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With the current downturn and increased market consolidation, wholesale providers will need an improved market strategy to survive. As bandwidth prices continue to plummet, will value-added services (VAS) become the new differentiator in this competitive landscape driving revenues and helping maintain and attract customers? Opinion varies about the status wholesale providers should give to VAS. "There is no proof that wholesale customers will buy or want VAS. The main reason service providers are pursuing VAS is the pressure on the base business," argues Gail Smith, VP of global business for Level 3, which wholesales IP services. "It is not necessarily the right long-term strategy - just a reaction to current market conditions."

With the current downturn and increased market consolidation, wholesale providers will need an improved market strategy to survive. As bandwidth prices continue to plummet, will value-added services (VAS) become the new differentiator in this competitive landscape driving revenues and helping maintain and attract customers?

Opinion varies about the status wholesale providers should give to VAS. "There is no proof that wholesale customers will buy or want VAS. The main reason service providers are pursuing VAS is the pressure on the base business," argues Gail Smith, VP of global business for Level 3, which wholesales IP services. "It is not necessarily the right long-term strategy - just a reaction to current market conditions."

In contrast, Helen Stott, PR manager for Europe and Asia at Telia International Carrier (TIC), which provides bandwidth, voice and IP services, claims, WAS is an important part of our strategy. It will help us enhance quality of service and improve customer retention."

Whether VAS is a 'reaction' to market conditions or a revenue driver is clearly debateable. Definitions are key though in this confused marketplace, especially as so many conflicting statements exist under the VAS banner.

"VAS are services that you wouldn't buy without a 'base product'. For example, a sun roof is a VAS but you wouldn't buy it in isolation without a car," explains Alastair Hall, practice director at consultants, Tarifica, PBI Media (formerly The Phillips Group). "A value-added product is something you get on top of the base product to leverage extra revenue."

Tom Wright, senior consultant at Tarifica, PBI Media, continues, "A VAS would be something like security or firewall protection with a service such as web hosting."

Who needs VAS?

The debate about whether VAS are important in the survival strategy of wholesale providers raises some conflict.

"I don't know if VAS are playing a bigger role in wholesale provider's portfolios in driving revenues," says Tarifica's Wright. "They are still happy to sell bandwidth which is an important product and fundamental enabler of the market."

Although, Tarifica's Hall adds, "Wholesale providers need to provide a spectrum of services - not just pure provision of connectivity."

Level 3's Smith agrees in part. "We are not convinced that the way forward to profitability is through VAS. However, Level 3 is looking at VAS in some areas -- maintenance services for customers on our long distance network, for example."

TIC's approach on the other hand is that the carrier wholesale market is about improving its customers' (carriers and service providers) offerings to its end-users through voice and IP-based services. This can be enabled through VAS. TIC claims a growing list of voice and IP-based services, including IP transit, IP VPNs, international voice termination and the Telia Clearinghouse portfolio.

According to TIC's Stott, "IP and capacity have shown the biggest growth in revenue in Q3 2001, whilst the voice market consistently generates a substantial amount of revenue."

Other providers have different rationales for choosing to pursue VAS. Pierre-- Louis de Guillebon, vice president of carrier marketing for the Long Distance division of France Telecom, adds, "Our strategy is to use VAS to complement the geographic reach of our network and our portfolio of products."

Guillebon is responsible for the Open Transit range of wholesale solutions. The base products within this range are Open Transit Mobile, Open Transit Internet, Open Transit Bandwidth and Open Transit Voice.

France Telecom's VAS include Multicast within Open Transit Internet. Guillebon says the Multicast service increases the capacify of fibre to carry data and enables a wider distribution of multimedia content that most frequently congest the network. The 'value-add' comes through simultaneously being able to distribute heavy content to a large audience through online video and audio streaming.

In response to whether or not developing VAS is an effective long-term strategy, Guillebon asserts, "VAS will be a major competitive advantage for France Telecom over those that do not offer them. If we can offer VAS at very little extra cost to the end-user we can drive revenue and build up our customer base."

In terms of revenues, he admits that VAS are still a small proportion but he insists "revenues from VAS will increase drastically in the coming years".

In fact, he points to voice as a potential market for VAS. Even though voice still accounts for a large chunk of revenues, there are very few VAS available in that market. France Telecom is developing a new VAS for mobile carriers that will enable end-users, when roaming abroad, to have `caller ID' functionality.

Survival strategies

If VAS is the survival tactic for wholesale providers such as TIC and France Telecom, what will others that are not convinced by the viability of VAS use?

Level 3's Smith stresses, "Wholesale providers must be careful of cost - what will differentiate those that make it and those that don't over the next few months will be financial depth rather than the increase in VAS. We can also differentiate on ease of delivery and quality."

Focus for Level 3 is reducing 'transaction friction'. Carrier services in general have traditionally taken months of negotiation and once the contract is finalised it can take longer to deliver it.

"We want to offer 'on-demand' service and automate the provisioning of capacity process. The key is providing flexibility for the customer, you have to have enough depth to provision a number of routes and be able to react quickly," explains Smith.

She points to Level 3's 'continuously upgradeable' network supported by SLAs "guaranteeing 100 per cent network availability, an average latency of 40 milliseconds or less in all regions, and less than one per cent packet loss".

TIC's Stott agrees that quality and flexibility are vital differentiators. "On the wholesale level, stronger SLAs are being put in place. In addition, customers don't want to commit to 20 year leases for fibre anymore because of the uncertainty of which companies will be around from one month to the next."

TIC's Stott also believes that focusing on core competencies will be an important survival tactic. "Service providers used a 'broad brush' approach before. Offering 'all things to all men' hasn't really worked."

In fact, although TIC is a proponent of VAS because of increased market consolidation, it believes the expansion of VAS will be restricted. "TIC's strategy throughout this period is based on using existing investments to develop competitive wholesale services," asserts TIC's Stott. "Based on a very selective investment policy, panEuropean carriers should concentrate on developing solutions that have already proven their business benefit and ROI [return on investment]."