Source: Channel Guide for NGA 2011
Telcos can be schizophrenic towards network aggregators. On the one hand they are big customers and know what they are doing so need little management. On the other hand they enable resellers to move easily between networks and can switch suppliers easily. If the Telco is complacent or greedy they risk losing a large piece of business very quickly.
To mitigate the risk from aggregators some of the Telcos are trying to persuade resellers they should be buying direct and setting up their own networks. Once the reseller has gone through the pain and expense of integrating to one Telco they are unlikely to have the will, scale or investment case to do it with others and the Telco has them locked in.
Andrew Dickinson, Managing Director of Griffin says that resellers can often find themselves with the worst of both worlds.
“They have an expensive network to run and they are probably paying more than if they worked with an aggregator. They have none of the flexibility and the development costs for software and new products that aggregators can spread across thousands of end points that have to be covered by them alone. Some Telcos are telling aggregators that to keep the cost down and make the ROI work they can get away with single host links. To an aggregator that knows of BT’s regular exchange outages this presents an unacceptable risk. They are also downplaying the need for traffic management and skilled engineering staff. Resellers need to think very carefully before following this advice.
In the last six years maximum broadband speeds have increased 80-fold and the average bandwidth usage per business user has gone up 600%. Wholesale bandwidth prices have not come down to match and the expectation of businesses is that they should be paying less for their broadband than six years ago. Managing this traffic is complex and expensive. DPI (Deep Packet Inspection) systems have to be deployed that can inspect every packet that enters or leaves that network. These are immensely powerful and expensive boxes that need careful, expert management and regular upgrades.
There are some subtle differences also in the way that some of the Telcos charge for their services versus the way charges are passed on by the ISPs. Telcos often charge for bandwidth at the 100th percentile i.e. every last bit you use whereas the standard is for ISPs to charge their customers at the 95th percentile. Most resellers will not understand this technical nuance but for some it could mean their bandwidth usage doubling when they buy direct. Telcos are often less flexible than ISPs too. For example you have to buy bandwidth often in 10Mbit/s increments rather than 1Mbit/s and once you increase your bandwidth you cannot reduce it for 3 months.
Fine if you have a massive and growing broadband base but for most resellers their requirements change from month to month and they end up paying for bandwidth they don’t need.
Something that initially looks like providing flexibility and control ends up very quickly being expensive, unreliable and risky. Most aggregators would not be able to operate profitability below 20,000 lines and yet resellers with only a few hundred lines are being persuaded to buy direct form Telcos.