The End Of The Traditional ILEC Business Model

Are we witnessing the end of the traditional ILEC business model? AT&T, Verizon and CenturyLink are in the traditional ILEC business, in which they sell hundreds of products to customers in the wireline business. Even a simple product like MPLS can have dozens upon dozens of variations. From the carrier perspective, selling these services to customers usually requires a large sales teams spread across the country made up of subject matter experts in the areas of contracts, quoting, product configuration, and so on. The telco business is interesting because it is a business that requires a Subject Matter Expert (SME) in mundane things like contracts, quoting, and processes – without an SME, things don’t get done. AT&T and Verizon see the handwriting on the wall, and thus, they’ve begun selling off assets.

ILEC Business Model vs The Cloud

In a nutshell, the traditional ILEC Business Model is to sell everything to everyone, everywhere – Colo, Long Distance, PRI’s, MPLS, Internet Ports, VPLS, Cloud PBX, VoIP Solutions, Teleconferencing, Video Conferencing, and the list goes on. On top of that, their customers must endure being serviced by big bureaucratic processes, contracts with a dozen pages, and antiquated quoting/billing/support systems that aren’t integrated. That’s the life of an ILEC.

Contrast that to the cloud business model – simple, plug-and-play, easy to use, pay-as-you-go, no upfront cost, cancel anytime, mobile enabled service, setup in minutes, and so on. No lengthy contract, bureaucratic processes, long wait times, etc.

ILECs Vs the Blue Jeans Networks of the World

The days of trying to be all things to all people is coming to an end in the ILEC world, courtesy of the Blue Jeans Networks of the world. Some business lines within the ILEC business model are under massive assault and are clinging to life. For example: video conferencing. Why would a company engage an ILEC for a video conferencing product, sign a multi-page long-term contract at a certain monthly commit, when they can sign up with Blue Jeans, and be up and running in minutes for a super low cost?

And what about voice and on-prem PBX’s? In the past, when a company had hundreds of employees with phones at their desk, buying an expensive on-prem PBX was the only option available. That’s no longer the case. Recently, we heard a story about a billion dollar gaming company in Los Angeles that has a few hundred employees running on Google Voice. No PBX or sophisticated VoIP solution of any kind.

Supposedly, the story goes like this – the sales team of a Tier 1 carrier visited the gaming company, in order to try to sell them more services. Low and behold, when the team was onsite, they found out the gaming company was using Google Voice. Of course, the gaming company was full of young folks, but that is a dramatic example of the things to come.

Cogent, Zayo, and CenturyLink Business Models

Zayo and Cogent are hanging in there plugging away and doing one thing and that one thing only very well.  Zayo is all about fiber everywhere, expanding like crazy, buying up the competition, investing all over the place, and focusing like mad in doing one thing very well. Cogent is the same; they do IP Transit, and they do it well, providing big pipes to the likes of Netflix and many CDNs. They are laser-sharp focused on one thing and not distracted by too many products. Zayo and Cogent are what we call a well-tuned, highly efficient service provider machine.

Now we have the ILEC, which includes the likes of CenturyLink. CenturyLink’s stock has taken a beating lately. Not only has CenturyLink’s stock taken a hit, two of their Cloud Evangelists left. AT&T and Verizon are selling off their data centers too. Clearly, the experiment of Data Centers + Telco in the ILEC product portfolio is no longer viable. Everyone can blame Amazon for the shift in business model dynamics.

New Era of Telco Specialization

What does Blue Jeans Network, Aryaka Networks, Zayo, Cogent, Equinix, AWS and Akamai have in common? Focus. These companies represent the new business model of the next decade. They offer one product, with tons of features supporting that product, and invest everything into that offering. This kind of strategy enables these organizations to build Subject Matter Experts out of everyone from billing to operations to sales to product management, and so on because they have far fewer products than an ILEC.

What is the Solution to the ILEC Business Model Problem? Become like Blue Jeans Networks

Here is a crazy idea. Why don’t the ILECs of the world become like Blue Jeans Networks. This means that they break up their business lines into units and spin them off so these units can can operate on their own. Each one would be like a startup supporting that one product and one product only. MPLS and Data can be spun off and become like the Aryaka Networks of the world. Voice can be spun off and become a cloud platform of some sort. The fiber and infrastructure business- sell it to Zayo because they know fiber like no one’s business. And Colo – sell it to Equinix or companies that do only colo. To not take these actions is like dying a slow painful death, while watching business leave to the cloud. Disclaimer: I’m not certified or qualified to give financial advice, so don’t consider this rant for investment purposes. 

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