This is an era of mixed blessings for two of the nation's biggest phone companies.
AT&T and MCI not only are grappling with the mix of promise and regulatory issues associated with their respective acquisitions by SBC and Verizon, they are finding it difficult to make money off some of their fastest-growing IP services.
At the heart of the problem are the relatively thin profit margins on the telcos' sales of enterprise-data IP services such as Internet protocol virtual private networks (IP VPNs). The remedy, experts say, is fairly straightforward but not necessarily easy to implement: The phone companies need to develop and sell more add-on IP VPN products and services to boost their returns.
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What's new: Business customers are shifting data-service spending to IP VPN services.
Bottom line: SBC and Verizon, which plan to acquire AT&T and MCI, will still be challenged to make money from the new and growing services.
"IP VPNs are crucial to the future of the AT&T and MCI networks," said Frank Dzubeck, CEO of Communications Network Architects, a telecommunications consultancy in Washington, D.C. "But the trick will be moving the enterprise data business away from being a commodity market into selling more advanced services over the new network."
On the plus side for the telcos, the market for IP VPNs is increasingly robust.
When United Communications Group, a provider of business publications, wanted to add bandwidth and new locations to its network, it faced a hefty increase in monthly service-provider fees, said Mitchell Barlow, chief technology officer of UCG.
So, rather than adding more point-to-point lines to the Rockville, Md., firm's network, Barlow looked at alternatives offered by AT&T and Sprint. UCG opted for AT&T's IP VPN service, which uses a signal-enhancing technology called multiprotocol label switching (MPLS).
The switch to an IP VPN has saved the company about 10 percent to 15 percent over what it would have paid to continue using its private-line service, Barlow estimates. In addition to the cost savings, the new service offers better redundancy and more flexibility for adding locations to the network.
"It just made sense for us," Barlow said. "We have a lot of communications between our Maine and Florida sites, and all of that had to come through Rockville because our point-to-point network was designed in a hub-and-spoke configuration. It was very inefficient use of our network. Now each of our locations can communicate with each other as if they are all on the same local area network."
UCG isn't the only company that is making the switch to IP VPNs, according to AT&T and MCI, which have both been marketing their services aggressively over the past year. These carriers claim that many of their customers are ditching their traditional data services for new IP VPN services because they are easier to manage and set up.
IP VPNs, whose MPLS technology tags traffic to create a defined path through the network for individual users, are the fastest growing services in AT&T's and MCI's business portfolios, the companies say.
These new services will play a key role in the strategy of the new telecom companies that will emerge after SBC Communications completes its proposed acquisition of AT&T and Verizon gets closer to closing a merger deal with MCI. MCI's board recently approved the merger with Verizon, although the deal still could fall through, as some MCI shareholders have threatened to block the purchase if a better offer comes along. Qwest Communications, which outbid Verizon for the MCI assets, could get back in the race, some MCI shareholders have said.
Experts warn that even with new, growing applications such as IP VPN, SBC and whoever ends up with MCI's assets still face many challenges as they develop their enterprise business.
Cannibalizing the legacy business Just as the shift to IP in the consumer market has hurt SBC's and Verizon's existing consumer voice businesses, the same thing is happening in the enterprise market
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SBC and Verizon, which plan to acquire AT&T and MCI, will still be challenged to make money from the new and growing services.
