Carriers need to think ‘integration’

I’ve spent the past few weeks in discussions with IT executives about their experiences with service providers. The upshot is the IXCs are in trouble.

I’ve spent the past few weeks in discussions with IT executives about their experiences with service providers.

The upshot is the IXCs are in trouble.

The big problem is a fundamental mismatch between what customers are asking for and what service providers sell.

What most IT executives want from their carriers can be summed up in one word: integration. “I’d like to be able to write one contract covering my global voice and data services, and have the carrier deliver to it,” one executive says.

“Anytime, anywhere connectivity,” says another.

What most service providers sell, however, is bandwidth – bandwidth that’s packaged and managed and protected by a service-level agreement, sure – but still bandwidth.

The difference between integration and packaged bandwidth is the difference between fruit salad and whole fruit. Imagine going into a supermarket for fruit salad and being directed to row upon row of apples and pears, each buffed to a sheen and lovingly wrapped in tissue paper – but not chopped, mixed and packaged in an airtight plastic container, ready to serve to the 12 dinner-party guests that will sit down at your table in half an hour. See the difference?

It’s starting to get critical because for the first time, IT shops at midsize to large companies are starting to talk seriously about turning away from the WAN services IXCs offer and implementing Internet-based VPNs as their primary WANs. (Internet-based VPNs rely on encryption technology across the Internet, as distinct from network-based VPNs based on services from a single carrier using technologies such as Multi-protocol Label Switching.)

Says one executive: “After extensive traffic analysis, I realized that the majority of the traffic on my WAN is external. So why should I pay the extra money to transport this traffic over my internal WAN?”

This executive is seriously considering an Internet-based VPN, and he’s not alone. By my informal estimate, a majority of small to midsize organizations are relying on Internet-based VPNs for their services. As the bigger companies begin to go this route, service providers can expect margin compression and decreasing revenue for business services such as frame relay and ATM.

Now setting up and configuring an Internet-based VPN is primarily an integration exercise. You’re buying fruit salad instead of fruit.

At first blush, this might not look like such a problem for the IXCs because they’re also the major Internet providers: The revenue ends up in their pockets either way. But that misses the point. The real effect is on service provider business models.

If you believe what you’re selling is bandwidth, your entire sales and operations divisions are optimized around selling, managing and monitoring that bandwidth. If you’re selling integration, you focus your time, effort and resources on making that integration as seamless as possible. You start to look more like the new IBM (selling primarily services) instead of the old IBM (selling primarily hardware and software).

Not many IXCs have made the leap. And until they do, they’ll continue to struggle . . . or end up like IBM’s erstwhile competitor, DEC, which never did figure it out.