Whether offering a bundle or a standalone service, operators of all varieties are faced with a fundamental dilemma that cannot be ignored: is true value defined by network infrastructure and ability to deliver reliable connectivity, or does it lie in the services that can monetize directly from subscribers?

 

This is a big topic, and I plan to explore various aspects of it in this column. Just looking at the business market, there were a few strong clues at last week’s ITEXPO in Miami.

First, there is the business market, which is where this show has a strong focus. Verizon’s Les Goldman talked about the complexity of providing VoIP, and by extension, the value that an end-to-end IP network represents.

 

For businesses looking at moving to VoIP this is extremely important. Most businesses lack the ability or will to effectively run VoIP on their own, and for them, a network like Verizon’s becomes a deal-maker. By providing a managed VoIP offering, they can deliver a complete solution for most any size of business. In these cases, the service provider gets the best of both worlds—providing both the connection and the services.

 

Moving further along the spectrum, however, these two pieces begin to diverge, and the incumbent carrier must share the pie with competitors and over-the-top operators. This is where direct alternatives such as 8x8, Cbeyond (News - Alert), Covad and XO come into play, reducing the incumbent’s role to a last mile provider. Even further along are the pure play hosted offerings such as VoIP Logic (News - Alert) and Cypress Communications. The alternatives continue to proliferate, with many focusing on a single niche within the business market.

 

Further complicating things for telcos are the cable operators, who are making their first moves into the business market, as well as the Web-based players such as Google, Yahoo and Skype, all of whom have designs on this space. On the telephony front, we must also factor in the open source movement, which continues to build momentum. Nowhere was this clearer at ITEXPO than Fonality’s announcement to integrate with Dell. This was a solid win-win move, and provides a great channel for open source telephony into the small business market.

 

Plus, let’s not forget Microsoft, with its bold Telco 2.0 vision that makes the company both friend and foe to traditional service providers. In all of these cases, the telco’s network may well be its key differentiator, and it would be unrealistic to expect that the telco can retain all its subscriber revenues in the face of these alternatives.

 

The consumer market is no different, and presents its own set of challenges. Bundles are becoming the norm; this was explored in a few different sessions at ITEXPO. It is becoming very difficult in this climate for service providers or operators to remain competitive with a single offering. Vonage (News - Alert) is perhaps the best example of this in the residential market. Lacking both a network infrastructure and a native subscriber base, they must compete on features and services. This was a successful model initially, but as competitors came into the market with bundles, voice became commoditized. It did not take long for the space to become price-driven, at which point, it becomes very difficult to hold your own with just services and features.

 

For service providers who can do both—provide a network and the services—Vonage brings the dilemma into clearer focus. The ideal scenario is to have native subscribers, a network and services. Having just one of these will only carry a provider in the short term. Service providers who can leverage all three of these have the best chance of surviving as competition gets stronger and smarter. The consumer market is especially important because it drives two key growth areas: mobility and video. As such, there is a lot at stake here, making the service provider dilemma very real.

 

Even if a service provider has all three pieces, it cannot afford to stand still with its existing services portfolio. The flexibility of IP, along with market pressures, dictates broadening into new areas, and hence the bundle is born. The imperative to do so was evident at ITEXPO, particularly in the longer sessions (Triple/Quad Play, Service Provider Roundtable and The State of IPTV). Consumer demand is strong and increasing across many forms of communication—PC-based, mobile, video, etc.—and service providers need to keep pace.

 

Video was also a strong theme during the State of IPTV (News - Alert) session, which I moderated. While IPTV is complex, and many carriers have reservations about deploying it, there is an implicit understanding of the need to go down this road. Interestingly, what came out of our session was the fact that RLECs—rural carriers—have become early adopters. Surely, if they can find a way to add this to the services mix, the larger telcos should soon be following.

 

As such, I’d be watching this end of the carrier market for early signs as to how telcos are making all this work. The short answer is simple: they have to, otherwise their competitors will. I’d venture to say that the longer answer (and the better answer) is recognizing the transformative potential of IP communications, and choosing to innovate by bringing services to market that subscribers demand today. The alternative is to become a dumb pipe and forego the new revenue opportunities that are coming as broadband becomes ubiquitous.

 

This road is not without risk, but the alternative of trying to maintain the status quo is even riskier. IP is not nearly as mature as the PSTN, so there will be growing pains. Mistakes will be made. Some customers will be lost. Some product launches will fail. However, it can be done, even by the incumbents. AT&T is a good case in point. That company’s fiber strategy is not as ambitious as Verizon’s, but the end-game is still the same. Fiber will give the company a leg up on the cablecos in the speed wars, and that means it will also have success with triple play. AT&T’s U-verse IPTV roll-out was not perfect, but is now finding its legs, giving hope for all the trials-in-waiting that IPTV can be done on a large scale.

 

Perhaps more interesting to me is AT&T’s recent launch of U-verse Voice in Detroit, a managed digital voice offering that integrates with digital services from the company. This isn’t actually VoIP, and most people don’t expect an incumbent telco to embrace a standalone VoIP service. The CallVantage service initially competed directly with the likes of Vonage, but there is little economic incentive for an incumbent to cannibalize its landline franchise with VoIP. U-verse Voice, however, is different because it leverages IP across AT&T’s various offerings rather than being marketed as a standalone business. This is one way to tackle the dilemma and make it work to your advantage.

 

AT&T has the network and they have the services—and of course, the subscribers. Using a managed service approach, the company can leverage all these assets into an integrated experience, where voice, video and data can work seamlessly across each other. Adding mobile to the mix, with voice, video calling and multimedia downloading on the go and you have all the bases covered. There’s no dilemma here for AT&T. The company may not get it right the first time, but its doing the right thing. Every service provider will follow its own path in addressing this dilemma, but in my mind AT&T is showing that big telcos can bring more than just connectivity. I’ll explore other ways of addressing this dilemma in future columns, and would also welcome your thoughts and examples any time.