Tim Cavill is a man with big plans. He has identified where he can sell unified communications into vertical markets such as finance and healthcare; he has teams of engineers skilled at deployment and operations; and his call centre and accounts managers are ready to take on more customers.
But, Cavill, a former SAP executive, is not just running any enterprise integrator. He is the managing director of the local arm of an international telecommunications company - Orange Business Services.
Although he works for a telco, he's serious about selling more than broadband and phone calls. Tim Cavill and Australian general manager Geoff Smith, ex-IBM and DEC, were brought into Orange from outside the telco industry six months ago with a singular mission.
"We are well on the way of transforming Orange into an organisation that is not a telco," says Smith.
Telcos have had a rough time. Deregulation destroyed government monopolies, then the introduction of phone-call bearing data networks undercut the pricing of long-distance calls.
Just as convergence of voice and data networks destroyed profitability of the old model, so it is revealing new models for telcos. Unfortunately for resellers, most of the roads to profitability head straight for IT hardware, software and services.
"There is no telecommunications company in the Asia Pacific that is not looking at expanding their business proposition," says Andrew Dutton, vice president for Asia Pacific at VMware.
"If you own the network, you know the logical next step is providing a cloud service - either to host movies and entertainment, or as a data repository or as an application host."
CRN spoke to resellers and vendors about the impact of telcos moving into IT services and the threat this poses to the reseller channel. One adage holds true - the channel will always survive - but exactly how, and who, is a longer story.
Telcos have a couple of advantages that make them the holy grail for vendors of commoditised IT products in any shape, whether hardware or software.
First, their reach is unparalleled. Every business with a phone connection is a telco customer - in other words, they cover 100 percent of the market. That's an attractive figure if you're looking to sell a router.
Second, they are good at doing tasks on a grand scale, such as routing calls and laying networked cables - or hosting cloud services and operating data networks.
A third development that plays to the telcos' advantage is the maturation of IT. Many products and technologies are getting much simpler to install, to maintain and to replace.
The hardware game
Netbooks appeared at a time when consumer IT sales were falling off a cliff. The Global Financial Crisis and sub-prime mortgage implosion were centre stage and everyone was sensitive about spending.
Cheap-as-chips netbooks arrived at the right time. The only problem was that few involved - vendors, distributors or resellers - could make much money on the things, because prices were hardly higher than the cost of production.
Enter the telcos, which began selling netbooks to secure highly profitable, two-year mobile broadband contracts. The model emerged in Western Europe in 2008 with T-Mobile and Orange, and then spread to Singapore, Taiwan, Australia and the US.
A Gartner report released in August said telecoms service providers were one of fastest growing channels for mini-notebook sales in the Asia Pacific.
This mobile-phone model worked well for the telcos' partnering vendors too. The netbook's rise worldwide was largely due to the over 50 deals between netbook manufacturers and telcos, says analyst Canalys.
Established notebook manufacturers had been left flatfooted by new entrants such as Samsung which had ridden the telcos to achieve market share.
Coulling attributed the telcos' impact in selling this range of IT hardware to massive advertising campaigns and their large mobile-phone user base.
In return netbook users were lifting data revenues "far beyond" those generated by smartphones, says Coulling. There are drawbacks, however.
Telcos "are not as skilled at selling/supporting these products and will find it difficult to compete on price if deciding to sell devices without a [broadband] contract", Coulling says.
Canalys says the telcos could extend netbook sales to small businesses making ad hoc purchasing decisions.
Gartner predicts netbook sales through telco retailers will rise from 9 percent in 2008 to 12 percent in 2012, "making this channel a viable alternative for original equipment manufacturers in the future and should be included in all [go-to-market] strategies".
The netbook has provided mobile-device vendors with a very strong case study for the telco channel.
Unified by communication
If mobile devices are one area favoured by telcos, desktop phones are another.
Before deregulation, government telcos supplied phones with connections. But the complexity of early IP telephony systems shut out telcos from all but the biggest deals, effectively handing over the sale and maintenance of phone systems to IT resellers.
Now that the technology is maturing, the pendulum is swinging the other way.
Telstra and Optus sell standardised IP telephony systems to small business as well as enterprise, as does Vodafone through its year-old Business One service.
Business One, an alliance between the carrier, Cisco and BlackBerry maker RIM, gives SMEs a fully integrated package that includes on-site equipment for wireless networking, an IPPBX, mobile and fixed line IP handsets, and bandwidth and mobile phone minutes.
Companies make an upfront deposit on the hardware and a monthly per user repayment that covers calls and bandwidth.
Shoretel recently signed a deal with Telstra Business Systems to bundle its IP telephony gear with Telstra fixed line and mobile services, which are funnelled through Telstra bundled partners.
"The Telstra deal opens up 780,000 customers to Shoretel," says Vasili Triant, ShoreTel's managing director for Southeast Asia. The fact Telstra is selling its products cements Shoretel, a relatively recent arrival to Australia, as a legitimate competitor in the IP telephony market, he adds.
"If you want to grow your coverage within the market you have to have a tier-one carrier reselling your product. A huge portion of customers are looking to upgrade their networks. They turn to the telco carrier to bundle all that together," says Vasili.
Shoretel signed the Telstra deal in March but the telco didn't start selling its products until May. In the first full quarter for the agreement, it accounted for 20 percent of Shoretel's turnover.
Vasili expects Telstra sales will increase to account for 50 percent this quarter, partly due to the increased visibility in the program. While the vendor is also investing in the reseller channel outside of Telstra partners, Vasili expects the telco deal to "dramatically affect" Shoretel's market share.
Under the arrangement, hardware is sold on a monthly payment plan that converts the sale to an operating expense, which is useful for SMBs wanting to manage their cashflow.
Telstra provides the equipment and the reseller installs and carries out on-site service. Telstra-registered Shoretel partners make less on a Telstra sale than when selling directly, confirms Vasili.
Vasili says Telstra's decision to form the Telstra Business Services program was an admission that selling its Commander equipment division was a mistake. After the sale, Telstra "realised that there was a huge portion of the customers that was looking for that bundle thing," he says.
Vendors who rely on referrals from telcos rather than bundling are in a weaker position because a sales rep can change his mind on any given day and refer a customer elsewhere, says Vasili.
"When a manufacturer takes on a partner they are standing behind it for the foreseeable future and there is a difference in the support and representation of that product," says Vasili.
While IP telephony for SMBs appears to be fully in the telcos' sights, unified communications and video conferencing aren't far behind.
Telstra already sells a bundled video conferencing system to the enterprise using Polycom equipment. The bundle, paid per month, includes bandwidth for all video conferencing calls.
Videoconferencing vendor LifeSize believes Australian telcos are a little slow to embrace the technology for smaller businesses.
"Carriers haven't embraced video yet," says Patrick Micallef, regional sales manager for LifeSize.
"The challenge for them is to integrate a business within their current cost structure."
Micallef says he is open to work with telcos but so far the vendor only has one on its books, regional service provider Community Telco. Video conferencing is a logical application for a telco to sell because it is one of the most demanding applications to run on the network, says Micallef.
"The benefit for the service provider is quite straight forward. They need the apps to deliver demand."
The power of cloud
One major development in IT that plays right into the hands of telcos is the advent of cloud services. What initially began with software supplied over the internet has exploded into a market that can supply storage, processing power and bandwidth on demand.
These days start-up companies need little more than an internet connection to their desktops; email, CRM, documents and accounting are hosted, as is the backup.
Cloud services require two things: the ability to scale to make it profitable, and a rock-solid network to ensure quality of service and customer satisfaction.
The business model of a telco relies on scale for profitability and managing networks is their core business. It seems like a perfect fit.
With the push into IT services and related hardware, telcos have the opportunity to integrate products into the cloud services to create standardised systems.
Unified communications applications in the cloud could be pre-configured to work with an IPBX and IP handsets, and sold as a bundle to businesses. Telstra's deal with Microsoft to supply versions of its ubiquitous productivity software is a step in this direction.
Smith, who spent 20 years selling hardware for IBM and then DEC, says the impact of cloud computing mirrors his experience in mainframes in the late '70s. At first, hardware drove all the sales, and software "fell out of the back of it".
Then when applications rose to prominence, hardware became subservient. "Now I see the same thing happening in our [communications] market," says Smith.
Telcos with IT skills are in a powerful position to write standard network-based applications for general business use and turn them into another optional feature such as voicemail.
Smith says IP telephony has been held back from mass adoption because the technology hasn't been fully connected to all business applications. Orange is writing application interfaces for IP telepony that tie the applications and communications layer together.
No matter the amount of integration carried out in the cloud or with pre-configured hardware, companies will always have specialised requirements that telcos could not make money on by servicing.
Most software as a service (SaaS) products today are point services rather than fully integrated solutions, says Jay Miley, CEO of Ingram Micro Australia.
Distribution can play a key role in the aggregation of SaaS offerings from vendors and suppliers and helping resellers to integrate these to provide integrated solutions for their customers.
"This allows a combination of best-of-breed services, applications and infrastructure into a single solution, rather than either a monolithic, one-size-fits-all solution or a collection of non-integrated services that don't provide a coherent business solution," says Miley.
Going up or down?
The IT services space is going to get very crowded. Domestic and international telcos are already competing for Australian customers in the enterprise and that competition is about to extend downwards.
Telcos recognise that SMEs have the same business requirements and technologies as larger companies. Until now the cost of delivering the technology to SMEs has been too high to make the market worthwhile.
Orange Business Services, which has been providing telecommunications and IT services to multinational companies for some time, is convinced it's easier to go down the chain.
"That's exactly our direction. We will develop at the high level because the costs aren't quite to where we need it for the SME market. It's still a touch high, and we need the quantity to get the return on investment," says Orange's Smith.
"As soon as we get that price down to the level we want - and my prediction is that will be in the next 12 months - then our whole strategy changes because then it becomes mass market."
Orange's Cavill clarifies that Orange has no ambition to become the only IT services provider in the market. While Orange does employ engineers of various stripes, it has always augmented its work with multinationals by hiring boutique integrators when it needed more hands or specialised skills.
"We have all that capability in-house. It's more a question of have you got enough of it within your FTE count to meet that demand," says Cavill.
This year Orange hired a head of channels for Asia and is looking for an alliance and channels manager for Australia. "We have a budget designed for next year," says Smith. "By the end of the year we will be seriously looking at alternative channels to market."
Are other telcos also going moving to a telco integrator model?
The recent news of Telstra's break-up makes it difficult to know whether ICT and telecommunications services will end up split apart or integrated more closely.
Vodafone is treating these first days of selling Business One as a way to fine tune its transition to selling more than carriage.
"Partly we were really happy with the fact that we were in a limited commercial availability where we've learned how to sell this product correctly and that we've got all our processes correct," says Page.
The telco has a product development roadmap that expands on the integrated communications theme but it won't divulge specifics. Page admits that video and collaboration would be a key part, as is software integration to packages like CRM.
He also says it's likely that Vodafone is working on a competitor to Telstra's T Suite, although Vodafone hasn't released any cloud service in any other country to date.
"There will be [a cloud service] in the future but not right now," says Page.
Optus appears to be happy with the status quo with its enterprise integrator, Alphawest. While the two companies present a united front to the customer, there are no plans to merge the ICT and telco businesses.
"There's been lots of discussion about integrating ICT companies into telcos," says Rob Parcell, Alpawest's CEO. "But there's been lots of evidence that that doesn't work. We need to keep them separate.
"With a professional services organisation there are fees for project management and design and that is slightly different than the telcos."
Optus Business sells IP telephony and conferencing to the enterprise, but it has made no mention of selling a commoditised IP telephony system to SMEs.
Alphawest is rolling out infrastructure-as-a-service for enterprise. It was selected to beta test VMware's vSphere and one of the first to get production units of Cisco's Unified Computing platform.
Both technologies are instrumental in supplying Alphawest's infrastructure-as-a-service, which will be released in the first quarter of 2010.
The telco has the capability and the skills to start a broader cloud service through its owner, Singtel, which operates a security-as-a-service business. This could theoretically be provisioned to Australian businesses.
Despite the operational separation between Alphawest and Optus, the integrator relies heavily on its telco heritage in its pitches to customers.
"We are deploying our infrastructure at the network level which means we can offer better service," says Parcell. "We are one, integrated provider."
Why it might not work
Telcos have long eyed IT as a business, but below the biggest accounts it has not worked. The main reason has been that the level of integration required for an IT project was too expensive for smaller companies.
Telcos standardise services so they can be maintained through a call centre rather than employing a customer account manager, as a reseller would.
But many IT technologies have matured to the point where much less integration into a company's infrastructure is required, thereby improving reliability and the customer experience. The arrival of cloud services reduces the need for on-premises customer equipment altogether.
These developments make it easier for telcos to standardise and scale technology and deliver it to many customers at a lower cost. If Orange's direction is any example, they are also taking action to shore up customer relationships.
Orange is offering two levels of its call centre, one international and the other domestic. The latter is "slightly" more expensive than the international, centralised call centre but customers get Tthe same sort of service that they would get out of the other IT companies, says Smith.
Orange also employs customer service managers to maintain relationships outside the call centre. Smith says he was brought into Orange from outside the telco industry specifically to address customer relationships.
The new Orange is "a company that listens to its customers, that works with its customers and provides the sort of service that they deserve", says Smith.
Working with the new boss
It is worth noting that Orange, Optus and Telstra have the in-house capability to do almost anything.
One telco strategy for the SME appears to be similar to the manner in which Telstra employs contractors to install and maintain phone lines. The customer is Telstra's, but the labour is outsourced. Once independent, resellers could find they have a new master.
Some already have experience at working under the telco mantle. Brisbane-based TT Group Communications won Telstra Enterprise Channel Dealer of the Year for its work with Australia's top 1500 companies in voice, data and AV services.
CEO Bob Bishop knows where his business fits in the gaps between the telco's limitations. "We're a good fit with a telco that has a customer that wants to go beyond the standard off-the-shelf," says Bishop.
TT Group Communications is positioning itself in the twin roles of IT adviser and telco services delivery, as the latter looks like becoming a permanent fixture in the channel, according to Bishop. Telcos ignore IT services at their peril.
"There's no doubt bundling is here to stay. If you're out to sell carriage only and you can't put applications around it, you back yourself into an option on price.
"I've got no doubt the carriers will continue to bundle applications and product with carriage; they'll move into cloud computing where they can control the variables more tightly. But companies need help to find out what's available and then to implement, manage and support it."
While Telstra and Orange are taking the reseller channel down the contractor/installer route, Vodafone is looking for an outsourced sales force. NetStar has an exclusive, nationwide installation and maintenance contract for all Business One systems.
"It's important for us to control the quality of the customer experience. We couldn't have multiple parties doing customer support and installation," says Vodafone's Page.
Business One requires IT resellers to learn not just about selling mobile services; they have to adapt to a different business model. Instead of making money on services such as installation and servicing, the IT reseller receives a big upfront commission and an ongoing trailing commission.
In some cases resellers might appreciate getting paid by a telco as a contractor rather than having to manage an address book of customers. A common weakness in resellers' business models is getting money, says Mathew Dickerson, owner of Axxis Technology, a Dubbo-based reseller.
"A lot of resellers get hung up on admin and billing and chasing bills. If you got 70 percent in your bank account and didn't have to do the billing" maybe that would be a better business model, says Dickerson.
The telcos' transformation is being watched by all elements of the channel, including distribution. Vendors cut out the IT distributor altogether for carrier deals. Samsung and Acer delivered their netbooks directly to Optus and Telstra respectively rather than through their main distributor, Ingram Micro.
Ingram's Miley is unconcerned by the prospect of competing with telcos.
"SME focused products are becoming more commoditised and simpler to use. There will be opportunities for telcos to retail product too or to bundle it with services to that SME market.
"Our retail partners will play a big role in the sales of these sorts of products, as they do now for things like ADSL equipment or SME networking gear. They obviously have tremendous amounts of experience with sales of commoditised products," says Miley.
Waking up one day to find yourself in competition with a multi-billion dollar organisation would not be a pleasant experience for any reseller. Luckily, technology greenfields are opening up every year.
"There's a whole range of applications and services we haven't even thought about or conceived yet," says David Peach, vendor channel manager at distributor Express Data. "That may be what the channel is doing in five to 10 years' time. Anyone dusting off their 2009 business plan in 2015 is going to be in trouble."
But the size and scale of a telco, which makes it such a threat, means it will never be able to move fast enough to fill every IT service.
"The success of our reseller channel is based on their ability to [integrate] solutions with their customers' systems. This is essentially the biggest advantage our resellers have over the telcos," says Miley.
Additional reporting by Brett Winterford.
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