Can telecoms wring profit from enterprise IP?

(continued from previous page)

as customers deploy their own voice over Internet protocol (VoIP) networks and abandon traditional private-line--or frame-relay--services for IP VPNs.

AT&T says it is prepared to handle the shift in the marketplace, since it has been investing in its IP MPLS network for several years.

"We are not at all worried about cannibalizing our legacy business," said Michael Antieri, group executive of AT&T's product management team. "We might have worried about that kind of thing 10 years ago, but not now. We're not in denial. We know the technology is enabling convergence, and we are committed to IP."

The problem is that since profit margins are actually smaller on IP VPN services than they are for traditional frame-relay services, experts say, carriers need to layer value-added services such as managed security or managed VoIP services on top of the IP MPLS network.

"AT&T and MCI might make it sound like the switch to IP VPNs is no big deal," said Sean Hackett, a senior analyst with The Yankee Group. "But it's going to be painful. They are only doing it because they have to. Otherwise their customers would go somewhere else. The margins on IP VPNs are going to be much smaller, but I'm sure they'd rather have small margins than no margins."

So far, the strategy of up-selling value-added services has not materialized, added Hackett. Customers have been unwilling in large numbers to outsource critical functions such as security.

"I could have signed up for the managed firewall service," said UCG's Barlow. "But I'm not ready to give that up yet. I need to have full control."

Making it work
Making IP VPN services profitable is critical for anyone selling data services to large companies, and it will be a key aspect of SBC's and Verizon's strategies.

The local phone giants, after all, are acquiring AT&T and MCI for their enterprise businesses, which they hope will help them scale their overall business beyond that of their arch rivals, the cable companies. Today, the enterprise market is one of the only areas in which the telcos do not compete head-to-head with cable.

Right now cable operators are eating away at the phone companies' traditional consumer voice and data businesses. SBC and Verizon are taking aggressive steps to upgrade their networks to add higher-speed data services and also TV service to compete with the cable companies. But this transition isn't going to be easy, since the phone companies will have to spend billions of dollars to roll out new services.

Additional revenue from enterprise sales and the savings they will get from consolidating networks with the long distance carriers could help offset the expense of building the new consumer networks. It also could provide opportunities for SBC and Verizon to cross-sell services, such as wireless and local voice calling, into the business market.

"The challenge for SBC and Verizon is keeping their focus while managing the merger, while at the same time rolling out ambitious plans on the consumer side," said Jim Penhune, an analyst at market researcher Strategy Analytics.

AT&T's customers do in fact worry about the company's ability to stay focused on service while the merger progresses.

"As far as I was concerned nothing was broken," said Barlow. "And now they are going to fix it with this merger. My gut reaction is that going through this integration process is going to be torture. Just getting the bills to come out to zero every month will probably be a challenge."

Todd Willinger, vice president of infrastructure engineering for Service Master, another AT&T customer, said he agrees.

"My experience with mergers is that they are messy," he said. "I know SBC's goal is to take as much cost out of the business as possible. I just hope they do it from the right places."

Antieri of AT&T said he knows the transition may be bumpy, but he believes the strategies of both companies are complimentary. For example, he sees SBC's large DSL footprint as a perfect way to reach more customers' branch offices.

"We're really excited about the merger, but it's still a long way off," he said. "There are regulatory issues to work through, so for now we remain focused on rolling out our new IP services and meeting customer demand."

[gjl229]

SBC/AT&T Compliments

While the strategists of the two companies may be complimenting one another, I doubt that the strategies are.