Turmoil Subsides, Canadian NSP Market Begins to Stabilize

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Market Analysis Turmoil Subsides, Canadian NSP Market Begins to Stabilize Abstract: The network service provider market in Canada has endured the turmoil of bankruptcies and restructuring.

1 Market Analysis Turmoil Subsides, Canadian NSP Market Begins to Stabilize Abstract: The network service provider market in Canada has endured the turmoil of bankruptcies and restructuring. Market stabilization is nearly complete, helping restore the confidence of enterprises. By Elroy Jopling Strategic Market Statements The network service provider (NSP) market in Canada is mature where Gartner's outlook is "positive." Enterprises will be able to plan their telecommunications evolution in a more stable environment. Between Bell Canada and TELUS, the Canadian NSP market is a duopoly, and it will remain as such in the near term. The positioning of Canadian NSPs, especially the niche players, will be determined greatly by the role of the government. Publication Date:4 December 2003

2 2 Turmoil Subsides, Canadian NSP Market Begins to Stabilize Introduction: Canadian NSP MarketScope The NSP market in Canada has endured much turmoil the past three years. Initially too many players were chasing too few customers, resulting in a raft of bankruptcies and departures of the smaller competitive local exchange carriers (CLECs). The primary incumbents, Bell Canada and TELUS, have reduced debt primarily through cost controls and productivity gains. Free cash flow has improved. The three smaller NSPs, Allstream, Sprint Canada and Group Telecom/360networks, have emerged from balance-sheet restructuring with little if any debt. Themarkethasevolvedintoaneffectiveduopolyofthemajorincumbents with a second tier of niche players trying to protect their business postrestructuring and defining the niche they will occupy. The turmoil is not complete, but the remainder of the decade will see a stabilization among the players. Market Description Evaluation Criteria This MarketScope addresses Canadian NSPs with a national presence. This analysis excludes the wholesale and consumer components of the carrier's operations. Where these services provide overall benefit or detriment to the carrier's operations, they are included in the financial stability analysis of the NSP. Gartner Dataquest used the following criteria in its MarketScope evaluation: Product and market innovation An NSP should be able to exhibit and enunciate an overall strategy that defines product and market innovation plans and addresses traditional services plus converged, value-added and managed services solutions. Technology implementation An NSP must have the technology vision and the demonstrated means (capital expenditure, or CAPEX) to accomplish this vision. This vision will need to include a consolidated backbone network, multiple access mechanisms and a robust back-office system, all of which will transform the carrier's network infrastructure into a next-generation model. Competitiveness An NSP must compete in terms of being able to deliver the best value for clients, blending cost-effectiveness with a high level of service delivery. Pricing structures should be easy to understand, market-equitable where the difference between similar volume enterprises is minimal, and not back-end-loaded where existing customers are penalized for upgrading. A market leader can exhibit a price premium of no more than 10 percent Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4 December 2003

3 Gartner Dataquest Perspective Figure 1 Canadian NSP MarketScope Service and support This represents a prime criterion that incorporates networks installed on time, effectiveness of configurations, availability times, and simplistic accurate billing. It covers the gamut of any of the NSP employees who face and interact with the enterprise in the life cycle of a contract. Financial stability This represents the NSP financials of revenue, margins, returns, cash flows and debt load. CAPEX and operational expense ratios demonstrate efficiency and will provide a future perspective. Incorporated in this criterion are the NSP management teams their experience and track record. Canadian coverage The assessment of the coverage is geographic, as well as depth of coverage, including such elements as points of presence and access. Global coverage Similar to Canadian coverage, it includes the geographic and depth of coverage, which will often be supplemented by partnerships and the related extending of service-level agreements and monitoring. Rating for Overall Market The Canadian NSP market is mature where Gartner's outlook is "positive." Enterprises can plan their telecommunications evolution in a more stable environment, but purchases should always be in a competitive environment, and the capabilities of the existing vendors should be scrutinized. There is no dominant player in all segments of the market. Ratings for NSPs Figure 1 shows the results of our Canadian NSP MarketScope. 3 Strong Negative Caution Promising Positive Strong Positive Allstream Bell Canada GT/360networks Sprint Canada TELUS Source: Gartner Dataquest (November 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4 December 2003

4 4 Turmoil Subsides, Canadian NSP Market Begins to Stabilize Allstream The former AT&T Canada emerged from creditor protection this past April and announced that the relationship with AT&T Corp. had ended, and in June it changed its name to Allstream. With a clean balance sheet, the company has demonstrated positive financials. For example, in the second quarter of 2003, year-to-date earnings before interest, taxes, depreciation and amortization (EBITDA) was positive and showed a year-over-year growth of 36.9 percent. But its future innovation is severely tempered by low CAPEX as a percentage of revenue, at 7.1 percent for 2003 year to date. Without the pipeline of new services coming from AT&T Corp., Allstream will need to fill this void, an extremely difficult challenge at these CAPEX levels. Allstream's niche is large and midsize business through its strengths in the basic services of frame relay, asynchronous transfer mode (ATM) and long-distance, and recently, through the acquisition of Montage, it has the foundation of a managed services offering. Allstream has the ability in the midterm to be a viable competitor and is often the second vendor along with the incumbent in many deals. The challenge for Allstream will be maintaining a competitive edge with its minimal CAPEX and growing its customer base. Allstream represents a carrier ripe for acquisition. Rating: Promising. Bell Canada Bell Canada is wholly owned by BCE Inc., the dominant telecommunications company in Canada with CDN$19.8 billion in revenue. The key components of BCE having an impact on Bell Canada's capabilities are BCE Emergis in the e-commerce market and CGI in IT systems and outsourcing. Bell Canada maintains the premier market positioning through majority equity ownership in Aliant for the Atlantic Provinces and Bell West (60 percent Bell Canada and 40 percent MTS) and through partnerships with SaskTel and MTS. As a result, Bell Canada has the broadest national presence. A breadth of product and services in most of the telecommunications market sectors complements Bell Canada's strong Canadian coverage. Its weakness is in the area of hosting and applications. Its relationship with CGI would seem to negate this, but the ongoing operational working affiliation with CGI has never been optimal. Bell Canada's pricing strategy can still be aggressive, especially in the high end of the market, but this always requires another competitive bid to ensure it. Recently the company has had a spate of technology announcements, but rather than products, these have been "futures." Bell Canada had consistently been the Canadian carrier with the most vibrant marketing department. However, these announcements do not belie the fact that Bell Canada has been consistently reducing its CAPEX. In 2003, Bell Canada's 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4 December 2003

5 CAPEX has decreased 25.1 percent from 2002 and stands at 14.1 percent as a percentage of revenue. Teleglobe's departure from the BCE family has raised questions about global coverage and directions. Bell Canada still remains the safe choice with many network professionals. Rating: Positive. GT/360networks GT/360networks emerged from bankruptcy in 2002 after receiving finances from restructuring specialist Wilbur Ross. Subsequently, it acquired bankrupt GT Group Telecom and U.S.-based Dynegy and put in an offer for Touch America's private line and Internet business. The primary business of GT/360networks is wholesaling, which is not covered by this MarketScope. The advantage of GT/360networks to Canadian enterprises is the post-restructuring low-cost nature of its national network (nine out of 10 provinces). It easily has the potential to be the low-cost supplier for raw network services. In the other areas of its business, it does not have this luxury. The company sells and leases dark fiber and conduit, but its general direction is to sell lit fiber. GT/360networks addresses the small end of the market and has had some success in that area as the incumbents have generally battled for the large enterprises. The company offers an optical mesh fiber network based on Synchronous Optical Network (SONET) and Ethernet across Canada and the major U.S. centers. Because GT/360networks is no longer a public company, the transparency of its financial stability is always a question. However, with the right combination of low price and risk-segregated opportunities, it can be a viable niche competitor. Rating: Caution. Sprint Canada Owned by Call-Net Enterprises, with Sprint having 7 percent equity in the latter, Sprint Canada was one of the first carriers to restructure. In addition, similar to most carriers, it has gone through cost reduction and shedding of unsustainable business lines to the point that it is now selfsustaining. On the business side, Sprint Canada addresses primarily the lower end of the market and continues to leverage its relationship with Sprint to win multinational cross-border customers. Although it has a very low CAPEX to revenue of 4.3 percent for the first half of 2003, it does have the luxury to use the innovations coming out of Sprint. However, these new services have a lag time of up to a year. This creates an environment in which technology may be delayed, but equally it has been tested. Sprint Canada operates an Internet Protocol (IP) network in Canada covering all but the Atlantic Provinces, with coverage there through leased lines SONET. U.S. and global traffic is primarily routed via Sprint's corporate network Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4 December 2003

6 6 Turmoil Subsides, Canadian NSP Market Begins to Stabilize Over the long haul, Sprint Canada will continue to focus on expanding its share of the local residential service market. In the business segment, Sprint Canada will continue to focus on multinational cross-border customers. Rating: Promising. TELUS TELUS' North American coverage is provided through a 21 percent ownership by Verizon, and its Canadian coverage has been strengthened through acquisition. Although TELUS has made an effort to crack Bell Canada's home market of Ontario and Quebec (Canada's most populated provinces), it has been a slow process, and to date non-incumbent local exchange carrier (ILEC) revenue represents only 7.9 percent of TELUS' overall revenue. From a technological perspective, TELUS has upgraded its network to the point of being equal to if not more so than Bell Canada's. Bell's weaknesses of hosting and applications are TELUS' strengths. However, in the area of managed services, TELUS' managed security services are not as robust as Bell Canada's. Interestingly, Bell Canada's prowess in public relations and marketing is not repeated at TELUS, which often seems to have difficulty getting its story across, especially in Ontario. TELUS' recent labor strife and incidents of poor service put a short-term blemish on its customer support and service. Equal to Bell Canada, TELUS can price aggressively when pressured. TELUS' CAPEX equates to Bell Canada's from a percentage basis. For the first six months of 2003, the company's CAPEX is 14.6 percent of revenue, with year-over-year representing a 46.2 percent decrease. As Canada becomes an effective duopoly, the difference between the combatants, Bell Canada and TELUS, narrows. Rating: Positive. MarketScope Rating Framework A Gartner MarketScope rating does not imply that the vendor meets all, few or none of the evaluation criteria. The Gartner MarketScope evaluation is based on a weighted evaluation of each of the vendor's products compared with the evaluation criteria. Enterprises should consider Gartner's criteria as they apply to the enterprises' specific application requirements. Clients should contact Gartner to discuss how this evaluation may affect their specific needs. In Table 1, the various ratings are defined Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4 December 2003

7 7 Table 1 MarketScope Rating Framework Rating Strong Positive Description Solid provider of strategic products, services or solutions Customers: Continue investments Potential customers: Consider this vendor a strong strategic choice Positive Demonstrates strength in specific areas, but is largely opportunistic Customers: Continue incremental investments Potential customers: Put this vendor on a shortlist of tactical alternatives Promising Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured Customers: Watch for a change in status and consider scenarios for short- and long-term impact Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor Caution Faces challenges in one or more areas Customers: Understand challenges in relevant areas; assess short- and long-term benefit/risk to determine if contingency plans are needed Potential customers: Note the vendor's challenges as part of due diligence Strong Negative Difficulty responding to problems in multiple areas Customers: Exit immediately Potential customers: Consider this vendor only if there are no alternatives Source: Gartner Dataquest (November 2003) Bottom Line The Canadian NSPs represent a mature market. Between Bell Canada and TELUS, it is a duopoly, a situation that will remain for the near term. The number of other players will probably be reduced over the ensuing years. This reduction in all likelihood will be through acquisition or merger. Survival will be as much about determining and solidifying a market niche as it is about financials. Presently, these NSPs seem to be defining these niches. Depending on the requirements and the circumstances, each ofthefivecompaniescanbeaveryviableserviceprovider.bellcanada and TELUS provide a greater breadth of capability and, as such, will maintain a dominant market share. The positioning of Canadian NSPs, especially the niche players, will be determined greatly by the role of government, with regulation continuing to lean toward the niche players and changes in foreign ownership rules providing a potential stimulus to the niche players. The latter is often overemphasized. No matter who the owners are, the Canadian NSP market will remain an effective duopoly Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4 December 2003

8 Turmoil Subsides, Canadian NSP Market Begins to Stabilize Recommended Reading For additional information, see the following research on www.gartner.

8 8 Turmoil Subsides, Canadian NSP Market Begins to Stabilize Recommended Reading For additional information, see the following research on "Fixed Public Network Services Trends in Canada, ," TCPS- WW-MT-0171 "Canada: Fixed Public Network Services, ," TCPS-WW-MS "TELUS Network Services," DPRO "Allstream (formerly AT&T Canada) Network Services," DPRO "Bell Nexxia Network Services," DPRO Key Issue How do enterprises select and implement communications solutions, and how must vendors position themselves to be successful? This document has been published to the following Marketplace codes: TELC-WW-DP-0632 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

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