ATC/M3Com Article

A little out of date, but may interest some of the ATC bugs/Deriders.

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telecomasia
March 2002
Robert Clark

Carving out a niche

Ambitious companies M3Com and Advantel are taking on established players in supplying services, although each comes from a different perspective, writes Robert Clark.

After the deluge of backbone investment comes the shoots of fresh competition. The massive amount of longhaul capacity available at low cost is attracting smaller and focused carriers to Asian markets.

Among these are Bermuda-based M3Com, which offers point-to-point leased services across the Pacific, and Australian-owned AdvanTel, which carries circuit-switched voice between China and Europe. Both have minimal fixed assets, target discrete segments of the market, and rely on well-positioned Asian partners.

To a large extent, M3Com defines itself by what it doesn’t do: it’s not a wholesaler, it’s not a carrier’s carrier, and for the time being in Asia it doesn’t offer IP or VPN. In other words, it doesn’t try to provide a broad portfolio of telecom services to a broad portfolio of customers.

What services it does provide are targeted at SMEs and "tier 2 MNCs" – basically the enterprises who turn over a lot of income for telcos but whose size make them less attractive to the larger telcos than Fortune 500 companies.

M3Com’s preferred customers are the financial, manufacturing and maritime sectors, according to executive vice president and chief operating officer Jeffrey B. Freitas. He observes that China alone has 100,000 manufacturers, trading companies and shipping companies.

The idea for the company came with the arrival of the Gemini cable system from New York to London five years ago. As Freitas says, that was a club cable which didn’t allow for interlopers. And besides, "those consortia kept the price way up. M3Com couldn’t buy a piece of those cables."

That changed with the arrival of Global Crossing’s disruptive first Atlantic cable, with capacity available to everyone at much lower prices.

Privately-held M3Com has since established itself in the US and is now turning its attention to Asia. While it competes on price, it also thinks it has a couple of advantages in this region.

First, much of Asia runs on fractional circuits. "Fed Ex has a very extensive network around Asia, it’s all fractional circuits," said Freitas. "The domestic infrastructure can’t even handle that much capacity."

Hence, M3Com is scaled to service customers in the 64k-DS3 range. It has IRUs for STM1s, but nothing bigger.

It also has set up partnerships with incumbents – PCCW in Hong Kong, China Netcom in China, Singapore Telecom and the Communications Authority of Thailand (CAT).

The China Netcom agreement, for example, allows M3Com to connect in Hong Kong for direct access into China.

"Our plan has really been to work with the incumbents in a strategic alliance or one-stop shop, not to go into their backyard to compete with them," Freitas said.

M3Com now connects over 15 countries in Asia to the US and beyond. It has regional hubs in HK and Tokyo and five POPs, with another five on the way.

Relationship-based

The other part was the manner of doing business, says Freitas. Asian business is very relationship-based, which suits a smaller company.

"If you go in and build a relationship, there is nothing you can’t do throughout Asia. So we really built from the business model and carrier capacity model, and we built the relationships."

While M3Com is tackling the burgeoning leased data market, AdvanTel is chasing the very traditional circuit-switched voice market. The AdvanTel wrinkle is the Euro-Asian connection, leveraging the difference in settlement rates to and from the two continents.

In particular, it is a Greater China play, running services in and out of China, Hong Kong and Taiwan through its switch in Hong Kong.

It has just completed a back door listing on the Australian Stock Exchange (ASX) through mining company Nugold Hill Mines, which previously owned 60% of AdvanTel. Nugold bought out the balance and changed its name to Advantage Telecommunications Limited, re-listing on the ASX on 26 January.

Until October last year, AdvanTel carried international traffic between Hong Kong and Shanghai. Now it arbitrages prices between Europe and Asia. The Europe-Hong Kong- Shanghai route currently costs $0.04, while the Shanghai-Hong Kong-Europe costs $0.15.

"AdvanTel’s service takes advantage of discrepancies in the wholesale traffic cost on inter-continental calls, due to incomplete deregulation of Asian markets, that has resulted in striking differences in price," says a company statement.

AdvanTel has traffic agreements with 40 carriers including China Unicom, Sonera UK, Swisscom, Worldcom Hong Kong, Asiatel, Teleglobe Hong Kong, Cignal, i-Basis, and ITXC.

Like M3Com, it also points to its partnerships, which provide entry to partially liberalized markets; in China, Unicom is the partner, while in Taiwan it has hooked up with Vopier, a subsidiary of one of the largest networking companies, Taiwan Telecom Network, owned by PCCW.

Chief executive Mark Stewart advocates going to market "asset light". "We don’t want to spend millions of dollars for an IRU," he said.

While the company is not wholly "asset light", it is a beneficiary of the surge in fixed network investment in Europe. After deregulation in 1998, many carriers built switches all around the Continent on a fairly high cost base, Stewart says.

"It occurred to me that rather than build switches all over, it made sense to put just one hub each in London and China."

Instead of buying IRUs, AdvanTel has worked a deal with SingTel where it leases capacity from the carrier, and also delivers SingTel traffic across those circuits.

"It’s a customer contract subsidizing network costs," according to Stewart. "We use SingTel international network as our back bone and then offer voice services to SingTel."

The result is a lower cost base — even when stacked up against IP voice, Stewart claims. AdvanTel uses circuit-switched for its international backbone, with some IP capability in China and other parts of Asia.

He acknowledges IP is an indispensable protocol in China, and is evaluating it for use elsewhere, but at this stage, it’s not a priority because it means additional capital spending.

"We are constantly looking at new assets and infrastructure. But it’s got to be the asset light approach."

That approach is working, according to Stewart. Advantel carried 4.6 million minutes in the fourth quarter, and aims to treble that in this quarter. He forecasts it will be profitable by the end of 2002.

Access to capital

So, is this a trend to segmentation of bandwidth markets? Are spaces opening for niche operators? It is difficult to verify the progress of the two companies, given the absence of financial results.

John Enoch, a senior consultant with PriceWaterhouse-Coopers, thinks a trend is underway, but cautions that startups may lack the staying power to last against established players, especially if they are competing on price.

"The asset light model is very strong, but it does require a solid understanding of the end-to-end concept."

He points to the unhappy ASP experience, where the model offering applications on demand was a good idea, but it pre-supposed infrastructure of certain quality which just wasn’t there.

"The ASP model came before the infrastructure made it possible," he said

Enoch says access to capital markets is constraining market opportunities, which is especially a problem for smaller carriers.

As a result, he believes the asset light, niche player is "something we will see over the next few years rather than in the current climate. There’s certainly a lot of scope for specialists, but the current market conditions and access to capital tends to favor incumbents."


Going with the small guy

M3Com may be a minnow compared to the carrier giants, but it is able to snare clients with high-level requirements. One such is US-based Savvis, an ISP and IP VPN provider, and the network underneath Reuters’ MoneyLine financial services.

It’s a high performance, fully-redundant network, featuring dual redundant E1 circuits at all locations, says Savvis’ principal technical consultant, Thomas Piergallini – "there can never be any downtime."

Savvis turned to M3Com for its fourth STM1 late last year, a clear channel for ATM services and which hooks Asian sites into the US backbone. "That is the one that saved us a lot of money," says Piergallini.

The decision came down to price as well as the confidence in M3Com to deliver, he says.

One of the secrets of the international bandwidth business is that large providers often don’t have the capacity available when required. And when they don’t, they often turn to the smaller players like M3Com.

So when a global carrier was unable to "build the circuit in the manner in which we contracted," Savvis turned to M3Com, which was already the end-supplier for one of its STM1s.

Piergallini points out that large telcos "don’t want to give us love and attention for our circuits, so we turned to the niche player like M3Com, who by the way is a provider to the other large telco.

"Why use the large telco when really it’s M3Com’s circuits I am buying anyway? I think we saved $100,000 a month."

Not that Piergallini sees a large group of other small-sized companies rolling out similar services.

Savvis has a link to M3Com through John Jacob, a former Savvis executive now with the carrier as vice president of sales and marketing. But this arrangement came about when "we were trying to sell them something and they sold us something," says Piergallini.

It’s a good fit, says Piergallini. Savvis sells IP services, but not circuits; M3Com’s customers are in the market for IP customers.

One advantage of the smaller telco: speed. M3Com was almost too fast, says Piergallini. The new link was ready in ten days. "You expect 40 to 60 days’ lead time." M3Com technicians also regroomed the circuit for better performance, he says.

What’s more, the extra provisioning for Moneyline means Savvis can use some of the surplus capacity to offer better service to other Asian customers.

-Robert Clark

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