> Detecon Executive Briefing

Dr. Markus Steingröver

Markus.Steingroever@detecon.com

Retail versus Wholesale

Effectively soIving the
conflict between retail and
wholesale
The fear that wholesale offerings will cannibalize retail revenues is
often unsubstantiated. If systematically analyzed, it turns out that there
are only a few areas in which wholesale offerings will result in
dangerously empowered competitors in the medium term.

On the contrary, the strategic shaping of retail markets can often be

done more effectively using partnering with strong brand owners, who
bring in their own core competences.

Separating the wholesale from the retail activities can be a profit

maximizing strategy. Independent wholesale units are more likely to
follow a proactive and innovative approach. Conflicts between retail
and wholesale have to be solved at the group level by following a
“wholesale joins retail” strategy.

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Retail versus Wholesale

The question as to whether wholesale business should actively be pushed is one of the most
disputed issues for fixed or mobile incumbents. Most incumbents traditionally view
themselves as being retail companies and are sceptical with regard to providing
wholesale offers to other operators. This has historical reasons: in newly liberalized fixed
network monopolies, wholesale was a niche segment that became crucial for market
development. The new entrants’ business models were based to a large extent on these pre-
products. Incumbents tended to use wholesale products to influence market
development, as the retail market share needed to be protected. Wholesale products like
bitstream access were generally not offered with great enthusiasm, but mandated by the
NRAs, often after hard litigations with new entrants.

Operators normally change their attitude towards wholesale, when an increasing number
of their wholesale services begin to face competition from new fixed or mobile entrants who
have rolled-out their own infrastructure. Moreover, innovative wholesale products have
emerged from the IP revolution including Ethernet, IP transport, Enabling Services, VoIP,
IPTV and VoD. It is a strategic question whether these services are to be provided on a
wholesale basis. The retail perspective is to protect a USP by not selling these services to
competitors. But is this strategy optimizing the profitability of the whole company or does it
need a joint retail-wholesale approach?

To understand the nature of the retail-wholesale conflict, it is useful to distinguish between

services that have to be provided to fulfil regulatory obligations and those which are offered
because of competitive pressure on the wholesale market itself.

Example: fixed wholesale

Rationales
products categories

Network Multimedia Business

Leased Network
Infrastructure & Data Services Voice Services Internet and IT Operation
Capacity Access
Facilities Services Support

• Site • E1 • IP Bitstream • IP VPN • VoIP • IPTV • Billing

• Land • STM-1 • ATM Bitstream • IP Peering • Domestic IC • VoD • Collection
• Tower • Low capacity • xDSL resale • IP Transit • International IC • Enabling service • Planning
• Antenna • High capacity • LLU • Satellite • IC transit • Web Hosting • Network design
• Rooftop • Satellite link • Ethernet transport • IP interconnect • eBusiness • Optimization
• Collocation • Transponder • NGA • ATM • VAS voice • Maintenance
• Power supply • Wavelength • Network roaming • Frame Relay • Consulting
• Duct • WiFi roaming • SMS transport • VNO
• Access road • BWA • MMS transport
• Grounding • GPRS transport
• Facilities

1 2 3
Regulated Products Potentially Regulated Products Commercial Products

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Wholesale products can be grouped into three categories that reflect different levels of
regulatory intervention:

1. Regulated products: Wholesale offerings in this category are mandatory for mobile or
fixed incumbents. Hence, no real retail-wholesale conflict applies as incumbents do not
have the choice of refusing to offer or even fine-tuning product features.

2. Potentially regulated products: In this category there is a threat of regulatory

intervention. The strategic recommendation here is to proactively design wholesale
products that do not cannibalize the retail business. Examples include bitstream access
and naked DSL as well as sharing facilities such as ducts, sites or towers.

3. Commercial products: Includes all products which could be offered by alternative

carriers on a wholesale basis. In emerging markets these operators are often larger
mobile carriers. Incumbents do not face a retail cannibalization problem but should follow
a me-too or even better a “me-first” strategy.

It becomes obvious that what seemed at first glance to be a huge threat actually only applies
to the second product category. As a result the retail cannibalization problem can be reduced
to the question of how to deal with potentially regulated products.

At a general level wholesale business opportunities in this category should be actively

promoted if the following formula holds true:

Additional wholesale revenues – Retail loss > 0

A detailed business case is needed to calculate the revenue delta. In addition, the following
issues have to be systematically addressed:

1. Regulatory threats: Potentially regulated services can be designed in a way which

prevents the regulator stepping in. These offerings minimize retail cannibalization using
creative design and pricing schemes. At the same time they provide protection against
much more painful regulatory intervention. For example, many incumbents come up with
some form of resale-based bitstream access offerings before the regulator mandates a
broadband access product.

2. Competitors’ reactions: Competitors align their strategies to the wholesale market

environment created by the incumbent. BT for example is currently facing the problem
that competitors are migrating from bitstream to local loop unbundling – a medium term
reaction to the relatively high retail-minus-based bitstream access price. This example
shows that what might be beneficial in the short run may have quite painful
consequences in the medium run. By opening up their infrastructure, incumbents can
accelerate and support service-based competition rather than infrastructure-based
competition. This sustainable competition is also to the benefit of incumbents as they
can still sell large parts of their traditional value chain.

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3. Market structure & market dynamics: An isolated view of retail and wholesale
revenues is hardly possible as there is no pre-defined way of designing the wholesale
business. In order to take the full advantages of the wholesale business option for
incumbents into consideration, an advanced strategic approach is necessary. Such an
approach takes the medium and long term effects of wholesale offerings on market
dynamics into account. For example, by actively promoting wholesale transport services
or FTTH wholesale products market consolidation would be given a hefty push, which in
turn could be used to gain retail market shares.

A strategic approach can also be applied in marketing new retail services. The wholesale
service portfolio can be designed to support, sustain and develop existing, and future retail
business. Many incumbents are developing new multi-play products to try to establish
services like IPTV in an already saturated market. The argument that these services are a
retail USP and should not be offered to competitors neglects the opportunities provided by
wholesale offerings based on a partnering approach. This approach chooses wholesale
partners because of their core competences, i.e. strong and credible brands. These are used
to push the offering in the retail market. For example, a telco-marketed IPTV might not take
off, but strong promotion with a major Pay TV provider as partner might change this picture.

Organizing for success?

The retail and wholesale conflict can only be resolved at top-management level and may
involve changes in the organizational structure. The systematic exploitation of valuable
wholesale business opportunities is in many instances hampered by inadequate decision
processes or inefficient committee structures. Related issues are often subject to informal
meetings/committees with no official decision-making power and with unclear responsibilities
leading to insufficient solutions. Often this is combined with frictions in delivery channels and
a poorly defined allocation of customers to the enterprise or wholesale segment.

An example of a well-designed organizational model is the separation of the retail and the
wholesale business. Independent wholesale units are more likely to follow a proactive and
innovative go-to-market strategy. A specific management approach to the retail vs.
wholesale dilemma includes the establishment of a superior committee within the
organization focused on the strategic goals of the whole company. This committee then
institutionalizes the joint enabling of the wholesale and retail business.

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Conclusion & Recommendations

A careful and systematic analysis of the retail versus wholesale conflict will in most cases
show that wholesale can add a positive net effect and improve the overall performance of the
company.

The wholesale products and the commercial conditions under which these are provided
should be carefully designed to support a “wholesale joins retail” strategy. This strategy
anticipates market dynamics by taking competitors’ reactions into account. Incumbents
should change their mindset with regard to wholesale by following a proactive approach,
and also start integrating complementary market players into their retail strategies.

An appropriate organizational structure can support a constructive approach and decision-

making. If the retail-wholesale conflict is addressed at the CEO level, it ensures a fair
balancing of arguments and a profit optimizing strategy for the whole company.

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