Few business owners ever enthuse about the service they receive from Australia’s telecommunications providers, particularly in regional and remote Australia. But for Nick van Namen and the team at Geraldton, Western Australia, reseller LogicIT, his customers’ constant complaints drove him to do more than just sympathise. He decided to try to do better.
“We deal with doctors’ surgeries that wanted to do remote consults and we had mining companies that needed to communicate faster over VPN tunnels,” van Namen says. “And we wanted to offer services such as offsite backups. So it seemed like we needed to do something about it.”
In 2009 LogicIT became a licensed carrier and launched its own internet service provider, Node1, to serve regional clients. Three years later the company linked to a data centre in Perth and today continues to expand its network across regional and remote Western Australia while also reselling NBN services. “Once we started increasing in bandwidth we hosted private cloud solutions for businesses, so we became a hub and set up VPN tunnels from other towns to our location,” van Namen says.
LogicIT has carved out a profitable niche. Van Namen also says this side of the business is more resilient in downturns than its traditional service and integration business, as clients rarely reduce spending on bandwidth.
The LogicIT story is repeating itself across the Australian IT partner community as traditional resellers and integrators chase the revenue opportunities that come from providing cloud and managed services. Often their ambitions drive them to build out their own communications infrastructure.
Not surprisingly, telcos of all sizes have their eyes on cloud and managed services revenues, and have been acquiring the integration skills needed to bring these to market. The result is a blurring of the lines between traditional telcos and IT integrators – and a whole new competitive battleground.
An integrator that has one foot firmly planted in the telco camp is Sydney-headquartered Brennan IT, which has a long history as a telecommunications practice and owns an MPLS network. According to Brennan’s practice director for cloud communications, Lyncoln De Mello, this heritage made it easier for his company to transition clients to its cloud services. “We didn’t need to rely on partnering with a telco to get the customers already on our wide area networking product connected to a cloud service. We built our own cloud platform in two locations, then championed the benefits of cloud services to our networking base.”
De Mello says this close integration is proving to be increasingly beneficial as clients become more discerning about what they seek from the cloud. “We have had customers come to us after bad experiences when promises made in terms of seamlessness of integration between cloud and the network didn’t eventuate.”
But it is also leading Brennan IT into competition with much larger companies, says De Mello.
“If you asked me who our biggest competitor is today, I’d say Telstra. The original premise of a company like Brennan IT to meet the needs of the midmarket – because the incumbents could not – is becoming less and less valid. The larger players are changing the dynamics by tailoring their sales processes and operational processes a lot more, and creating ring-fenced teams to meet the needs of the midmarket. So it is more and more important for service providers like us to create and maintain a real sense of loyalty among our customers.”
Another IT services company with a long heritage in telecommunications is Nexon, which got into telephony in 2003 using a managed private network to deliver VoIP services to its customers.
“We saw four years ago we were not going to be able to do that for much longer,” says unified communications business lead David Russell. “So we delivered a whole bunch of different cloud telephony solutions out of our data centres and offer that to our customers and reseller channel on a per month, per user basis.”
But Russell says the market is becoming increasingly crowded as integrators and telcos release similar services.“It is quite difficult to differentiate – especially when customers have the expectation that if they go cloud, it is going to be outrageously inexpensive. If you are looking at point solutions, the market is really crowded.
“Where we are having the most success is if the managed service covers multiple services such as managed network, hosted firewall and managed telephony. The market for that is very small.”
Big change
There are two broad options for an IT firm with telco ambitions: partner with an existing telco; or build an internal capability. For Vonex, winner of the 2014 CRN Fast50, partnering was the chosen path and it has forged close relationships with tier-one carriers. Vonex also developed a hosted PBX product called AMPT that managed service providers can white-label. Last year Vonex mounted a reverse ASX listing and is busy recruiting its own channel, now with more than 400 partners.
Six years ago the company noticed carriers were making the transition from a traditional telco model to an ICT model, chief commercial officer Matt Fahey says: “So we developed around providing business for their products.”
While the relationship has proven highly beneficial to Vonex, Fahey says working with a telco involves a big change to internal processes. “They don’t have a really experienced channel team like Microsoft of Cisco. Their channel is more focused on traditional dealers and Telstra business centres. A lot of other ISVs that have been in the market for some time aren’t going to have the patience to work with a vendor where they are struggling.”
Then there is the age-old question of who owns the customer.
“I don’t think anyone knows, really,” Fahey says. “If they bring the customer, they own the relationship, but it won’t stop me selling our products and services into the customer. We have a lot of services competing against Telstra, so that is always a sticking point, but I find communication is key. Open and honest communication works really well.”
Despite the closeness of the relationship, Fahey says Vonex is careful not to become too reliant on Telstra. The company stays close to Microsoft and Cisco.
This could be handy, given the form of many telcos diving into the IT integration space. Telstra has snapped up a bevy of IT providers, such as NSC Group, O2 Networks, Bridge Point – and, most recently, award-winning Microsoft partner Kloud for $40 million.
“If Telstra went all-in and wound down their channel we would suffer, but it wouldn’t be a huge risk,” Fahey says.
So far, telcos dabbling in systems integration has produced mixed results. The clearest examples of telcos moving into systems integration were Optus’s $25.9 million purchase of WA-based Alphawest in 2005 and Telstra’s $333 million acquisition of Kaz Computing in 2004.
Success has been hard to come by. Telstra sold the remains of Kaz to Fujitsu in 2009 for $200 million. Amcom Telecommunication acquired L7 Solutions in 2012 for $15 million, then sold it just four years later to Cirrus Networks for $500,000.
But unhappy experiences have daunted neither Telstra nor Optus. Each has continued adding to its integration credentials through further acquisitions, but with a greater emphasis on cloud services – as demonstrated by Telstra’s purchase of Kloud and Optus’ buyout of Ensyst in 2014.
For many smaller carriers, IT partners represent a strong channel to market, just as they might for any IT vendor. One example is telecommunications wholesaler Inabox. Managing director Damian Kay says the company’s traditional model has been to assist resellers and integrators to offer their own telco services via its Telcoinabox wholesale service.
In November 2014 Inabox spent close to $10 million buying IT and telecommunications provider Anittel, giving it a chance to combine its carrier offerings with IT integration skills.
“We started off in franchising, where anyone with a phone, an internet connection and a computer could become a retail service provider,” Kay says.
“We’ve got 430 retail service providers, of which probably 150 are managed service providers or systems integrators of some sort. But on the other side there is us as a managed service provider– in a way, competing with ourselves.”
For junior telco Vertel, integration partners are an essential component of its strategy to sell mobile and fixed network services. “We are focusing on being the enabler of connectivity and being able to assure connectivity across a network that will pull together our own and the other carriers out there,” says Vertel’s managing director, Andrew Findlay.
Hence, he says, Vertel wants to work with partners with skills in unique verticals or niches to define specific service packages. “The carriers are getting much more into the space of the network and the application services,” Findlay says. “The managed service providers are coming at it from saying they have the ability to pull that stuff together, buy services from a carrier and focus on the application.”
Whether it is carriers pushing into IT or IT companies getting into telecommunications, the change is rarely easy. It’s a clash of cultures.
It’s tough to merge the annuity-based, high-volume revenue model of a telco with the lumpier, high-touch revenue model of an integration business.
And without an acquisition, each new market is uncharted territory. But for van Namen and LogicIT, it’s been a battle worth fighting as communications now account for half of the company’s revenue.
“To set up an ISP definitely involves a lot of uphill battles and expenses,” van Namen says. “When you are a competing IT company, no one else is helping you. You need a loyal customer base to justify certain expenses and you just grow from there.”
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