Barriers Falling say Aurora Kendrick James

Matt Atkinson at Aurora Kendrick James says the barriers to entry in the network services market have fallen rapidly over the past few years, to the extent that on face value agents and resellers alike could set up as a network services provider almost overnight.

“Distributors need to focus on markets that offer significant economies of scale and barriers to entry if they are to add the most value to the agents and resellers. The BT Indirect Channel proposition is a good example of where distribution can add value. In the BT model, BT would only take on partners that could achieve significant volumes and could provide dedicated resources to manage the business. As a result smaller agents and resellers could not secure a partnership directly with BT, creating a barrier to entry. Secondly the commissions paid by BT on voices services increases significantly with volume, so there are real economies of scale that made the model work. The result is that the BT distributor can offer BT network services to agents and resellers and still make money, and the resellers have access to services that they could not secure in their own right. This is all fine up to the point at which BT terminates the partnership with the distributor or offers customers better terms directly than it does through its indirect channel.

In the CPS market, the barriers to entry do not exist and the economies of scale are quite small. Today, there is unlikely to be more than a 10% margin difference between the wholesale prices offered to the largest and smallest resellers. As a result the margins made by a distributor of CPS only services are small and being rapidly eroded making it impossible to add real value.

Wholesale Line Rental (WLR) does however offer more of the barriers to entry that the distributor requires. WLR requires an agreement with BT Openreach which is both time consuming to set up and requires a good credit rating and financial track record if the reseller is to avoid making very large deposits. In addition the pricing structure of WLR means that the distributor automatically buys services at the best market rates and at a significant discount to retail prices. Finally WLR services require ongoing customer support and fault desk services; which are difficult for the smaller resellers to provide in house. As a result a distributor offering combined white label CPS and WLR services can expect to have a far higher level of success than CPS only distributors. CPS and WLR are however only the start of distributing network services and where the longer term value lies is in supporting a full service proposition.

Many of the agents and resellers that are involved in the CPS market today do not have the resources and knowledge to create a rounded fixed line, data and mobile proposition for their customers. In many cases where they do offer these services, it is on an agency basis and the end solution to the customer is disjointed and is provided and billed by multiple service providers.
Distributors have an opportunity to exploit this market opportunity and provide smaller agents and resellers with a long term sustainable range of services and support which adds value to both parties. In addition the distributor can also offer the longer term security of revenues which is not available through agency deals with the large carriers.”