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Loosely Coupled weblog

Friday, March 12, 2004

Up the stack

Grand Central's deal with AT&T is a terrific endorsement, but will it bring in any new business? It was cunning of the telco to launch WebService Connect with a live customer already in place, but of course Thomson Financial was already a longstanding customer of Grand Central's. So it's rather disingenuous, to say the least, for AT&T to describe Thomson as one of its first customers, when Thomson came already bundled with the product, as it were.

One of the things that I've found very interesting over the past year has been the way that telecoms carriers have been climbing onboard the web services bandwagon. The first was BT, which launched a hosted web services offering, initially with Flamenco Networks, and then later with AmberPoint. Actional, whose website (at the time of writing) also claims AT&T as one of its customers, has MCI on its books.

Carriers have a dual interest in web services technology. On the one hand, telecoms as an industry has always been an early adopter of information technology, so they're all testing it out for use in their in-house operations — in fact, the first case study we published on Loosely Coupled described how BT was using web services to integrate customer service applications (see EAI? Keep it simple, says BT). But much more important is their expectation of new revenue streams from offering hosted web services infrastructure to their customers.

The carriers' traditional revenue streams are still strong, but their ability to harvest enormous profits from those revenues is fading fast. Behind the headlines of the dot-com bust, a much bigger collapse was taking place as the next-generation telecoms industry imploded. There's enormous spare capacity out there today, and companies like MCI (the former WorldCom), XO and others have had much of the cost of building it wiped clean by their passage through Chapter 11 bankruptcy. Further price competition is on the way from structural changes like the emergence of low-cost Voice-over-IP (VoIP), which challenges the profitability of long-distance telephone, and cellular WiFi, which allows subscribers to connect to the network without having to pass through the local phone company's cables.

Faced with these challenges, carriers look to web services as their opportunity to move up the stack, away from unprofitable physical networking, into much more lucrative value-added software networks. They reason that they have a proven, trusted track record of providing reliable voice and data network services to their customers. Therefore, they believe, it's only natural that their customers will turn to them for the next generation of software networks based on service oriented architectures.

I'm interested to see this happening because I witnessed the carriers getting equally excited just a few years ago about the emergence of application service providers. They saw themselves as the natural providers of hosted applications to their customers, and they invested millions of dollars in positioning themselves for a lucrative market ... that never emerged.

Several years later, hosted applications are finally emerging, but from a completely different quarter than the carriers had predicted. And I think the same thing will happen with the carriers' efforts to position themselves to win the web services market. The fundamental flaw with their thinking in both cases is the concept that they're simply offering a different kind of network infrastructure proposition. Customers are not investing in web services because they love infrastructure. They're investing because they want specific business results. If they're interested enough in the infrastructure per se, they'll want to build it themselves. If they're not, they'll turn to providers who can combine infrastructure with finished services to run over them. That's why AmberPoint will probably make a lot more money from having value-added B2B network operator GXS as a customer than it will from BT. And why Systinet will do well out of providing the infrastructure software for Amazon's supplier network.

As for Grand Central Communications, the deal with AT&T puts it firmly on the map. But if it's hoping to get somewhere, it mustn't rest on its laurels and expect AT&T to gain any traction. I shan't be at all surprised if most of WebService Connect's early customers end up being introduced in the same way as Thomson Financial. Grand Central understands what it's offering. AT&T may think it does, but I doubt it really has a clue.

PS [added March 15]: More evidence that infrastructure providers don't understand application provision came in last week's news that hosting provider Interland has called time on development of Trellix, the hosted website creation business that it bought a year-and-a-half ago. Trellix (which once played a part in keeping Blogger going during a tough patch) was the brainchild of VisiCalc founder Dan Bricklin, who announced the shutdown in his blog last week: End of an era as Trellix office closes. If a website hosting company like Interland can't get to grips with a hosted website builder like Trellix, what chance does a telecoms company like AT&T have with an application infrastructure proposition like WebService Connect? Believe me, the skills just aren't transferable from one layer of the stack to another. They're absolutely different worlds.

posted by Phil Wainewright 10:22 AM (GMT) | comments | link

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