Incumbents lose, enterprise wins: analyst

A telco battle for corporate cash could spell victory for Canadian businesses, according to one industry observer.

Michael Sone, president of NBI/Michael Sone Associates Inc., a telecom industry research firm in Toronto, said businesses in this country would benefit from the “much more vigorous phase of competition” that the telcos are entering.

In a study released Nov. 18, Sone outlines the market dynamics behind this development. His report, entitled the 2004 Edition of the Canadian Local Telecom Services Market, found that the new service providers are eating away at the incumbents’ market share, causing companies like Bell Canada and Telus Corp. — incumbents — to improve their offerings and their prices.

“More competitors equal more choice, which is always better for customers,” Sone said, referring to the general notion that competition means lower costs for clients. “New entrants…force incumbents to be more responsive to customer demands and to be proactive in introducing new features.”

Sone says incumbent local exchange carriers (ILECs) will lose ground in the coming years. In the business-customer arena, ILECs will provide just 76.6 per cent of wireline local access come 2007. In 2002 the incumbents owned 88 per cent of this market.

Voice-over-IP (VoIP) offerings from the likes of Primus Telecommunications Canada Inc. and Yak Communications (Canada) Inc. will take a bite out of the incumbent market share, Sone says.

The total number of business phone lines is declining as companies move from Centrex service to ISDN-based PRI, and from traditional TDM-based PBXs to IP PBXs, which require fewer lines to provide dial tones across the enterprise, according to the report.

Sone says businesses will increasingly turn to VoIP as the decade unfolds, predicting 759,000 business VoIP lines by 2007. There are 223,000 such lines today.

Local phone competition isn’t confined to the nation’s largest urban centres, either. Competitors are making headway in smaller cities like Halifax, Hamilton, Ont., Kitchener, Ont. and London, Ont.

Sone’s study fits with comments from other telco analysts, who also predict an end to the incumbents’ reign of the telecom landscape, and an accompanying improvement in prices and services.

“It goes without saying that the incumbents are going to lose ground,” said Mark Quigley, an industry observer at The Yankee Group Canada, headquartered in Ottawa. He said VoIP, new entrants like OneConnect and reworked competitors like the recently-formed MTS Allstream Inc. — the result of merger between ILEC Manitoba Telecom Services Inc. and competitive local exchange carrier (CLEC) Allstream — could make life harder for the Bell Canadas of the world, while presenting new services for enterprises to consider.

The first effect of this shake up should be price-based competition, Quigley said. Competitors and incumbents will drop their fees for services as they fight each other for the enterprise’s attention. Soon after the market entrants should crank up the application battle machinery, aiming to convince enterprises to buy into productivity-enhancing apps like unified messaging and “find me-follow me” features.

The ILECs “have not been asleep at the wheel,” Quigley said, noting that Bell and Telus are fighting back with their own brands of VoIP: Managed IP Telephony Service from the former and IP One Evolution from the latter. Both services — hosted like Centrex, but more feature-rich — are meant for large business customers.

Quigley said he expects to see a certain amount of consolidation in the VoIP market as service providers thrive or die in their attempts to win customers away from the incumbents.

Sone warned businesses of the chance that new VoIP service providers won’t survive the market melee.

“However, I don’t expect that this will happen nearly to the extent that it did early in the decade,” he said. A few years ago numerous CLECs hit the scene looking to steal away incumbent customers, but few of those competitors remain, having gone bankrupt in their tilts at the telecom windmill.

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