Over the last year we have been fielding many questions from U.S. service providers about the future of the U.S. wholesale voice market and what the business models of the future will look like.
In October of 2011, the Federal Communications Commission’s (FCC’s) adoption of the intercarrier compensation reform order effectively changed the rules of engagement for wholesale voice, potentially altering the ecosystem over the long term. Wholesale voice has been a market under consistent pricing and technological pressure for many years, but the reform order upped the stakes by further compressing prices and moving to a bill-and-keep arrangement for termination by 2020, thereby eliminating significant amounts of addressable revenue opportunity from the industry.
At the same time, the order delivered definition to the wholesale VoIP market, eliminating uncertainties surrounding certified traffic and setting VoIP-originated (i.e. enhanced) traffic at parity with its interstate TDM brethren. Both of these moves will significantly alter the wholesale voice ecosystem going forward, changing wholesale voice product portfolio requirements and opening doors for greater network transformation and new solutions development. Note the following:
- With the updated regulations, the termination market will face extreme price compression as the market moves to bill-and-keep: ATLANTIC-ACM estimates that the total US wholesale TDM voice market will decline by a CAGR of -11 percent from 2011 to 2017. At the same time, the emergence of voice-over-LTE, combined with new regulation, will drive traffic toward a greater amount of IP-based voice traffic, enabling greater interconnection and direct connection and placing continued pressure on overall wholesale revenue opportunities. In the long term, look for the wholesale opportunity with both TDM and VoIP traffic to be significantly smaller as regulation combined with accelerated technological migration create a much smaller total wholesale opportunity in the next seven years.
- Survival in a bill-and-keep world will be very different from today: The role of carriers such as Inteliquent, Peerless Networks, Onvoy Voice Services, Intelepeer and other wholesale pureplays without (or with few) end-users will change as arbitrage-driven, middle-party wholesalers are eliminated from the playing field. The primary way for today’s middle-play wholesalers to survive is to scale up by becoming go-to outsourced voice service providers to subscale owners of end users (i.e. rural LECs and MSOs) that play in the long tail of the voice market. Middle players that are unable to partner with subscale end-user footprint owners to make this leap will fall out of the market or disappear through consolidation as major players with large end-user footprints (think: AT&T, Verizon, CenturyLink, Sprint) become the last players standing. (Although major players habitually preach managing wholesale revenue streams for margin they will continue to play in wholesale voice in the long run.) In the end, the consolidated voice ecosystem will consist of large end-user owners and superscaled intermediaries vying for the traffic of subscale end-user owners lacking network resources (think: rural LECs).
- The new market will drive a complete revamp of carrier product suites. VoIP and interstate TDM traffic parity eliminates the need to distinguish between traffic type, allowing carriers to streamline rate structures and product offers. As pricing distinction by traffic type evaporates, carriers can roll pricing into single-rate termination schedules at the NPA-NXX level, eliminating VoIP- or TDM-specific products in favor of simplified voice origination, termination, toll-free or interconnection services. At the same time, these simplified portfolios will drive voice services innovation; with continued IP convergence, carriers must adapt their platforms to meet the needs of the IP-based communications community. Voice network items ripe for repurposing include enhanced services via voice connections (think: E911 innovation), easier end-user services platform integration for long-tail players (such as Twilio integration into any number applications and platforms) and the packaging of voice products away from minutes and toward voice-as-a-component pricing models (tying voice to other network aspects or differentiated pricing). All-in, look for wholesale changes to the wholesale business model.
The Bottom Line:
The wholesale voice ecosystem will undergo an immense shift over the next five years as providers face an intense period of Darwinian adaptation (and for some models/players, extinction). Look for the wholesale sector to clean out its closet of third-party players while end players innovate their business models to roll out the next generation of wholesale voice services.