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The Personal Information Technology Report

May 21, 2002

In this issue:

Systems Integration, Round 2

Gemplex and the New Service Provider Model

Systems Integration, Round 2

The story in brief: Offering personal information technology integration services to small businesses and consumer households is an excellent opportunity for ILECs to thrive in the 21st century. But to succeed in this emerging market, they must let go of network-centric thinking and put together network-independent service packages-and soon, before new competitors lock up the market. 

A few years ago, a few telecommunications service providers, including AT&T, BT (via Syncordia), and the Global One joint venture, attempted to enter the corporate systems integration and outsourcing markets. All failed. 

The reason these telcos failed in those ventures is that they worked under the assumption that their network facilities-what they saw as the heart of their companies-would be their most important contributions to the corporate IT equation. But like desktop PCs, software, and servers, the network is only an element of the whole process. It can't be the groundwork for a sale.

IBM, once a company so wedded to selling its own brand of PCs that it failed to see the implications of owning the rights to a piece of software known as DOS, eventually figured this out. While companies that refused to let go of their hardware-centric and proprietary data technology were diminishing or dying, IBM embraced open networking. It realized that IBM products were just a part of an overall user's business process -- and often not the most important element. The value was in the way the whole system came together. IBM survived by subsuming its brand identity into the business process solution and away from its hardware.

So today, you see IBM Global Networks vying with Electronic Data Systems for a 10-year, $7 billion to $10 billion contract from J.P. Morgan to handle as much as half of its information technology operations, according to news reports. And EDS and IBM's competitors are Ernst & Young, Accenture, PricewaterhouseCoopers. 

Note that there's not a phone company to be found in that group. Still believing their networks are the keys needed to unlock the golden hoard, most carriers and the incumbent local exchange carriers (ILECs) especially are missing business opportunities that require leaving behind network-centric thinking and focusing instead on delivering network-independent solutions.

Such myopia could blind the ILECs to opportunities in the large corporate marketplace -- and to a lucrative, emerging market: providing integrated personal information technology services to the small and medium-sized business market (SMB) and the high-end consumer market. 

In this new market, the ILEC role would be analogous to that played by large systems integrators -- taking a proliferation of communications devices and services and integrating them into a manageable package that offers clients measurable benefits, high utility and predictable costs.

That's the opportunity: packaging a range of personal information technology services -- even and especially those that don't originate with the ILEC integrating them -- to create solutions.

Systems Integration for everyone

Here's how such a sale would play out with an SMB customer: A personal information technology services consultant visits the business by appointment and spends 60 to 90 minutes reviewing the current phone, PC, Internet, wireless, security, even media/entertainment products and services the business and its employees use. The consultant inventories what the client likes and doesn't like about its service providers, what services the client wants to add, and costs currently paid for services. 

The consultant then analyzes usage, hidden costs and overlapping or duplicated services and projects the business's future needs, then presents a competitive bid. The bid incorporates all communications, information, computing and network needs. The SMB client pays one bill and has one point of contact for all its personal information technology services - and the ILEC-integrator is integral to that client's business in a way the typical phone company no longer is. 

WorldCom, despite its troubles, took a step in this direction with D Street, a service that gives SMBs a one-stop shopping point for ordering and management of diverse telecom services. SMB owners can even work with a consultant to help them simplify and focus their needs. 

Similar services could be offered to the high-end consumer market, such as providing integrated services to a large condominium or planned community development as well as the individual "early adopters" with home PC networks. In addition, some integration packages could be "off-the-shelf" for the lower-end consumer market, such as combining voice, Internet access, wireless and entertainment services. 

New ways for a new value chain

Integrating personal information technology services for SMBs and consumers will require new partners, new approaches and new skills. The ILEC-as-personal-IT-integrator must partner with a wide range of network operators, consumer electronics manufacturers and software suppliers to deliver the network-independent services necessary to build solutions. 

Offering such integration services also means building a new set of internal skills (see sidebar). Carriers will need to deploy consultants who are skilled in understanding the SMB market needs as well as how to build a solution from a range of services. That's a rare - and expensive - blend of soft and hard technical skills. 
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Skill sets for a new services market

As service providers evolve away from a network-centric business model to an integrated services focus, they must cultivate expertise in these areas:

Understanding the customer's business
Providing solutions implies that service providers must understand the everyday challenges of the SMB customer -- challenges that could differ significantly by vertical business segments. A retailer requiring a small network to link three stores will have different needs than a manufacturer that must equip a mobile sales force with devices that integrate with the firm's enterprise resource planning (ERP) system, which in turn is tied to supply chain management systems at other vendors. So service providers will need to hire and/or train personal information technology consultants who understand business issues as well as potential solutions. 

Diverse partnerships
To package and deliver comprehensive personal information technology solutions for the SMB and high-end consumer market, service providers will need channel partnerships with name-brand technology companies, carriers and Internet portals. They must also partner with established brick-and-mortar brands that have a stake in the extension of personal information technology. For the SMB market, such partners could include finance, insurance, health care, even automotive firms. 

Metrics and deliverables 
Neither IBM nor EDS will win J.P. Morgan's business by promising that firm long distance service at half-a-cent a minute. Instead, the two integrator/outsourcers will focus on bottom-line benefits they'll deliver. Increasingly savvy SMB customers also want solutions that can yield hard measurements, such as cost savings, increased sales, higher productivity. 

Global reach
Today, even the smallest firms often have international contacts, suppliers and/or clients while on the consumer side, many families now have members living all around the world. It's easy to imagine a carrier managing service for a Chinese-American business based in New York City that includes service for the company's trading partners as well as employees' relatives in Shanghai. The necessary carrier-to-carrier relationships exist, while competition in most countries will keep costs in line. Already Telmex, via e-commerce, allows families in the U.S. to pay phone bills for relatives in Mexico. The key to delivering such services is letting go of network-centricity and thinking in terms of connectivity and service.

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But most important of all, carriers must give up the idea  their own networks are the sole font of all customer service and ensuing revenues and growth. In the future, two types of phone companies will exist: one group will operate networks, and the other will integrate services. The former will own bandwidth. The latter will own customers. It will be the far more profitable and long-lived of the two.

Unfortunately, the implications of this dichotomy won't even be contemplated until an ILEC reaches the crisis point. The long-distance companies, especially AT&T, might actually be closer to the point at which they would spin off network operations. The Baby Bells, however, are still enjoying decent revenues and profits (although the red handwriting is on the wall, with the companies reporting a decrease in lines at a time when businesses and consumers are using more personal information technology services than ever).

Yet while relying on basic network-derived revenues is a bit like the frog who stays in the steadily warming water until he's boiled to death, the ILECs undoubtedly would struggle to gain internal consensus for a move into integration services. Further, the Congressional and FCC responses are unpredictable. Then there are the unions, to which the Bells look for heavy political support, but whose members would have virtually no role in a company no longer focused on running a network.

Nonetheless, the move to integration services makes perfect sense. The ILECs have strong brand recognition far beyond their regions, gained through their expansion of wireless services. Despite some contentious battles in federal and state regulatory circles, the companies also are seen as establishing the hallmarks of service quality. So SMBs and consumers should still trust a professional consultant from AT&T, Sprint or Verizon to provide integrated solutions to their personal information technology needs -- as long as these companies don't squander that trust in the next couple of years through poor customer service, delays in roll-out of new technologies, or just plain unresponsiveness to competitive alternatives.

The stakes

In the midst of telecom's miserable 2001, IBM reported net income of $7.7 billion on revenues of $85.9 billion for the fiscal year. EDS reported revenues of $21.5 billion and net income of $1.36 billion, a 19% increase over 2000.

The worldwide market for corporate IT systems development and integration is forecast to be $159 billion for 2002, according to research from Gartner Dataquest released last week, a slight increase from $157.6 billion from 2001. Gartner Dataquest predicts the development and integration market will be $199.4 billion by 2005. And while the economic downturn has affected the market for corporate IT services, it has only slowed the rate of growth. There hasn't been the contraction we're seeing in telecom services. 

Had they been willing to let go of their network-centricity, AT&T, BT, WorldCom and Global One may have had a piece of this business. The industry outlook might be clearer and brighter, too.

But there's still time to give up ruling the network and focus on services instead to win big in an important new market. Integrating personal information technology services will be a major business. SMBs and consumers can be sold on expertise that gives them solutions instead of an unwieldy smorgasbord plate of services they must manage on their own. 

Meanwhile, the future health of PC and equipment manufacturers, network infrastructure vendors, and software developers depends on a confident, secure public embracing pervasive communications technology. Plus, all of these companies are looking for new distribution channels. Companies creating transparent bridges between end users and equipment/services markets and manufacturers will be positioned to reap benefits on all sides.

That's why competition will be stiff in the personal information technology services integration market - possibly including names like EDS, IBM and Microsoft and networks of independent agents. Further, companies in this market space will compete on delivering value and on the quality of their customer service and responsiveness. Success will require a solid commitment to human skills such as technological dexterity, analytical thinking and a passion for customer satisfaction.

It will always be safer to operate the network, but current trends favor automation, centralization and consolidation. The U.S. bandwidth market cannot accommodate four Baby Bells, three long-distance companies, not to mention their European and Asian counterparts, all expecting to do $20 billion a year in business while employing tens of thousands.

Controlling the services supplier chain and owning the customer puts a lot more at stake. A bandwidth provider is largely transparent to the customer. When you're the integrator, it's your brand and your accountability on the line. 

Yet given the potential rewards of integrating personal information technology services -- including global reach, longevity and rich revenues -- which is riskier: Going after SMB and high-end consumer integrated services or clinging to the network while the pot boils dry?

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Gemplex and the new service provider model

The story in brief: Gemplex, a global provider of end-to-end IP VPNs, shows that owning network facilities may not be the advantage it once was. 

Networks don't count for much anymore.

Take Gemplex Inc., a Vienna, Va.-based network service provider, which last month unveiled a suite of managed global end-to-end IP virtual private networks for enterprise customers.

On the face of it, the company's services seem no different than what AT&T, WorldCom, Cable and Wireless and KPNQwest have been offering for several years -- and given the current market value of these companies, their efforts seem fruitless. 

So what's different about Gemplex? It doesn't own a network. Its business model is based on leasing bandwidth on international backbones and careful selection of competitive local exchange carriers (CLECs) in foreign markets. 

Several international service providers are taking this approach, and Gemplex is among the first to target small and medium-sized businesses. Genuity Inc., Woburn, Mass., Primus Telecommunications Group, Vienna, Va., and Alpha Telecom Communications Ltd., London, are other companies following the same model. Even WorldCom's MCI Group is exploring it. The local access portion of The Neighborhood, its bundled local and long-distance service, is leased from Z-Tel, a competitive local phone company. Z-Tel itself leases copper loops from incumbent local exchange companies, who, in this arrangement, find themselves two steps removed from the end-customer.

"Connectivity" versus "network operations" is far from a matter of semantics. Just compare the wheezing businesses of the facilities-based carriers against the 13 straight profitable quarters reported by Primus and recent statements by Alpha that its EBITDA was running at L700,000 ($450,000) a month. And Genuity leads the fragmented IP VPN market with a 14 percent share. 

The great conflict

As discussed in the story above, ownership of network facilities ownership is growing less and less significant to the delivery of telecommunications and personal information technology, whether for corporate or individual customers. Today's VPNs can tunnel from network to network. With management information embedded in the packets and in open signaling protocols, a service provider doesn't need to own a network to provide or guarantee service quality. 

In fact, facilities ownership may be a disadvantage. For a facilities-based carrier, revenues depend on loading as much as much traffic on its network as possible. But, in today's IP world, an end-to-end service provider best serves its customers by managing connections transparently across numerous networks, thereby gaining the benefits of low costs and high redundancy. The idea of being a facilities-based carrier that can, at the same time, manage end-to-end services is becoming untenable. Yet this is the business model many incumbent local and long distance providers are trying to maintain.

Gemplex's approach

Quite to the contrary, Gemplex offers end-to-end VPN networking by assembling bandwidth from backbone providers such as Global Crossing for long-haul traffic and forming relationships with CLECs in local markets for last-mile access. Its service is available in 530 cities in 37 countries, with a strong focus on India and Southeast Asia.

CLEC partners come aboard under different arrangements but most involve some sort of revenue splitting, says Gian Dilawari, chief operating officer at Gemplex. In addition, the ability for a CLEC to directly connect to an international network under extremely favorable conditions provides it a tremendous advantage when competing against a large incumbent, which often is encumbered by long-standing agreements involving other national and international carriers, usually at expensive, government-mandated rates.

For Gemplex, the public Internet serves as its backbone. Using protocols that provide quality of service over IP, such as multiprotocol label switching (MPLS) and IPsec, Gemplex layers secure remote access, intranet and extranet solutions atop the basic worldwide Internet infrastructure. Physically, the network remains "carrier-neutral," says Dilawari. 

The company's IP VPN services are defined by class of service. Fully secure, managed, end-to-end VPNs are at the high-end, with service classes scaling down to flexible plans that combine various QoS and bandwidth guarantees with best effort IP.

By using the public IP network, Gemplex can configure far-reaching wide area networks on a small scale. This is especially valuable to smaller businesses with large service requirements in some countries, and small, yet mission-critical needs in others. For example, Gemplex can provide T-1 or greater type bandwidth to a customer's call center in Bangalore, India, and under the same service plan, provide a 128 Kbps connection to a branch office in Frankfurt. Because Gemplex leases the bandwidth, connections can be configured quickly and provisioned at incremental cost to the user and, most critically, to Gemplex.

Gemplex coverage map                                Source: Gemplex

The assumption behind the Telecom Act, as well as many current carrier business strategies, is that incumbent service providers have an inherent competitive advantage because they own their networks. Gemplex, along with Genuity, Primus, Alpha, have business models that directly challenge that assumption. Their approach is anchored in the economics of IP, which drives down bandwidth costs and allows for discrete separation of the physical and logical layers of the network. 

Gemplex illustrates the real-world value of adopting a network-neutral business model -- a model absolutely necessary to profiting from delivering personal information technology services. Gemplex's value to its customers comes from the channel partnerships it forms with other carriers and its ability to offer customers efficiency wherever they operate no matter what their size or location. Facilities-based service providers can't match its costs, flexibility, and most of all, its customer service focus under their current network-centric business models. This new wholesale/retail market is inevitable. You can see it taking shape in the ILEC-to-Z-Tel-to-MCI example above. 

As noted in our top story, the wholesale side is viable if your goal is to be a lean, mean bandwidth machine. But for telephone companies to remain key players in delivering communications and personal information technology services, which they all say they want to, they must join Gemplex and stop selling their networks to indifferent customers and instead start selling network-independent solutions.

--Steven Titch

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