNC customers in Europe. "A lot of the value comes from managing the [mobile] user base more efficiently," says White. "We think there is a lot of fat there."

Fixed VNOs obviously seek to offer mobile data access into VPNs for their customers--though they would not manage mobile voice in the way that DotDash aims to do. White says that DotDash "already has relationships in the fixed VNO space", though he declined to say what they were or with whom. The aim, however, is to offer a full corporate communications service.

Given the attractions that the MNC customer base holds for telecom providers and the increasing moves that many are making into more complex, managed services, it looks as though competition for business clients will be robust. The network operators are confident that they are the right partners to address the needs of the biggest corporates. The VNOs are equally sure that they have the agility the customer really demands. However, it may be that this stand-off between network-based operators and VNOs is more apparent than real. Some customers will value the low-cost, managed connectivity that VNOs bring; some will want the 'trusted business partner' that Equant aims to be.

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RELATED ARTICLE: What about interconnecting MPLS networks?

One of the issues facing carriers and VNOs alike is that interconnecting MPLS networks is not easy. "We are dealing with the fact that carriers are different by design," says Charlie Muirhead, the CEO of Nexagent, which offers an interconnect system. Nexagent says that it can link any kind of IP VPN and that MPLS interconnect is no stumbling block. "We have solved that problem and it works," says Muirhead. "It can be done in days [without the need for direct collaboration]." Vanco has its own system for linking up disparate MPLS clouds, which, Timpany says, has the advantage of being non-intrusive. It functions by stripping and replacing the MPLS labels and doing this very quickly.

Muirhead believes that there is a move in the industry toward a model where the customer contracts with several carriers--to gain control and transparency on pricing--but the management of integrating the different carriers is left to a systems or network integrator. (Obviously, Nexagent envisages a world where the SI or NI go to Nexagent for the integration solution.) "In enterprises there is a big trend away from mega deals to multisourced deals," says Muirhead, who points out that many potential clients are only now getting to the stage where they trust managed VPNs.

In this scenario, of course, the value-add that the VNO could bill for would be reduced, so it is questionable whether they would embrace that model with open arms. There have also been suggestions that it might not be in the best interests of the network operators to work with Nexagent. If it enables seamless interconnection of VPNs then, it could be said, owning a network is no longer an advantage. Equant, a managed network services provider, does not seem overly disconcerted. "Our sweet spot is complex, cross-border customers," says William Priest, head of global products and solutions at Equant (who, at the time of going to press, was due to meet with Nexagent). "IP VPNs are not a commodity, but the technology is rapidly becoming neutral."

Priest believes that multinationals often prefer to deal with providers they feel have scale and clout. (It should be stressed that VNOs like Vanco are also not, necessarily, competing directly with operators like Equant. "There are limitations on contract size [the average is [euro]15 m]," says Allen Timpany, Vanco's CEO. "This is mainly because customers don't like to see the financial value of their contract get too high as a proportion of overall revenues.")

The Nexagent model would also make it easier for SIs to act as VNOs. In some cases, they already do because they can be asked to manage networks for their IT customers. However, this remains peripheral to their IT role and IBM, for one, has said that it has no interest in becoming a VNO per se. However, Equant argues that it does compete with SIs in managed messaging, managed security, convergence and mobility solutions and that this forces some SIs further into the networking space.

written by OuidaTaaffe

Ouida Taaffe, features editor (otaaffe@horizonhouse.co.uk)

COPYRIGHT 2004 Horizon House Publications, Inc.
COPYRIGHT 2004 Gale Group