With the exception of a powerful cable industry, the regional Bell operating companies may have fended off a legion of now-bankrupt competitors, but are they ready to take on a burgeoning field of content delivery, application hosting and managed business service providers? xchange's survey of service development executives at three of the four Bells finds uniform acknowledgement that a capital-intensive value-added services campaign has only just begun. However, the degree to which the Bells are putting real money down on data center and content delivery infrastructure and applications and information technology expertise ranges from cautious to aggressive.
"Lots of people, including us, have been slow to realize just how capital-intensive all this is," says Denzil Samuels, senior vice president and general manager of a newly unified Qwest Communications International Inc. Cyber.Solutions unit, which includes professional consulting and systems integration services as well as hosting, applications infrastructure, applications management and managed security and business continuity services.
"We've spent hundreds of millions of dollars on server colocation data centers alone. Interface integration brings significant costs. If you're hiring tier-4 application know-how or serious security experts, those people do not come cheap," Samuels says. "It's a five-year and 10-year business plan to fill up all that data center space. Not many companies can weather the storm the way Qwest can."
Like Samuels, executives for BellSouth Corp. and Verizon Communications Inc. say their companies are well aware of formidable services competition arrayed against them. (SBC Communications Inc. declined to comment for this story, though a spokesman said the company would issue managed services news shortly.) Those opponents include cable and wireless operators poised to bring managed content, applications and information technology to consumers and small and medium businesses. They also include content delivery network and hosting providers that have consolidated rapidly under the ownership of Cable & Wireless plc, Sprint Corp., Qwest, WorldCom Inc. and other IXCs.
Facing all that, the Bell executives say they're committed to developing content, application and IT management services to drive traffic over their networks and create "stickier" customer relationships. But in a time of constrained spending and still uncertain customer willingness to pay, entry into these markets will be careful and incremental.
"There are an awful lot of applications out there looking for a market," says Mike Bates, group product manager of business IP services at Verizon Online. "We're coming at it from the other direction, trying to find out what their real needs are and what they're really ready for."
Opportunity
Verizon has developed a first-things-first game plan based on research into demand among the 2 million to 3 million small- and medium-sized businesses in its service region during the past year. The plan aims to pull customers up from dial access gradually through broadband access to Web site hosting, email, security and voice over broadband, and only then to hosted business applications.
In its most recently reported quarter, Verizon reported 120 percent growth in DSL lines. Working closely with DSL sales, Verizon Online has spent the past several years building a customer base in Web site design, domain registration, shared hosting and ecommerce tools, as well as premium email service with "always-available storage for large attachments and file, service level guarantees, self-administration of mailboxes, and access from any location via the Web, with some customers taking 500 megabytes," Bates says.
On deck for the third quarter is a package of firewall, intrusion detection and other security services. "For SMBs, we envision an entry-level offering that can run firewall software on a PC, and if there's a local area network with printers and the like, a hardware firewall," Bates says. "Then we expect SMBs with multiple locations, telecommuters or mobile workers will want virtual private networks.
"In my mind, the applications market has not yet developed," he says. In the meantime, "We're trying to create simple, off-the-shelf, non-technical products for the mass of smaller businesses that have difficulty with the complexity of information technology."
Dave Abrahamson, vice president of e-business services for BellSouth says 30 percent to 40 percent of SMBs buying broadband DSL services are inquiring about shared Web hosting, domain name registration, business email and other managed services.
"We spent the first two years building hosting colocation scale, and now we've moved up the stack to application enablement services," including managed storage, as well as voice enablement and wireless enablement of customer web content, he says.
--Verizon Online's Mike Bates |
For application and content services, BellSouth remains "pretty certain of double- digit percentage growth in revenue," says Abrahamson. "The model I'm operating under says that, for every one dollar at retail, the software provider takes 50 to 55 cents, BellSouth distribution takes 25 cents and BellSouth as infrastructure player takes 20 cents." While Fortune 500 companies comprise the early target for managed storage, application enablement and application hosting services, "the IT savings value proposition can generate $30 to $50 per month" among some 1 million SMBs in BellSouth's service region, Abrahamson adds.
Its voice-enabling partnership with BeVocal Inc. yielded a contract with an eight-state traffic information provider last winter. Further, through co-ownership with SBC of Cingular Wireless, BellSouth's Air2Web Internet-wireless integration service launched in December is enabling mobile access to content and applications from partners including The Weather Channel Inc. and to inventory, email, sales data, shipping status and other corporate applications and content for customers including United Parcel Service of America Inc.
"These utility-type services become another feature on top of our customers' hosted applications," says Abrahamson. "The next stop will be moving directly into hosted applications," as customers progress from outsourcing their front-office commerce and customer care operations to seeking further savings through outsourced back-office operations, says. "We see Internet-enabled, hosted business applications like collaboration, ERP [enterprise resource planning] and CRM [customer relationship management] as a significant opportunity."
Other Bells similarly tout their edge in captured SMB customers. Samuels says Qwest Cyber.Solutions bills about 700 enterprise customers to the tune of $18.4 billion in annual revenue and the company has identified 187,000 in-region SMBs as prime targets for those same business consulting, storage, security, colocation and managed hosting services. Cyber.Solutions boasts 250 experts certified in managing Microsoft Corp., Oracle Corp., PeopleSoft Inc., SAP AG and Siebel Systems Inc. applications and databases for large enterprises.
"Bandwidth is bandwidth," Samuels says, "but if you don't have applications that drive its consumption and the know-how to manage those applications, you're never going to get a sticky relationship with the customer, who is just going to keep moving to the lower cost bandwidth provider."
Facing this mandate, the Bells were poised at press time to launch a drumbeat of new services. In late May, BellSouth planned to debut an Internet Services bundle for SMBs that echoes Verizon's blueprint: hosting, domain name registration, messaging and integration with its yellow pages services to drive traffic to hosted customer sites.
--BellSouth's Dave Abrahamson |
Qwest expected in May to launch full corporate desktop application remote access services via DSL, cable or any other Internet connected device. In June, it plans to launch a CDN service for broadband consumer content and a broad suite of security, storage, backup, disaster recovery and continuity services for businesses. Samuels confirmed press-time reports that Qwest intends to leverage Cyber.Solutions assets, including 23 data centers worldwide, to raise money. "Qwest hasn't hidden the fact it needs cash, but this is really an investment play to get more capital, not a sell-off," especially since investors may see little value in managed service assets that have been divorced from Qwest's network assets, he says. "We have been making these investments for three years, and this portfolio of services coming out this quarter is going to generate real revenue at hundreds of percentages in growth this year."
He expects discounted bundling to accelerate that potential. "I have the GMs in each service area collaborating, because each is a Trojan Horse for the others, and the potential for up-sell and cross-sell strategies is significant," Samuels says. "A customer for client/server, IP-based ASP services may want colocation space for his legacy apps, and then professional services has the ability to pull customers through all these lines into managed router, managed firewall and other services."
BellSouth is counting on storage as an early Trojan Horse, last October launching Managed Storage Services, partly driven by demand for business continuity services since the terrorist attacks last September on the United States. The carrier's plan is to distribute the infrastructure for storage, content and applications hosting services gradually from its data centers in Atlanta and Miami out to "storage PoPs," across its 1,500 central offices throughout the Southeast, comprising a million square feet of raised-floor computing environments. Because those COs are in place, BellSouth effectively will build hosting infrastructure for "pennies on the dollar," Abrahamson says.
"As more companies move to hosted applications, and transactions explode, the need for storage will grow, and we can leverage our communications network infrastructure to provide storage in close proximity to each customer," he says. That same decentralized concept "holds true" for solving quality and response-time barriers to reliable consumer video on demand, SMB business applications outsourcing and other content services, he says.
Abrahamson argues that BellSouth has an advantage on the content supplier side over competitors that lack the same metro and last-mile assets. "Partly through our DSL and gigabit Ethernet investment, BellSouth can offer access to applications all the way to the premises of millions of customers, so I can have guaranteed availability, which other hosters may or may not be able to provide," he says.
Still, like Verizon, BellSouth sounds a note of caution about getting too far ahead of buyer adoption curves, particularly among consumers and SMBs. With the dust still settling from so many collapses among over-extended new market plays, Abrahamson says, "We're starting where we believe the real, near-term return is, and that's in business services."
