With due deference to Confucius, we are indeed living in interesting times! Over the 20 years since Tim Berners-Lee invented the World Wide Web, GSM started to roll out, market liberalization of communications took hold worldwide and Moore’s Law proved itself time and again, we have been living through a revolution with implications at least as profound as the invention of the wheel and the printing press.
As the world recovers from a deep recession, that revolution continues to gather pace. The merging of previously separate industry segments to form the Telecom, Media and Technology (TMT) market is simultaneously creating significant opportunities and threats to each component industry. The big issue now in the boardrooms of players in each segment is who will be the winners and losers of this revolution over the coming years.
The common denominator in any future scenario is the availability of ubiquitous, fast, reliable communications – the core enabler of all digital services from cloud to the iPad, from app stores to mobile banking. Yet despite seeing massive growth in communications bandwidth demand (for example AT&T estimates that they have had a 5000 percent growth in mobile data in the past 3 years), growing revenue will be tough, leading to some big concerns looming in the minds of CEOs.
Adapting to change
So data volumes are certain to spiral along with costs, but revenues are nearly flat. IDC and Gartner estimate worldwide revenue growth of the IT sector at 3.3 percent in 2010, while communications is expected to grow only a paltry 1.8 percent – and that positive growth masks some significant declines. Wireline services are expected to continue their decline by around 4 percent, with the only bright spot being mobile data growth expected to be around 12 percent.
Across the globe, significant variations in growth also mask the true picture – huge continuing growth in parts of Asia and revenue declines in many mature markets. The “crunch” issue is that as markets for voice and messaging services saturate and offer low or negative growth, the demand for fixed and mobile bandwidth is soaring, driving huge increases in network capacity (and therefore capital expenditure) yet generating little new revenue.
So my often quoted “eternal triangle” of simultaneously driving new revenues, improving customer loyalty and cutting costs comes into play as never before. It’s no longer theoretical or something to do in the future; the need to adapt to the new world very quickly is now very real. Most available investment capital will be increasingly diverted to expanding the capacity of the network, putting yet more of a squeeze on IT budgets and operating costs. And while all 3 factors of that triangle are all able to improve the corporate bottom line, CFOs of the world view the promise of new revenue with skepticism while regarding cost cutting as much more tangible.
Rethinking business models
So after predicting for years that service providers (and therefore their suppliers) will eventually have to seriously rethink their business models and processes to dramatically cut their cost base and improve agility, a number of market and economic factors are combining to make that need happen very quickly.
Looking ahead over the rest of this year and beyond, there are a number of key factors emerging that will have a significant impact on the core strategies of communications service providers, including:
Service providers will accelerate pressure on cutting operating costs. As price pressure increases, operators will strive to maintain margins through continual reductions in operating costs and examining ways to become ever more efficient on their core service delivery. This will be most marked in highly competitive, mature markets and in operators most exposed to fixed-line substitution by mobile.
Capex pressure on IT budgets may increase. As pressure to expand network capabilities to keep up with growing bandwidth demands increases, capital spending may be increasingly diverted to network investment. IT investment may increasingly move from capital to operating cost, especially if cloud services become common. Investment cases for IT will become more stringent.
Growing bandwidth demands will accelerate network rationalization. The rise of applications and content driven by network-based devices (smartphones, tablet PCs, Internet-based TV, cloud services, etc.) is set to drive access and core network capacity into a typical “Moore’s Law” position. It is likely that this investment will not be matched by linear increases in revenue, and this will accelerate the move to highly rationalized, single, multi-service IP networks in both core and access networks. This will accelerate FTTx fiber fixed access and 4G/LTE mobile access investments.
Infrastructure sharing, consolidation and outsourcing will continue to grow. The market economics of significant bandwidth increases not matched by revenue increases will accelerate the trend towards a smaller number of larger networks through a mixture of merger/acquisition, infrastructure sharing and outsourcing moves. Achieving the resultant integration issues and driving real economies of scale will continue to be problematic, driving the need for better planning and execution of such moves.
New service revenues will continue to prove hard to get. Despite the growth of mobile broadband, candidates for truly new revenue sources (e.g. mobile money, cloud-based services, IPTV, app stores, etc.) will continue to be proposed and trialed. However, the likelihood is that the failure rate on these will be high and margins will be thinner than in the past as revenue will often need to be shared with partners. Existing and new regulatory constraints (such as net neutrality) will continue to play against new revenue exploitation for service providers in many markets. The ability to launch new services quickly and easily and operate them across value chains at low cost will continue to grow in importance. There may be a new round of M&A and diversification strategies as service providers seek to acquire new revenue streams rather than growing them organically.Market share management will become increasingly important. In mature, saturated markets, the easiest path to growth is through taking market share from competitors. Pricing is obviously important, but the importance of a good customer experience to drive up loyalty is beginning to be better understood and practiced in the communications sector. An increasing emphasis on reducing churn and increasing “wallet share” through improved customer experience is likely.
Cloud services will become increasingly important to communications players. Recent service outages from major cloud providers made clear that many cloud services lack service persistence, governance and accountability. More fleet of foot communications players will move to leverage their service management strengths and provide enterprises with secure and sophisticated managed cloud environments with service performance guarantees. Key functions may include overseeing service delivery, SLAs, federation, orchestration, security, governance, billing and settlement.
A tipping point
Twenty years ago, the process and systems engineering to create, deliver and monetize services were largely done in-house by service providers employing large software teams. In the past decade, much of this has moved to using systems integrators and deploying commercial systems, though these have often been highly customized to fit legacy work practices and preferences. As this shift has occurred, the supply side has consolidated from hundreds of small software companies providing niche products, to a small number of large companies providing broad solutions. Going forward, simple economics dictate that we are likely to see a much greater use of standards-based, commercial-off-the-shelf systems that are able to share information and be integrated simply and easily both within the service provider and among trading partners. In addition, we are likely to see continued growth of operators using managed services (outsourcing) of network operations and/or IT operations. Cloud-based services may also become a major factor in improving business agility and reducing costs.
It’s clear that the communications industry is currently at a critical juncture and desperately needs to shift from very inefficient, slow and cumbersome approaches to service creation and delivery to a very agile, highly efficient approach based on standardized processes, information and systems integration provided by a highly competitive and efficient supplier base.
We’re seeing a radical change taking place that will transform the communications industry as we know it. The days of fat margins and heady growth are gone, and now it’s the hard graft of doing what many other industry have baked into their DNA – continuously doing more for less. We truly are living in interesting times!
Keith Willetts is chairman and CEO at TM Forum