Pulling the Strings for E-Biz Synergy

Voice carriers and service providers are joining forces to deliver profits.

On the brink of codependency, voice carriers and next-generation service providers are beginning to work together to learn how to recognize and address the real needs of e-business.

The historical phone company model is being strafed with enterprise requests for Web hosting, intelligent IP services and optical networking, to name a few, while service providers are often caught out of their league when selling to big customers.

The key to profiting, as these and other services become commodities, is successful partnering, just as it was in the early days of the mainframe and PC revolutions, experts say.

Vendors seem to be getting the message. Earlier this month, Cable and Wireless plc. acquired San Francisco-based Digital Island Inc. for $340 million. The C&W deal is noteworthy because of months of industry speculation about whom the carrier might buy. Initial rumors pinned the acquisition on Exodus Communications Inc., of Santa Clara, Calif. Further industry buzz suggested that Exodus officials rebuffed C&Ws advances.

C&W officials would not comment on the rumor. However, they stressed, the merger with Digital Island—for almost 9 percent above its most recent presale closing price but still 98 percent less than its December 1999 high of $148—will help to fill in the management blank for the London companys business hosting options. The deal could also buttress C&Ws a-services application service provider division by applying Digital Islands expertise in content delivery networks, analysts say.

"The combined company will be able to offer a comprehensive range of IP/data transport, hosting, content delivery and other value-added services to business customers in the United States, Europe and Japan," C&W CEO Graham Wallace said. "We will continue to evaluate [other] investment opportunities."

A deal for an Exodus-like company would not necessarily have accomplished that goal for C&W. For its part, Exodus has been actively trying to succeed in the managed services area but with limited success.

Wallace also announced C&Ws contract with Nortel Networks Corp., of Brampton, Ontario, to build a voice-over-IP network. This network, to be completed in three years, will let C&W offer business customers options such as next-generation videoconferencing and telephone capability, IP contact centers, and unified messaging, he said. Trials will begin soon, and the first product, wholesale voice interconnect, will launch at the end of this fiscal year, he said.

Other examples of the growing synergy between carriers and service providers abound. Deals exist between NTT Communications Corp. and Verio Inc., WorldCom Inc. and Intermedia Communications Inc./Digex Inc., and British Telecommunications plc. and Rackspace Ltd. More cases are likely, as service providers that stay solo will either wane or experience only nominal growth, pundits say.

"These two industries are on the verge of a collision," Marc Andreessen, chairman and co-founder of Loudcloud Inc., of Sunnyvale, Calif., told telecom and software providers last week at the Forrester Research Inc. telecom forum in Washington. "Basically, the implication of this is that everybodys a service provider now."

Customers of smaller service providers view telecom mergers and partnerships with mixed feelings. "The jurys still out," said Dennis G. Reavenelle, vice president and CIO of Travelago Inc., in Lexington, Ky., which uses Digital Island to give customers streaming video of tourist destinations. "Theres always potential downside when you have a change in management. They could start squeezing for tighter margins." But while a belt-tightening at Digital Island could have negative consequences, having C&W behind it could have a positive change, Reavenelle said. "Akamai [Technologies Inc.] is pitching us ... If Digital Island said We could do the same thing, I think [C&Ws] deep pockets might give Digital Island an opportunity to go head-to-head."

Consumers have long used the Internet as a series of applications—e-mail and Napster, for example—and many industry observers said they expect enterprises will follow suit with the expansion of e-business.

If the telecommunications industry does adhere to the evolutionary path of the computer industry, it will mean a faster rate of innovation, improved economies of scale and standardization. These are all good trends for customers, who will not have to choose a single vendor.

And while these partnerships have come a long way, they are far from perfect, especially in areas such as determining pricing as the worlds of telecom and datacom collide, said Forrester analyst David Cooperstein, in Washington. Before service providers can repeat the successful partnerships of the past, they must first show their potential value, Cooperstein said.

"Telecom companies have not put in place the technology and mind-set that they are strategic service providers," Cooperstein said. "Companies are willing to pay more if theyre paying for the actual bandwidth theyre consuming."