After being largely off the radar, Virtual Network Operators (VNOs) are claiming a measure of success—yet another sign the telecom industry is finally rebounding after a long downturn. VNOs are so labeled because they generally do not have any infrastructure of their own. However, they provision network services to carriers, IT outsourcers, and enterprise customers by utilizing the services of numerous wholesale carriers, on local, regional, national or global basis. Having the flexibility to shop among multiple carriers to meet client requirements, VNOs are able to deliver a selection of services at competitive prices. Theirs is an enticing value proposition: a customer that might have to use multiple carriers around the globe now only has to deal with one provider, the VNO. There are currently only a handful of VNOs, but all claim high margins and an expanding customer base.

The first, largest and oldest is Vanco, which has been in existence since 1988 when CEO Alan Timpany purchased Vanco, an unprofitable data-services company for £1. Timpany’s mission was to make Vanco the first Network Service Provider without its own infrastructure. Vanco succeeded, and its services now include:

• Data services (such as MPLS Matrix, which integrates MPLS paths from multiple service providers and supports CoS and end-to-end SLAs);
• IPSecure, (IPSec with SLAs)
• Hybrid – incorporates multiple technologies;
• Converged services (VoIP)
• Remote access;
• Security services.

Vancos’services are available in 230 countries and territories and its global deployment of Network Management Centres provide local service and support of clients’ networks. Since Vanco owns no assets, it can combine services from multiple carriers to build a custom solution for clients, one that offers them an attractive combination of availability, price and service. Vanco has over 200 multinational customers and claims an enviable churn rate of 0.5 per cent.

In 2005, Vanco purchased Chicago-based Universal Access (UA), a company focused on provisioning and management services to US and international carriers and also to integrators. In addition to UA’s sophisticated software, the acquisition has given Vanco UA’s US-customer base, its long-term relationships, and access to UA’s unique web-based pricing and design software.

For the year ended January 31, 2006, Vanco’s revenues increased 41 percent to £146.6 million. The company also signed on several new customers in the past year, the most impressive a 10-year contract signed with Swisscom in 2005. The contract is the first of its type for a Tier 1 telco. Vanco will supply and manage the networking requirements of Swisscom’s multinational customers outside of Switzerland and Liechtenstein. Vanco’s other recent telco clients include Sparkle and Asianetcom, and it also boasts several marquee enterprise customers, including British Airways, Siemens, Avis Europe, Pilkington, Virgin Megastores and Ford Motor Company.

Sirocom is another UK-based pure-play VNO, specializing in building and maintaining virtual private networks (VPNs) and remote workforce solutions for enterprises. Sirocom has over 500 corporate and government customers, including Abbey, HSBC, ARM, STA Travel, BSkyB, Reed, JD Sports, Royal Borough of Kensington and Chelsea, Alliance Pharmacy and Cadbury Schweppes. Privately-held Sirocom claims ten consecutive years of double-digit revenue growth, with profits increasing every year, and an overall operating margin of 39%-40%. Sirocom’s online suite of network administration tools, FlexiVision, provides customers with monitoring, controlling and management capabilities.

In November, 2005, Sirocom became the first VNO to unveil voice/VoIP options. The first product, VoIP Blend, is for customers who want a circuit-to-pack migration option for voice services. VoIP Blend gives customers the flexibility to transfer as much of their voice traffic onto an IP network. The other product, IP Central, provides full migration to VoIP, with complete redundancy and the ability to change between service providers.

McLean, VA-based Global Internetworking, Inc. (GII) describes itself as a telecom service integrator as well as a consultant specializing in WAN design, data communication and connectivity, and managed network services. Although GII does own a limited amount of network infrastructure in strategic locations, and will acquire, manage and operate network facilities when it best serves a customer's requirements, it acts primarily as a VNO. Its data transport and connectivity services include:

• Private Line (U.S. and International)
• IP Access and Transit;
• Ethernet;
• Private Line Multi-Hub;
• Gateway Hub;
• Wavelengths.

GII also offers managed IP VPN and co-location services in addition to its WAN design consulting. Its key areas of growth include MSOs, wireless carriers and international carriers coming to the US for partnerships. International carriers, who view the US market as being too fragmented and complicated to navigate, see benefits in using the services of a VNO. GII claims that since the last mile piece is often 80% of the total cost, its ability to find less-expensive metro transport gives it an advantage for its customer base of service providers and enterprises. However, major players like AT&T will use their own metro access networks, GII points out, rather than seek out more potentially efficient routes.

GII offers a number of unique software features to its customers. Its pop2pop.com pricing portal provides customers real-time pricing for private line, IP and Ethernet services throughout the U.S. In addition, GII’s proprietary Consolidated Management Database is critical to its facilities-neutral model by allowing it to identify, in a matter of seconds, the cost-efficient service options between tens of thousands of domestic network POPs and lit buildings and the transport routes connecting those locations as offered by hundreds of providers. GII recently unveiled its IP Access Price Index. Based on the pop2pop.com portal for its newsletter subscribers, IP Access Price Index offers a snapshot of costs and speeds for dedicated Internet access. GII also recently announced agreements with KPN of The Netherlands and Australia’s Telstra to increase its ability to serve customer requirements in Central and Eastern Europe and Pacific Rim markets.

In 2006, GII added professional services to its product portfolio. Leveraging its engineering expertise, carrier-neutrality and software tools, it is targeting three customer requirements: network continuity planning; network transformation/convergence planning; and network opex reduction.

In May, 2006 Mercator Partners Acquisition Corp. announced its intent to acquire Global Internetworking as well as a UK- based VNO, European Telecommunications and Technology (ETT). Mercator will pay approximately $63.1 million for the two companies.

Michael Keenan, GII’s co-founder and CEO will be CEO of the newly combined company. Following the merger of GII and ETT, Mercator intends to change the company’s name to Global Telecom and Technology. Together the companies have over 200 customers.

VNOs say their ability to offer a variety of service and pricing options has played a role in the price stabilization now occurring in the long-haul IP, DS1/DS3 space. Price variation is still significant among carriers—Tier 1 carriers charge more for comparable routes to comparable locations than Tier 2 carriers.

VNOs offer a compelling solution that can be ideal for multinational enterprise customers as well as telcos. They simplify procurement of best-of-breed services, freedom to choose from any carrier, lean management processing and tools, and experience in managing services and supporting customers.

The barriers to entry are fairly high for VNOs, which helps to explain why there are only a few operating at this time. A single customer can require the use of many different carrier networks. VNO’s have to be able to track and manage services over multiple carrier networks, pricing among hundreds of carriers, all of which demands sophisticated software and expertise. Since VNOs provide a single bill to customers (which might be developed from many invoices from various carriers), their back office systems must be robust. Consequently, aside from Vanco, most VNOs are significantly smaller in scale and also rely on their own asset-based services..

Understandably, asset-based carriers question the VNO business model, saying that since they own and manage the networks themselves, they are better suited than VNOs to provide services to large corporations. They point to their long-standing relationships with some of the largest corporations, and note that these customers prefer a single, trusted partner.

VNOs, on the other hand, argue that they provide more flexibility and better pricing than asset-based carriers. As a validation of their business model, they point to their several multinational corporate customers as well as a growing base of telco accounts. With enterprise CIO/CTOs focused on cost savings, VNOs say it is not enough to issue an RFP. They say customers want a range of options, footprint, and service providers to choose from, and, of course, better pricing--a factor that may be driving some of the mergers that are occurring in the industry. VNOs also say that in the long run their business model is more viable and that customers will prefer their services over those offered by asset-based carriers.

There is truth to the claims of both the VNOs and the asset-based carriers, but clearly one will not win at the expense of the other. Some customers will prefer the flexibility, management, and pricing VNOs offer, others will want their traffic to be handled by one carrier. Indeed, asset-based carriers may already act as VNOs from time to time, commonly using broadband, WiFi and other suppliers globally to provision services for their customers.

The VNO business model has already attracted investors such as Mercator Partners who feel that demand for carrier-independent solutions from VNOs will only increase.

Looking toward the future, VNOs appear set to continue their growth and market reach. The sophistication of their integration and software solutions is key and will enable them to expand their client base of large enterprises, systems integrators, VARs, and increasingly other carriers. Pricing will be less of a determinant going forward, with flexibility and service management playing a greater role. Asset-based telcos will still be preferred by many customers, and when the infrastructure is not in place, these telcos may act as VNOs for specific customers from time to time by purchasing services from others and managing and integrating them to meet customer needs. It can safely be said that the VNO approach may benefit all service providers in some fashion.