The economics of success: Convergence can be your business reality - Industry Trend or Event

With the breakup of AT&T in the 1980s, competition joined technological innovation as a driving force in the U.S. telecommunications industry. In 1996, Congress passed the Telecommunications Act, which served to further accelerate industry competition, again joining technological innovation that, at the same time, was evolving the Internet into a mainstream communications platform. Advances in technology and the dismemberment of old regulatory schemes have combined over the past two decades to create the most aggressively competitive marketplace in the history of the telecommunications industry. In this environment, service providers--incumbents and next-generation carriers alike--are being forced to scrutinize their business models and identify those ingredients that show the greatest promise for the future.

The shifting sands of the marketplace require that carriers' business and technology strategies dovetail to support evolving market economics. In reality, this means transitioning from the traditional circuit-switched network to the next-generation packet-switched network and seamlessly transferring customers from the old to the new. Despite their overwhelming market dominance, the incumbent local exchange carriers (ILECs) are actually following their younger competitors into this new world.

Competitive local exchange carriers (CLECs) have generally pursued three distinct business models as they have entered the market: reseller, incremental-build (or smart-build), and facilities-based. Resellers have a very simple strategy for wholesaling service from incumbents and reselling at a premium. However simple this strategy is, resellers are limited in their control over the service they provide and over their customers. CLECs pursuing an incremental-build strategy will install a switching platform in an incumbent's central office and then lease the remaining network elements from the incumbent. While this gives the carrier a certain level of control over service, the margins are less than those of the reseller because it requires a significant investment in equipment. Lastly, the facilities-based competitors face the highest initial capital costs but provide the greatest degree of control over both service and customers.

The economics of each operating strategy vary, and we can expect that during the next year the challenges and opportunities of each will become more apparent. For CLECs of all stripes, however, as well as incumbents, the economic pressures of the future are the same. From an operational perspective, carriers must:

* Migrate existing revenue opportunities onto the next-generation network;

* Simplify the infrastructure by minimizing the number of overlay networks;

* Build and retain a solid customer base with high-value services; and

* Leverage convergence technology for future revenues.

MIGRATE REVENUE TO NEXT-GEN NETWORKS

As data and voice traffic continues to grow at a rapid pace, carriers have been forced to invest in additional PSTN capacity and packet-based network infrastructures--a costly exercise, given that large circuit switches cost between $1 million and $3 million and DACS systems between $100,000 and $250,000. Large traditional circuit switches are also based on proprietary technology and manufactured by only a handful of vendors. This results in a technology investment that is not only costly but is aging and offers no ability for carriers to differentiate their services.

Furthermore, the PSTN (and the equipment that comprises it) was designed for, and works well for, voice traffic, but the network is inefficient for data traffic. Research and development (R&D) in the area of data networking has far outpaced R&D on time-division multiplexing (TDM) technologies, producing new, more flexible packet-based solutions for carriers. All of these factors are driving carriers to decrease expenditures on traditional circuit-switching technology and invest in flexible, packet-centric platforms. However, despite the explosive growth of data traffic, it is important to note that voice services continue to provide carriers with 80% of their revenues.

It is essential that carriers continue to support the high-quality voice and value-added services that supply the bulk of their profits. The trick will be to transition today's traffic from the traditional circuit-switched network to the newer packet-based network--while also accommodating future traffic demands on that same packet-based network. In other words, successful service providers will be those that can transition their existing revenue streams onto their new infrastructure without any "hiccup" in service.

UNIFY THE NETWORK

The migration toward a single unified network is critical to reducing the service provider's operational costs, maximizing the efficient use of network resources, and providing a platform for new value-added, revenue-generating, and customer-relationship-building services. In the short term, reducing the number of overlay networks will simplify network monitoring, accelerate problem resolution, and improve customer service. Over the longer term, personnel training requirements will diminish as technicians focus on a single network instead of multiple technologies and applications. By consolidating multiple types of traffic into a single network, the need for costly and redundant parallel networks is further reduced. The benefits for end users are similar: consolidated network management, reduction of separate telecommunications and data communications personnel, and the obvious economic return from consolidation of access lines.

KEEP CUSTOMERS WITH VALUED-ADDED SERVICES

It can be argued that for all carriers the economics of success can be summed up in a single world--churn. Reducing customer churn reduces a carrier's overall operating costs by reducing marketing and customer acquisition expenses. This problem is particularly acute in the wireless world, where some experts report that the average churn rate now hovers around 40% for most providers, with customer acquisition costs at about $400 per subscriber.

Whether the carrier is a CLEC looking to develop its customer base or an incumbent carrier concerned with retention and growth, the CLEC's technology decisions must support its customer-development plans and target markets. Here, advanced services, such as voice mail, call forwarding, and caller ID, have produced dramatic results. Surveys indicate that the more services a customer subscribes to, the less likely he is to switch carriers. High-value, bundled services increase the "cost" to switch carriers for the customer, in terms of time and effort required to get set up with a competing carrier.

LEVERAGE CONVERGENCE TECHNOLOGY

With the scope of networks and number of customers increasing at a momentous rate, carriers are in search of ways to converge their voice and data traffic. Greenfield CLECs are searching for low-cost platforms that can carry both data and voice services and that can interconnect to the existing PSTN. Meanwhile, incumbent carriers are searching for low-risk migration solutions that leverage their existing circuit-switched investments. By moving voice services to packet networks, carriers can provide more value-added, cost-effective, and revenue-generating services.

Advances in technology address this need for consolidated voice and data traffic with a single, unified, packet-based network--convergence, the merger of packet-switching technology with signaling system 7 (SS7) intelligence. A converged switching architecture removes the barriers to cost-effective convergence of voice and data by delivering telephony-grade reliability; toll-quality voice; full SS7 signaling integration; extreme scalability of both port count and SS7 signaling power; and an open architecture for rapid, simplified service deployment.

The next-generation network will be a unified platform that carries all forms of media--voice, data, video--and provides a host of heretofore unrealized services. The economics of success will be determined by carriers' ability to leverage convergence technology to deliver such advanced services and to migrate their existing customer base from the traditional circuit-switched network to the packet-switched network of the future.

www.convergentnet.com

Circle 266 for more information from Convergent Networks

Yang is founder and CTO, Convergent Networks, Lowell, Mass.

COPYRIGHT 2000 Nelson Publishing
COPYRIGHT 2000 Gale Group