ROUNDTABLE: No easy solutions to wholesale revenue dilemma

The wholesale telecoms business is a tough business to be in on the best of days – competition is fierce and margins are as thin as they get. And the age of digital disruption isn’t making things easier – wholesale players are pressured to evolve with the times and the demands of their customers, but that’s a tall order in a low-margin business. Perennial issues like revenue leakage and fraud only exacerbate the margin problem, as does the cost of combating them.

We hear a lot about how wholesalers need to innovate new business models and revenue streams – and that’s true. But new revenue streams are often incremental at best and subject to the same leakage/fraud issues. As such, wholesalers have to think about where they will focus their precious capex budgets – developing new revenue streams or plugging up the revenue leaks. Some have the budgets to do both, but many don’t. What to do?

Disruptive.Asia put that very question to top telecoms wholesale executives at an exclusive breakfast roundtable kindly sponsored by CSG International on the sidelines of ACC 2017 in Cebu. The roundtable was held under Chatham House rules (which is why we don’t name names in the following report), enabling executives to speak freely about the issues they face.

The breakfast was delicious, and the discussion lively. And while we didn’t have nearly enough time to go through all the questions we’d hoped to explore, what we learned is this:

The wholesale dilemma is getting tougher every day, and while carriers have plenty of ideas of where new revenue opportunities lie, the sector is changing so drastically that new revenues alone won’t save it – and neither will plugging revenue leakage. That’s no reason not to do either of them. But the fact remains that the wholesale business as we know it may well be coming to an end, and carriers have some very tough decisions to make in the near future.

Pain points

Many of the pain points of wholesale have existed for years – voice and traffic volumes are up but revenues continue to decline, etc. The reasons range from regulatory pressures to retail operators becoming more cost-conscious as their markets become more competitive, whether the competition comes from other telcos or OTT players.

Wholesale is no exception – the barrier to entry is now low enough that wholesale is a much more crowded marketplace. As one executive pointed out, “In the old days, a global call only had to hop between two or three operator networks at most to be terminated. Now it can be more than 20 hops. There are far more parties involved between origin and termination.”

That’s why it’s become important for wholesalers to be as close to the origination and termination sites of the call as possible. “That’s where local partnerships come in. You scale the business in terms of reach and scalability instead of volumes.”

Chase the new, protect the old

Unsurprisingly, everyone at the table agreed that revenue leakage and fraud were major headaches, with A2P messaging particularly singled out as a source of lost revenues. Some carriers noted they had already taken measures to combat A2P fraud and it’s already paying off. Voice fraud also remains a problem, accounting for around 1% of top-line for most telcos.

However, a number of execs said that revenue leakage and fraud, while problematic, weren’t the biggest challenges on their plate right now.

“In terms of targets, technology and fraud management, that has been taken care of,” said one. “The real challenges now are partner selection and continuing pressure from the retail side to lower prices.”

Also unsurprisingly, all present were keen on chasing new revenue streams, although the field of possibilities is notably slim.

A2P generated the most enthusiasm as a hot growth area. “It’s growing faster than voice is declining,” said one exec, “and at some point A2P will be big enough to compensate for declining voice revenues.”

Other possible revenue opportunities mentioned include B2B, IoT, and even leveraging customer data – if carriers can figure out what to do with it.

There was considerably less enthusiasm for VoLTE, as even the retail telcos haven’t found a way to make money from it – VoLTE is more beneficial to them in terms of efficiencies and cost savings rather than revenue generation.

LTE roaming enabled by IPX is also looking less and less promising, not least because the GSMA chair Sunil Mittal declared a war on roaming charges at this year’s MWC event in Barcelona. End users simply don’t roam with data as they used to with voice (which is to say, automatically), and the business model is already changing.

“I think that roaming as we know it will go away at some point,” said one executive. “People will travel more and use data, but it won’t be under roaming agreements. It may be something more like a travel app with built-in local options for connectivity that you pay a premium for.”

One challenge to chasing new revenue streams raised by some carriers is the cost involved, as well as the risk factor – unless your pockets are deep enough that you can afford cost and the risk. But for more cost-conscious operators, it’s a dilemma.

It’s a sort of Catch-22 in the sense that traditionally risk-averse telcos are being told by digital transformation experts that they need to learn to take more risks and embrace failure in order to keep up with OTT players who are capable of doing just that. But, as one exec put it, “That’s a tough call for wholesale because the revenue line is so big – no one wants to rock that particular boat for fear that they might make it worse.”

Another exec commented that the level of risk the board is willing to take can depend on whether you’re a public listed company or an angel-invested company. “The angel investors tend to expect ROI on an annual basis.”

The end of wholesale?

For many operators, the question of protecting old revenues or finding new streams isn’t an either/or proposition. As one exec put it: “We had a discussion about this a few years ago and the decision was to do both – chase the new, protect the old. And we created two different vertical structures dedicated to each.”

The problem is that even doing both may not be enough to sustain the current wholesale model for much longer. “Protecting old revenue is important, but that’s not really where the profits are. Chasing the new is equally important, but it’s not being monetized to meet the pace of investments that are required. Yet when we look to the future, we know it has to be done.”

One point that wholesale players generally agree on: business as usual won’t be an option.

“We’re looking at roughly a 4% decline in revenue every year, and we’re asking for single-digit-plus growth every year, so the only thing suffering is margin,” observed one exec. “So for us, the crucial decision is when do we take it from a revenue line to a cost line, because other parts of our business rely on that wholesale to deliver calls globally. But it’s a tough call because if you’ve got an ‘x’ hundred million dollar revenue line, you don’t want to have to turn that into a cost.”

Nevertheless, it’s a call that is going to have to be made sooner or later. “Just do the math – if you’re in a declining business and it’s your main business, then it’s not going to be your business for long. So pick a time frame and say, okay, ten years out or whatever, and say, ‘This is when we’re going to stop this and start that, because there’s no more money here after that timeframe.’ There’s no choice.”

There was some debate over whether that timeframe might be longer for Asia-based carriers than in other regions – but the point remains that it’s a finite timeframe.

Some wholesale execs even brought up the possibility that many telcos may opt to drop out of the wholesale business altogether – either by selling off their wholesale units or, perhaps more likely, outsourcing its operations to a pure play company. The advantage of the outsourcing option is efficiencies of scale – put another way, it’s cheaper than running it yourself. Also, a third-party player would be handling more than one wholesale carrier’s traffic, which means better costs.

Whichever option wholesalers take, it likely spells the end of the status quo and the wholesale business as we know it. As one exec put it – to unanimous agreement – “I don’t see wholesale being around in its current form in ten years’ time.”