Original article: Mind the gap - wholesale performance falling against key criteria
Wholesale providers fall short
An increasing number of telecoms service providers now appreciate that wholesale is a valuable source of revenues that also helps reduce unit costs by increasing traffic volumes. Yet our 2011 Wholesale Customer Survey has found that many are in danger of limiting or missing out on revenue opportunities by not responding to the needs of their customers as the financial crisis deepens.
Worryingly, Ovum’s biennial survey of wholesale customers found that the performance of suppliers has declined against most of the criteria that matter most to buyers.
The service levels, repair times, and product and service features offered by suppliers influence the buying decisions of wholesale customers the most after price, yet supplier performance on all three has declined during the last two years.
Some blame cost-cutting exercises put in place by carriers to offset the price pressure and other adverse effects of the economic downturn, while for others it is a result of wholesalers failing to recognize and respond to the retail trends driving the businesses of their customers. In some instances, this failure is in danger of breaking the wholesale model because wholesale product features and pricing are not enabling intermediaries to differentiate.
Price pressure becoming untenable
Price has been, is, and always will be the most important decision-making criteria for customers buying wholesale services. Prices are reducing as competition among carriers increases and pressure on intermediaries from the retail side is being passed on to wholesalers. The result could become unsustainable for both buyer and seller.
For international commodity services, margins are being squeezed to a dangerous point according to one European mobile operator we spoke to, which said:
“There is pressure on margins for them and on our cost base. We have come to a point where that has created genuine tension. It has moved from joking to real fears that prices will become unsustainable on the wholesale side.”
On the access side, the situation is even worse as intermediaries find the gap between wholesale and retail prices closing and in some cases even flipping so that retail prices are lower than wholesale. As one ISP explained:
“Retail is priced below wholesale. That makes the market fundamentally flawed and we could do with this being sorted out…We need telcos to try to do things differently and transparently. Don’t hide pricing.”
Furthermore, ISPs and other resellers targeting the business sector were disappointed with the depth of access products and the speed of their development. In particular, intermediaries were looking for better options around Ethernet in the US and fiber in Europe. Overall, wholesale access product development is lagging behind retail offers, making it difficult for intermediaries to keep up with, much less differentiate from, rival consumer products.
Quality counts but needs to improve
A key tool for intermediaries as they seek to differentiate is quality of service, but our respondents say that too many wholesale SLAs are toothless and unenforceable.
Wholesale providers must realize how critical consistent quality is to their customers in serving their end customers and provide SLA terms that are meaningful to the customer’s business. These SLAs should include realistic and proportionate penalties for failure. This is not to suggest that wholesalers should take responsibility for failures in the end service beyond their control, but as a systems integrator suggests, wholesale suppliers need to demonstrate that they have a vested interest:
“When they don’t [perform] it has a material effect on our business and I want it to have that same effect on theirs as well. SLAs are worthless without significant penalties. Bigger penalties would change behavior and focus their minds. This would help with our margins and SLA penalties with our reputation.”
Opportunities exist for best-of-breed wholesalers
Wholesale represents a growth opportunity for telcos but only if they deliver products and services at the quality and price that allow their wholesale customers to differentiate in their own markets. Wholesale customers want specialists that excel within their product sector, providing choice, expert support, and innovation.
Wholesalers must understand their target markets even better and create business models that are sustainable for buyers as well as themselves. They must recognize the growth potential wholesale offers and not see it as competing with their own company’s retail offerings; the retail and wholesale cost bases are very different and their business models are not directly comparable.
Finally, the successful carrier will be the one that appreciates that wholesale is very different from the retail market – every customer has different needs and priorities. To meet these requires carriers to develop long-term trusted partnerships with their customers, and only then can wholesale service providers hope to grow. Our wholesale customer surveys have repeatedly highlighted the variety of requirements that wholesale customers have. This diversity will only increase as new types of intermediary emerge.