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Wholesale VoIP Feature Article

Greater Reliance on Wholesale in Telecom Future

May 02, 2012

By Gary Kim, Contributing Editor

Target (News - Alert) is not happy about "showrooming," the practice by which many consumers simply examine products they end up buying online. Target now appears to be concerned enough about lost sales to Amazon that it will stop selling Kindles in May 2012.

Every firm has to decide what to do about competition, and Target seems to have no similar qualms about selling Apple (News - Alert) tablets. In fact, Target is preparing to launch Apple Stores inside Target locations.

The Kindle Fire was Target’s best-selling tablet during Black Friday (News - Alert) 2011, since the retailer began selling Amazon's Kindle line back in 2010.

The new deal with Apple is said to represent a "conflict of interest."  Target's move, in one sense, isn't unusual. Lots of distributors have special deals with certain suppliers, and Target might be betting it will make more money selling Apple tablets than Kindles. There might be clauses in the deal that require Target to remove Kindles. It just isn't clear.

But Target and Best Buy (News - Alert) might be heading in opposite directions in dealing with "showrooming." Target has asked its suppliers for special "Target only" merchandise, for example, to limit the "showrooming" impact. That might be likened to mobile phone "exclusives" offered by mobile service providers.

Best Buy, on the other hand, is mulling a shift in the opposite direction. Best Buy has, like Target expects to do, supported Apple mini-stores inside Best Buy locations for quite some time. But Best Buy might consider shifting even more fundamentally in that location, essentially allowing many other suppliers to rent space inside Best Buy as a primary revenue model.

In telecom terms, Target wants to remain a retail supplier, where Best Buy could move in the direction of a major reliance on a wholesale role in the value chain. Target's strategy is the more common approach in the communications business, where nearly all the money is made selling products directly to retail end users.  

Best Buy might be considering a shift to a "Clearwire (News - Alert)" style, wholesale-only strategy that is relatively uncommon in the communications business. Where the retail Target strategy rests on revenues created by end users, the wholesale strategy rests on sales of products to business partners.

Where Target is a business-to-consumer model, Best Buy might be contemplating a shift to a business-to-business model.

Generally speaking, the direct to end user “retail” strategy offers higher profit margins, but more operating cost. The wholesale approach features lower profit margins, but less operating cost. Either choice can work.

Over time, though, it is likely that virtually all tier-one service providers will have to consider a greater reliance on wholesale operations, or at least sales of network features and capabilities to business partners who buy features and then create retail products for sale to end users.

In that sense, a “two-sided” business model with sales to end users and business partners would move practitioners in the direction of greater wholesale operations. There are precedents.

Business phone systems represent a scenario where the customer creates their own voice services, rather than buying from a communications service provider. On the other hand, those derived voice operations do require purchase of “bulk” connectivity services that resemble wholesale offerings.

Many of the proposed new lines of revenue, ranging from cloud computing to machine-to-machine services, ad networks and banking and payment services, have some potential amount of wholesale character.

One way or the other, it appears most tier-one service providers ultimately will feature more wholesale services.

Edited by Braden Becker

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