Verizon's Shammo wants more enterprise customers to migrate to IP services

August 17, 2012 | By Sean Buckley

Fran Shammo of Verizon (NYSE: VZ) said on Wednesday that the telco plans to drive more of its business customers off of the legacy frame relay and ATM-based networks to its all-IP network.

Like other major telcos—particularly its large ILEC counterparts AT&T (NYSE: T) and CenturyLink (NYSE: CTL)--Verizon continues to struggle with migrating its legacy revenues to IP revenues.

Speaking at the at the 15th Annual Oppenheimer Technology, Internet and Communications Conference in Boston on Wednesday, the obvious challenge, Shammo says, is that it still has a lot of customers on its legacy frame relay and ATM networks.

The telco has given those customers an end date where they either have to convert to an IP platform or work with another service provider to get their service.

"If you look at technology change, we have been in the IP world for a number of years, but we still have customers that are on IP/VPN, frame and ATM, but they have to go away," said Shammo. "We can't continue to invest in those networks and we can't continue to dedicate resources to that platform."

Shammo added that these while there's a lot of benefits for customers to move to IP, he realizes there's a lot of cost involved with making that switch. 

"From a moving forward down the road perspective, these customers have to move to IP—there's too much benefit for them not to move—but there's some capital intensity for these customers to move," he said. "The question is do I take the capital I invest to keep that platform alive or take that capital and help the customer move their network to IP and realize the benefits."

While these moves create pressure on their top line, the end result is these measures will improve their margins of the overall enterprise space.

Complementing its IP migration drive is the move into new spaces like data centers and machine to machine (M2M) via its acquisitions of Terremark and Hughes Telematics. These platforms provide greater value beyond traditional voice and data services that have become commoditized.

Since it's continually investing in the network every year, being able to reach its customers via its fiber network is not a problem to serve its enterprise customers.

"Our issue is not coverage," Shammo said. "Our issue is voice and data has been commoditized so the issue is how do we add the value on top of that core voice and data and build on top of things like Terremark and the cloud perspective and bring in the Hughes platform that can sit in the Terremark cloud and drive those types of solutions into the enterprises."

Of course, in the near-term the reality is that its migration to IP drains overall enterprise revenues.

During the second quarter, Verizon reported that enterprise revenues were $3.8 billion, down 3.4 percent compared with second-quarter 2011. However, strategic service sales, including Terremark and Ethernet, were up 4.4 percent during the quarter.

"Our IP revenue stream is in fact growing, but the issue is you don't see it because we have all this legacy voice and data that is just declining, and you see that in our wholesale business as well," Shammo said. "The key for us is to transition everybody over to this IP platform and be able to build a value proposition above this IP platform."

Cloud, via Terremark, has become a key point of the new direction for the telco.

A year ago customers had little, if any interest in putting their applications into their cloud, but Verizon is seeing that mentality begin to change as more businesses look to reduce their IT cost structure.

"You're not going to move everything to a cloud because there are certain things you want to hold to the vest, but there are other things that are not strategic to your business that you can get a 10-30 percent reduction in cost," he said. "That's the easy piece."

To help assist customers in moving their apps from their facilities and into the Verizon cloud, it will employ the help of CloudSwitch, a cloud software company it purchased earlier this year.

"We invested in CloudSwitch to have that software to move that application over to the cloud without any disruption and move it back," Shammo said.  

Besides the legacy-to-IP migration and cloud services, the service provider would like to get out of the standalone CPE supplier business, one that's not exactly profitable.

"If we sell CPE in a bundle with managed services it makes all the sense in the world to that, but if people are going to come to me for a server that I drop ship to them that's not the business I need to be in," he said. "It's an extremely low margin business and it's not good for me to be in that business."

Shammo added that it is moving away from the CPE business, which is putting pressure on the company's top line.

"Coming out of the out of the second quarter [CPE] was $84 million of my increase on a year-over-year basis, but that business is business that others can do better."