Posted: 06/2002

Fertile
Ground

By Fred
Dawson

THERE’S NO DOUBT A COMBINATION of foot dragging in telecom deregulation worldwide and the collapse of big carrier initiatives in the international market has complicated life for anyone looking to provide global voice and data services to stateside enterprise customers. These complications mask the fact that, for the smart buyer, the opportunities have never been better.

Several factors underlie the improving situation. The first is the effect falling prices have had on the ability of telecom service retailers to offer their customers competitive deals. Even though the power of incumbents in other countries to charge inflated prices for termination has been buttressed by their success in slowing deregulation, the lower cost on the long-haul segments into those countries have pushed the overall end-to-end connection costs down.

“We can lease capacity at 10 cents on the dollar of capex from companies like Global Crossing,” notes Cliff Rees, president of Convergia Networks Inc., a facilities-based supplier of wholesale transport and connectivity into Latin American markets. And resellers, like F3 Communications LLC, which operates globally, are in a position to wheel and deal for extraordinary prices across the long-haul segments, says F3 president and CEO Mike Harazin. “We have the luxury of being able to deal with many different carriers on these routes with the leverage that comes with buying capacity for many customers, which not only keeps prices low but allows us to choose providers who meet our service quality standards,” he says.

The success of the leading international IP voice wholesalers in demonstrating they can meet even Tier 1 carrier service standards has been another factor in the descending cost curve.

“We are providing international services to all of the top 10 carriers, such as AT&T, WorldCom and Sprint,” says Adam Banker, spokesman for iBasis Inc. “We terminate calls in 80 countries and have partnerships in those countries with local telephone companies that provide the network connectivity to end users.”

Similarly, iBasis’s archrival ITXC Corp., with 800 PoPs spanning 148 countries, has gained credibility as a wholesale provider for Tier 1 carriers. Like iBasis, it uses the Internet to transport voice across its destinations, with conversions to circuit-based service occurring at the PoPs. The key to making the Internet useful for voice has been implementation of proprietary software that constantly reads routing options and ensures the ones chosen will be able to support stringent QoS requirements, says Ezequiel Villasenor, ITXC’s vice president of sales for the Americas.

ITXC has taken steps to make it easy for virtually any service provider to make use of its facilities through implementation of an SS7/C7 signaling system that avoids the need to backhaul lines to major switching centers, Villasenor says. Carriers that colocate the ITXC-provided “SNARC” signaling system at their local PoPs invest almost no capital to connect to ITXC’s global network and avoid the call setup delays that often occur when intermediate switches on traditional telephony networks come into play, he adds.

One of the first implementations of this system at local carrier premises occurred earlier this year in conjunction with Cotas Teledata.

Cotas Teledata, a Santa Cruz, Bolivia-based competitive service provider, recently won a license to compete in the country’s long-distance market. “This enables Teledata to compete with the incumbent (Entel) through gateways connected to Teledata’s network without having to install Class 4 or 5 switches,” Villasenor says. Once signals are connected through the gateways onto the Teledata rings, they become local long-distance signals just like any others, with last-mile connectivity provided over the PSTN or dedicated private-line facilities.

The Impact of Deregulation

The ITXC deal in Bolivia points up deregulation as another factor shaping the wholesale termination market. It still isn’t easy to establish such deals in most Latin American countries because those countries aren’t licensing new entrants to compete with the incumbents, notes Eileen Pisciotta, a partner in the law firm of Kelly, Drye & Warren, LLP. However, deregulation is making it less difficult for stateside service providers to terminate services for a specific set of customers as need arise.

“With regulatory progress in Mexico and Venezuela combined with what’s already been accomplished in Brazil, Argentina and Chile, it’s a lot easier for outside carriers to follow their customers into the region,” says Pasciotta, who advises carriers on how to deal with the regulatory conditions in these and other countries. “If you’re a company that wants to enter the market in a big way and build a new customer base there, you’re going to be well advised to form partnerships with established carriers who have full regulatory compliance, good finances and strong customer relations. But, if you have a more limited plan and you just want to be able to terminate your customers’ traffic rather than handing it off to someone else, all you need in many areas is a license.”

In the ’90s people thought the deregulated markets would open opportunities to set up big competitive operations in Latin America, Pasciotta adds. But they quickly found the barriers were still formidable and that, without a large customer base to work with, it was nearly impossible to build significant market share. “Now outsiders are being more selective, focusing on specific customers’ termination needs or offering specialized services like prepaid, where partnerships aren’t necessary,” she says.

But one still must deal with monopolies in many places when it comes to setting up international call and data service termination. This explains the big “gray” market in Latin America where an unlicensed local entity will offer to bring calls in, sometimes via satellite, to a PoP that often consists of a PBX in an office and terminate the call from there over analog twisted pair. This cost disparity between using the incumbents’ versus these gray market connections can be on the order of 19 cents per minute versus 4 cents per minute, says Convergia’s Rees.

Convergia has developed a middle ground for wholesale termination across many Latin American countries through relationships with incumbents that already have ties to its parent firm, Future Electronics, as a supplier of power supplies, transistors and other electronic products in Latin America. “We took the global data network we’d developed (for Future Electronic’s operations) and used our political contacts in South America to make a telecommunications company,” Rees says. “We have multiple DS3 fiber links connecting from Miami into Ecuador, Peru, Chile, Argentina, Venezuela and Mexico and are licensed for SS7 interconnectivity with the incumbent PTTs.”

The footprint allows Convergia to offer inbound and outbound wholesale and retail services, Rees adds. The exceptions are Chile, where the service is strictly retail, and Brazil, where Convergia offers termination but not outbound services. Stateside wholesale customers can access the Convergia network, which delivers long-haul voice in IP format, via hardwire connections to its PoPs in New York City and Miami or through local connectivity right into the Internet, Rees says.

Convergia offers an alternative in the 11-cents-per-minute range in countries where the gray market still thrives, including Argentina, Brazil, Ecuador and Peru.

Deregulation is moving at different paces in these countries, with some slated to be more open in a matter of months while others, like Ecuador, could take years, Rees says. In the meantime, Convergia is looking at explosive growth as it seeks to become a “pan American telecommunications supplier from Canada to Chile,” he adds. “From 2001 to 2002 we anticipate our revenue will grow at least tenfold.”

The gray market already is disappearing in Mexico, even though deregulation is taking longer than some outsiders had hoped. As things stand, there’s a much greater opportunity than before to do termination deals in Mexico, thanks to new government rules. This means outsiders need better means of accessing the market than they once had.

To meet this demand, C3 Networks has begun operating what it hopes will be a major conduit for carriers and other service providers that want to exploit the demand for network connectivity between the United States and Mexico. C3, a unit of AEP Communications LLC, the telecommunications arm of American Electric Power Co. is expanding on its position as a leading provider of regional fiber transport in Louisiana, Oklahoma and Texas by offering a ring-protected, dense wavelength division multiplex (DWDM) link between Dallas and carrier-neutral PoPs in the Texas border towns of Laredo and McAllen. C3 executives say the platform makes it easier for stateside network service providers to link with Mexico carriers than if they had to arrange for their own fiber links all the way to the border crossing points.

“If people can get to Dallas we can aggregate minutes there and pass off to Mexican carriers via interconnection with cross-border transport suppliers,” says Leo Welsh Jr., vice president of sales at C3. “We won’t be in the minutes business ourselves; they’ll be the ones billing their customers.”

In other words, C3 is making it simpler for service providers to get to Mexico without requiring them to give up direct business tie-ins with Mexican carriers. This sort of arrangement dovetails with the carrier-neutral types of service offered right at the border by companies like CarrierCOM Corp., a McAllen, Texas-based concern with whom C3 has contracted for provision of the short-haul cross-border connections into Mexican carrier PoPs.

These arrangements make for a transformation in how the burgeoning traffic needs between the two countries are met, Welsh notes. “It takes a long time to establish network connections into Mexico with everything proceeding on a one-to-one basis,” he says. “That’s why there’s been a gray market. But with the Mexican government cracking down on anyone who doesn’t have a proper license, people are forced to look at new ways of doing things, which is where what we’re doing comes into play.”

With the emergence of carrier hotels that allow carriers on each side of the border to connect easily with one another, the process of establishing connectivity and obtaining licenses is being streamlined to meet legal and business requirements. “There are a lot of industrial parks on the Mexican side where U.S. companies have set up operations and need connectivity to their U.S. quarters,” notes Denny Harabin, regional sales manager for C3. “It should be a strong growth segment for our business.”

Regional Share of International Calls Terminated (in 2000)
Source: TeleGeography

Wholesaler Gains

As gray markets crumble under the weight of more local competition, there’s every reason to believe the wholesale business at all levels will improve.

Deregulation is encouraging more homegrown options to emerge in the local markets, says F3’s Harazin. He points out one of the hottest markets is India, which is moving toward deregulation on a scale that only can make things better for F3. “He who has the best routes wins,” Harazin says, “We’ll be in a better position to optimize our routes as deregulation takes hold.”

For facilities-based providers that have made it through the storm to set up local competitive operations the prospects are especially good that their wholesale termination business will continue to grow, says Henricus Cox, executive vice president for U.S. operations at Telefonica International Wholesale Services. “Globally, prices for voice services have fallen to the point where carriers no longer are willing to invest a lot of capital in order to reach the last mile,” he says. “Carriers are forced to execute where they have an advantage and get out of markets where they don’t, and that is what Telefonica is capitalizing on.”

In other words, service providers are turning to wholesale options in order to meet their stateside customers’ needs for termination in other countries. As a result, the providers of wholesale facilities-based termination services are going out of their way to build that side of their businesses, which makes it a lot easier for service providers to offer international services to their domestic customers.

Telefonica, earlier this year consolidated its wholesale operations, which had been handled by individual in-country and international units, into Telefonica International Wholesale. “We now provide a one-stop point of sale for service providers, which greatly simplifies their efforts to do business in the countries we serve,” Cox says. “We also give customers an ability to leverage their total group buying power and to make their routing decisions on a more global basis.”

Telefonica has invested heavily in a facilities-based presence in Argentina, Brazil, Chile and Peru and is benefiting from liberalization in some of these countries to move from single region to national footprints. Having met stringent regulatory requirements for providing ubiquitous high-quality service in the Sao Paulo market, Telefonica anticipates it will be licensed for national long-distance service and will be able to offer local mobile wireless and broadband services such as
DSL.

Shares of VOIP in International Calling
Source: ITU World Telecommunication Development Report 2002

The Data Advantage

Data are a vital up side in the international telecom market. Many providers of wholesale services are seeking to support data through enhanced service offerings built around IP technology.

Telefonica is among the carriers that have implemented IP virtual private networks (VPNs) on a global basis. Having such capabilities helps in dealing with local carriers whose doors remain closed when the outsider is looking for a partnership in voice alone. China offers another example of this.

Despite China’s achievement of membership in the World Trade Organization and commitments to open its telecom markets, outsiders say it remains extremely difficult to do business there. “Things haven’t gone the way people expected,” says Yuquan Wang, general manager of Frost & Sullivan’s office. “Telecommunications services opportunities will be offered to outsiders, but it will take time.”

Despite the difficulties, BCTeleglobe recently cut a deal with China Telecom seamlessly interconnecting the incumbent’s IP VPN capabilities based on MPLS (multiprotocol label switching) technology with BCT’s global IP VPN network. “What we’re trying to do is jumpstart China Telecom in the value-added marketplace at a moment when IP VPN services are starting to roll out all over the U.S. and elsewhere,” says BCT spokesman David Thompson. “We want to be the first service provider to tell our clients that we can provide them IP VPN connectivity to end users in China.”

Nothing better illustrates the opportunity service providers have to leverage the new shape of the telecom market than the approach Broadwing Communications Inc. has taken to international services. While network ownership is a means of securing control over service performance, it’s not the only way to build a successful business if the main goal is to sell international connections to domestic customers, says Gina Nomellini, senior product manager for international services at Broadwing.

Nomellini explains Broadwing began its partnership with Infonet Services Corp. in 1997 offering international services with an emphasis on building relationships with other carriers on a service-by-service basis, “We’ve found it’s easier to sell global solutions based on establishing relationships with best-of-breed providers in those service categories,” she says. “This allows us to create a comprehensive set of rules and responsibilities around the product so that we can provide our customers a single point of contact for a fully managed solution.”

Such agreements establish the rules of interconnection between Broadwing’s and its partners’ networks, the billing and administration interfaces and processes and the operations performance monitoring capabilities that go into Broadwing’s ability to meet provisioning and service level agreement obligations. “We need strong relationships with PTTs and other local networking companies,” she says.

The model, which targets Global 2000 companies, has been extended through a relationship with BCTeleglobe. About a year ago, Broadwing, through BCTeleglobe, began offering a dedicated Internet access service through 30 city centers around the globe. In October it added a private-line service that provides customers access to about 100 countries. Earlier this year Broadwing added a managed VPN service to the mix, which will round out the portfolio for the foreseeable future. Teleglobe’s relationship with Broadwing also extends in the other direction, with Broadwing providing a nationwide multiple-wave OC192 IP backbone to serve as the international carrier’s U.S. network.

Clearly, service providers that want to extend their services to customers on a global basis are positioned better to do so now then ever before. With solid research, no one really needs to let the international business go to someone else. In many respects, global telecom simply has become an extension of local service whether it’s voice or data or both.

Global Telephone Penetration
Source: ITU World Telecommunication Development Report 2002