Posted: 05/1998

Wholesale Report Card
Resellers Give Underlying Carriers a C+

By William West and Judy Reed Smith

It’s no secret that Wall Street loves network providers. This article was written on
the heels of wholesaler Qwest Communications International Inc.’s bid for the much larger
retailer LCI International Inc.–a bid that was wholly funded by the smaller company’s
significantly larger market cap of $7 billion. At a time when MCI Telecommunications Corp.
is being pulled under the WorldCom Inc. umbrella, no one is unconquerable, regardless of
size. Wholesale providers of long distance services (both domestic and international) are
fighting for more than minutes; they are fighting to remain on top of the acquisition
heap.

Most certainly, Wall Street’s love affair with network providers gives wholesalers a
distinct financial advantage over retail players in the near-term. However, their networks
are built for one purpose: to pass telecom traffic. This simple purpose is complex to
implement efficiently and reliably, resulting in far-reaching profitability implications
for wholesalers and retailers alike. While one would expect to see intensified competition
equate to across-the-board improvements in performance among wholesalers, the 1998 edition
of ATLANTIC*ACM’s Wholesale Long Distance Carrier Report Card, first published in 1996,
finds that not to be the case.

Overall Performance

Based on performance rankings provided by their resale customers, smaller wholesale
long distance telecommunications service providers score better overall, particularly
among switchless resellers responding to ATLANTIC*ACM’s survey. This finding indicates the
increasing importance of wholesale services in the overall product mix of these smaller
providers which, under the pressure of slimming margins, will allow others to ride their
contracts at or near cost to leverage better buying rates from wholesale carriers
themselves. This makes the indirect value of the wholesale minute greater than its direct
value as it affects the overall profitability of the resellers’ retail customers.

Although leading wholesalers have not improved in every category–provisioning,
network, service, products and pricing–ranked in the ATLANTIC*ACM study, they are showing
improvements overall. Generally, wholesale customers ranked underlying carriers almost
exactly the same as they did in 1996–the equivalent of a C+. As price differences among
competitors diminish over time due to falling rates, wholesalers are expected to focus on
other categories to find their competitive edge.

Among reseller types–switchless and facilities-based–that responded to the
ATLANTIC*ACM survey, individual wholesale carrier scores varied. Sprint Communica-tions
Co. and LCI International, along with a group of smaller players classified as
"other," received some of the top scores given by switchless resellers.
Facilities-based carriers reselling long distance gave their best rankings to Qwest
Communications.

Category Rankings

Billing. Generally wholesale carriers performed similarly in 1998 as
in 1996, receiving scores slightly above average for both years. As in 1996, larger
carriers were ranked below the mean score, earning criticism primarily for their systems’
inflexibility.

Provisioning. Wholesale carriers were ranked slightly worse in 1998
than in 1996 for performance in provisioning. Again in 1998, smaller underlying carriers
generally outranked the large ones with the exception of Sprint, which scored above the
mean–an improvement of nearly a full point (on a scale of one to 10) over their 1996
rankings. Other improvements were noted for LCI International and Qwest, which led the
pack in this category.

Network. Overall scores for network quality and reliability were down
slightly from the 1996 survey. The Big Four carriers held onto the top spots followed by
Qwest, which received an improved ranking from seventh to fourth. Additionally, Frontier
Corp. ranked significantly better, up more than a point to capture the fifth spot.
Significantly, MCI nudged out AT&T Corp. for the top ranking among switchless
resellers. WorldCom, Frontier and LCI International performed better among
facilities-based carriers than among switchless resellers.

Service. As in 1996, service scores, on average, were the lowest among
all the categories ranked, suggesting this is still an area where carriers can improve.
Qwest scored significantly higher than the other carriers, and improved its score almost
two full points over its 1996 score. "Other" providers received the highest
scores among switchless resellers, indicating that small wholesalers have found a niche in
providing strong service.

Products. Wholesale providers received highest marks in the products
category. AT&T earned the highest product scores overall, moving up from eighth in
1996 to first in 1998. The Big Four performed the best among both reseller types that
responded to the ATLANTIC*ACM survey. Generally, switchless resellers gave carriers higher
scores–7.5 on a 10-point scale–for products than facilities-based carriers, which only
allotted 6.8 on the same scale.

Pricing. Rankings for pricing among wholesale providers stayed
relatively constant from 1996 to 1998. The Big Four, not surprisingly, scored the worst
once again. Bumping Frontier, Qwest became the front-runner in the pricing category for
all respondents, up from fifth in 1996. Frontier maintained a high score among switchless
resellers, which gave the carrier the No. 2 spot behind the group of various small
providers. Scoring by facilities-based carriers followed the trend of high price with
large size with the exception of WorldCom, which they ranked third best in price.

Conclusion

ATLANTIC*ACM’s survey results reveal that resellers are using more underlying carriers
than in 1996, suggesting that opportunities remain for wholesale providers that can supply
a competitive product. Declining prices, in particular, are forcing wholesalers to employ
new means of differentiation. One response appears to be diversified product offerings,
such as wholesalers’ advancing international service integration. In addition, low scores
in service provision indicate that this area presents an opportunity for a
service-oriented wholesaler to gain an edge. In the future, those wholesale providers that
demonstrate a service-oriented strategy will be most likely to improve their standing in
the industry and improve customer retention.

William West is principal and Judy Reed Smith is chief executive officer of
ATLANTIC*ACM, a Boston-based strategy consulting firm. Information for this article was
taken from ATLANTIC*ACM’s Wholesale Carrier Report Card published in May 1998. For more
information, call (617) 720-3700, fax (617) 720-1077, e-mail [email protected],  or web: www.atlantic-acm.com