Telcom Industry Review and Future of Telcom Providers - Telco 2015


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How will the Telcom industry evolve over the next five years? Will telcom providers strategies be proactive or protective? Our research suggests four plausible scenarios and the events that would signal their unfolding. More important, we outline the characteristics of companies most likely to succeed in each of these possible futures.

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Telcom Industry Review and Future of Telcom Providers - Telco 2015

  1. 1. IBM Global Business Services TelecommunicationsExecutive ReportIBM Institute for Business ValueTelco 2015Five telling years, four future scenarios
  2. 2. IBM Institute for Business ValueIBM Global Business Services, through the IBM Institute for Business Value, developsfact-based strategic insights for senior executives around critical public and privatesector issues. This executive report is based on an in-depth study by the Institute’sresearch team. It is part of an ongoing commitment by IBM Global Business Services toprovide analysis and viewpoints that help companies realize business value. You maycontact the authors or send an e-mail to for more information.Additional studies from the IBM Institute for Business Value can be found
  3. 3. IntroductionBy Ekow Nelson and Rob van den DamDespite the run-up in mobile revenues over the last few years,communications revenue growth is beginning to falter as voice markets in developingcountries saturate. While the global digital renaissance has yielded pockets of success andopportunity for telecom providers, content and connectivity revenues have not offset thedeclines. How will the industry evolve over the next five years? Will provider strategies beproactive or protective? Our research suggests four plausible scenarios and the events thatwould signal their unfolding. More important, we outline the characteristics of companiesmost likely to succeed in each of these possible futures.The telecommunications industry has experienced more IBM research suggests that the outcomes for several importantchange in the last decade than in its entire history. In 1999, industry trends are highly predictable.1 Conversely, we haveonly 15 percent of the world’s population had access to a identified 13 significant variables from a larger pool oftelephone; by 2009, nearly 70 percent had mobile phones. In unknowns that will also have significant impact on the industry.addition to this phenomenal growth in mobile communica- The outcomes of the 13 variables are far from certain and falltions, the past decade also brought steep declines in public into two main categories: potential areas of growth and theswitched telephone network (PSTN) voice revenues, an competitive structure of the industry. Mapping the extremes ofexplosion of over-the-top (OTT) communication services and the possible outcomes related to these uncertainties revealsglobal industry consolidation (see page 27 for a glossary of four contrasting scenarios depicting what the industry couldcommon telecommunications terms and abbreviations). There look like five years from now.were even ground-breaking decisions by some Telcos tooutsource functions as core to their business as their physical Four future scenariosnetworks. Survivor Consolidation: Reduced consumer spending leads to revenue stagnation or decline. Service providers in developedFueled by rapid growth in developing countries, mobile markets have not significantly changed their voice communica-communications have propped up the industry’s top line. But tions/closed-connectivity service portfolio and have notnow with these markets saturating, communications revenue expanded horizontally or into new verticals. Investors’ loss ofgrowth is stalling. Expected content and connectivity-related confidence in the sector produces a cash crisis and elicitsrevenues have not risen quickly enough to compensate. industry consolidation.Although increases in mobile Internet usage offer a glimmer ofhope – along with a host of operational challenges – thetelecom industry faces some serious questions: Where willfuture growth come from? How will the industry evolve?
  4. 4. 2 Telco 2015Market Shakeout: Under a prolonged economic downturn or Our modeling of the four scenarios suggests Generative Bazaara weak and inconsistent recovery, investors force providers to as the most attractive outcome in terms of revenue, profit-disaggregate assets into separate businesses with different ability and cash flow projections, followed by Clash of Giants.return profiles. Retail brands emerge to collect and package Survivor Consolidation and Market Shakeout are clearly lessservices from disaggregated units. The market is further attractive scenarios, both of which imply a contracting andfragmented by government, municipality and alternative challenged industry. If the current growth model, based on anproviders (e.g., local housing associations or utilities) that ever-expanding customer base, persists, the industry is likely toextend ultra-fast broadband to gray areas, while private experience flat or declining revenues. In such a case, Survivorinfrastructure investments are limited to densely populated Consolidation or Market Shakeout would be the mostareas. Service providers look for growth through horizontal plausible outcomes.expansion and premium connectivity services sold to applica-tion and content providers, as well as businesses and To return to strong growth, the telecom industry needs to actconsumers. collectively to create the conditions necessary for the more dynamic and profitable scenarios of Clash of Giants orClash of Giants: Providers consolidate, cooperate and create Generative Bazaar. They can begin to accomplish this throughalliances to compete with OTT players and device/network greater global industry cooperation on common capabilitiesmanufacturers that are extending their communication and platforms to improve competitiveness with global OTTfootprints. Mega-carriers expand their markets through providers. The role of service providers can be enhanced inselective verticals (e.g., smart electricity grids and e-health) for adjacent vertical markets, enabling new business models inwhich they provide packaged end-to-end connectivity health, smart grids, transport, retail, banking and Telcos develop a portfolio of premium network Further growth can be achieved through pervasive, openservices and better-integrated digital content capabilities to connectivity for any person, object and a multitude ofdeliver new experiences. connected devices by stimulating third-party innovation and leveraging customer and network insights to deliver newGenerative Bazaar: Barriers between OTT and network experiences that help to accelerate the evolving digitalproviders blur as regulation, technology and competition drive access. Infrastructure providers integrate horizontally toform a limited number of network co-operatives that providepervasive, affordable and unrestricted open connectivity to anyperson, device or object, including a rapidly expanding class of As growth and revenues from traditionalinnovative, asset-light service providers. services stall and data and content struggle to compensate for declines, the industry faces a range of uncertainties and must prepare for a number of alternative scenarios.
  5. 5. IBM Global Business Services 3More change in the last 10 years than the During the same period, fixed telephony (PSTN) linesprevious 100 and voice revenues continued their long-term decline inThe way in which the world communicates has changed more advanced markets where the volume of mobilein the last decade than in all previous history. In this section, telephony voice minutes increased at the expense ofwe explore the following critical changes and challenges: fixed telephony. In 2008, for example, outgoing fixed voice traffic in the EU-5 markets – France, Germany,• The mobile migration Italy, Spain and the United Kingdom – amounted to• The changing face of communication 560 billion minutes or 53 percent of total minutes of• The challenge to monetize content use (MOU), down from 645 billion minutes and 72• The decoupling of traffic and revenue percent MOU in 2003.3 In 2010, mobile is expected for• The flight from the network. the first time to carry more outgoing voice traffic than fixed telephony.4The mobile migrationIn 1999, more than a century after its invention, less than one After a decade of meteoric increases, global mobilein six people in the world had access to a telephone of any kind. growth has begun to stall. In 2008, revenue growth fellBy 2009, mobile telephony was accessible for seven out of ten below double-digits for the first time.5 In somepeople worldwide (see Figure 1).2 advanced countries, overall mobile revenues are expected to decline for the first time during 2009-2010.6 Average revenue per user (ARPU) has actually beenper 100 declining for some time. For example, ARPU for Italianinhabitants telecommuniations companies declined from almost 80 Mobile cellular telephone subscriptions €30 per month in 2004 to just over €20 per month in 70 Internet users 2008.7 Fixed telephone lines 60 Fixed broadband subscribers Over the decade, emerging markets demonstrated their 50 ability to make profits from low ARPU users, as telephony was for the first time extended to many new 40 consumers. In 2008, average EBITDA (earnings before 30 interest tax, depreciation and amortization) levels for 20 the mobile telecom industry in South Asia ranged from 45-65 percent, with ARPU levels below US$5.8 This 10 was driven, in part, by significant increases in MOU and 0 innovative cost-management models. From Q2 2008 to ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 Q4 2009, for example, Bharti Airtel roughly doubledSource: International Telecommunications Union (ITU) ICT Statistics Database, http://www.itu. the total volume of traffic on its network, from over 64int/ITU-D/icteye/Indicators/Indicators.aspx. (2009 figures are estimated); “The world in 2009:ICT Facts and Figures,” ITU Geneva 2009, billion minutes per quarter to 130 billion minutes.9flyer.pdfFigure 1: Mobile cellular telephony has exhibited strong growth overthe past decade.
  6. 6. 4 Telco 2015Emerging market expansion has also begun to falter. From revenues, 1 percent of fixed telecom revenues and 1.5 percent2005-2009, revenue growth from telecom services declined 14 of broadband revenues. Our most optimistic view forecastspercent in the Middle East and Africa, 11 percent in Latin IPTV revenues at US$17 billion and 6 percent of the pay-America, 8 percent in Brazil, Russia, India and China (BRIC), 4 television market in 2012.percent in North America and 1 percent in Europe (excludingRussia).10 In emerging markets, adoption of mobile messaging-based applications that leverage two-way/premium SMS is growing,The changing face of communication as well as Unstructured Supplementary Service Data (USSD),Over the past decade, Internet access and connectivity shifted to deliver public information and advisory services to ruralfrom dial-up to broadband. Higher data speeds through Digital communities. These applications also allow mobile paymentsSubscriber Line (DSL), cable modem and fiber access tech- and money transfer services. They can also provide basicnologies enable users to communicate in more innovative ways. banking services in countries where such services are relativelyToday, communications are fragmented across online services under-developed or unavailable.(VoIP, peer-to-peer, social networking, e-mail, instantmessaging, blogs, forums, wikis and more) and telecom services The decoupling of traffic and revenue(fixed and mobile voice, SMS, MMS). While non-traditional One of the brightest spots in the industry toward the end ofcommunication services in advanced markets have grown the decade was the phenomenal growth of mobile broadband,overall, outgoing call minutes from traditional telecoms have facilitated by the rollout of High Speed Packet Access (HSPA)remained relatively flat. In France, for example, the volume of networks. This growth helped mitigate declines in overallcall minutes across fixed and mobile will increase by only 9 revenues in 2009, particularly in Europe and North America.percent from 2005 to 2010 – from nearly 190 billion minutes Driven in part by the increased penetration of smartphoneto 207 billion. However, OTT communications over the same devices like the 3G Apple iPhone, High Speed Downlinkperiod, including VoIP, peer-to-peer and instant messaging, Packet Access (HSDPA)-enabled USB keys or dongles forwill increase by 211 percent, from 303 billion to 942 billion laptops/Netbooks, and other mobile Internet devices (MIDs),minutes.11 A challenge for the industry is to devise a way to mobile broadband growth is paving the way for a second wavebetter monetize this massive growth in over-the top services. of fixed-mobile substitution, but this time in data connectivity services.The challenge to monetize contentRevenues from digital content services, such as InternetProtocol TV (IPTV) and mobile content (mobile video, mobilemusic, wireless games and mobile advertising) have not yet Much of the growth in overall communicationcompensated for the decline in traditional services. Ouranalysis shows that IPTV generated close to US$4 billion in volumes has come from OTT innovations, but2008 revenues, representing only 0.5 percent of total mobile providers are struggling to monetize these using traditional models.
  7. 7. IBM Global Business Services 5Aggressive pricing and attractive packages, including “all-you- Trafficcan-eat” bundles and simple pre-pay (or pay-as-you-go) Network cost (existing technologies)options – generally unavailable with fixed broadband – have Traffic Revenueshelped accelerate consumer adoption and increase mobile volume/ Network costbroadband traffic. revenue (future technologies) Voice dominant Revenue and traffic decoupledThe dramatic increase in application stores, following thesuccess of Apple’s App Store, has reinvigorated the market formobile applications. Just 18 months after its launch in July2008, the number of App Store applications had surpassed Profitability100,000 – with more than 3 billion downloads.12 At an averageprice per application of around US$2.50, the App Store model Data dominantis far from a significant source of revenue. But it is a powerful Timecomplement to drive Apple’s hardware revenues.13 Source: Nokia-Siemens; IBM Institute for Business Value analysis.Overall, global mobile data traffic has more than doubled since Figure 2: Revenue and traffic are disassociated in an increasingly2008.14 With future growth forecast at 130 percent year-to- data-dominant world.year, capacity on current 3G networks is likely to be exhaustedby 2013, increasing pressure on providers for additional The flight from the networkinvestment in radio access and backhaul networks. As part of the effort to reduce capital costs, many telecom providers are turning to network outsourcing and infrastruc-Furthermore, with flat tariffs, costs no longer match revenues ture sharing, which are becoming mainstream even amongfor delivering an ever-increasing amount of data over a Tier-1 providers such as Vodafone. In early 2009, Vodafonenetwork designed to support narrowband voice and light- UK signed a seven-year agreement for Ericsson to take overweight download, Web browsing and e-mail. Essentially, the maintenance and operational support of its second- andrevenue and traffic volumes are disconnected as telecom third-generation radio access networks.15 France Telecombecomes more data/connectivity-centric. While the boom in Orange has outsourced the management of its networks in thedemand for mobile broadband is welcome for an industry United Kingdom and Spain to Nokia Siemens Networks.16looking for new sources of growth, based on the current Indeed the number of outsourcing deals in the industry roserevenue model of “all-you-can-eat” data plans, it is unsustain- from six in 2004 to nearly 90 in 2008.17able long-term. Historically, traffic and revenue tracked alongthe same path. In the past ten years, however, they have After the unprecedented change that has swept through anddiverged. The disassociation of these two is at the heart of the across the telecommunications industry in recent years, whatTelco revenue model challenge (see Figure 2). evolution will transpire over the next five years?
  8. 8. 6 Telco 2015Scenario envisioning for Forces driving telecommunications through 2015telecommunications There are a number of forces and underlying trends in theTraditional approaches to predicting the future based on evolution of the communications industry for which there is aprefabricated world visions of economic and geopolitical trends high degree of consensus about their certainty (see Figure 3).are unsuitable for an industry changing as quickly as telecom- These provide a common backdrop for future scenariomunications, the evolution of which has taken many unprec- envisioning. We’ve grouped these forces and trends into fiveedented turns over the past decade. Given the ongoing categories:uncertainties, a scenario-envisioning approach – one thatenables industry executives to assess alternative contrasting 1. Usage – changes to user consumption patternsfutures for the industry that are distinctly different from the 2. Services – changes in services compositionpresent – is more appropriate. Our scenario envisioning 3. Access – device and network access technology evolutionconsists of an analysis of the following: 4. Business model – future revenue structure and sources 5. Industry structure and regulation – future of industry structure• Forces driving telecommunications through 2015 and regulation.• Critical (uncertain) variables – nascent technology, possible consumer responses to offerings not yet invented, potential Usage – Mobile and broadband have emerged as key staples, regulatory structure and possible competitive initiatives and consumers are unwilling to make drastic changes in their• Scenario realization triggers – economic, technology, use of communication and connectivity services, even in a time regulatory, market of economic uncertainty. Asked what they are least likely to• Scenario revenue and profitability outlooks. give up if the economy worsened, after their homes, respon- dents listed their mobile phones and broadband Internet access. The items ranked considerably ahead of family holidays, PayTV and going out (see Figure 4). • Ubiquitous, seamless open access becomes the norm • Communications fragmented across multiple tools • PSTN decline accelerates Usage Services • VOIP migration accelerates • Mobile and broadband are basic household staples • Increased use of data – both fixed and mobile. • Growth in shared communication capabilities.• Commitment to net neutrality remains Forces • Basic broadband pervasive as TV Industry • Battle for mobile broadband favors LTE• New local access competition rules with Next shaping the structure and Access • Proliferation in high-end devices (e.g., Generation Access future of regulation Smartphone, Netbook)• New broadband infrastructure competition will telecom emerge from industry (e.g., utilities, municipalities) • Market for ultra-low-cost handsets grows.• Fixed/mobile termination rates converge as barriers fade. • Revenue from environmental mitigation programs grow Business • Share of revenues from third-party connectivity grows model • Voice is monetized as a feature of connectivity.Source: IBM Institute for Business Value and IDATE analysis.Figure 3: A number of forces are shaping the future of the telecommunications industry.
  9. 9. IBM Global Business Services 7 79% 5% 16% Home 51% 15% 34% Mobile phone 26% 27% 47% Broadband Internet access 26% 13% 61% Landline/fixed telephony 17% 15% 68% Family holiday Unlikely to give up 12% 18% 70% Going out (e.g., restaurants, bars, cinema) Neutral 12% 12% 76% Pay TV Likely to give up 11% 9% 79% Newspapers/magazinesSource: IBM Institute for Business Value Global Telecom Consumer Survey, 2009; N= 7722.Figure 4: After their homes, consumers are least likely to give up mobile phones and broadband Internet access.Furthermore, while many consumers will make adjustments in Over the next five years, driven in large part by youngertheir use of communication services to control costs, only 23 consumers, communications will be fragmented across apercent of consumers expected an economic downturn to number of tools, from fixed and mobile voice and textsignificantly impact their use of such services. messaging, to online alternatives, including e-mail, VoIP, instant messaging and social networking (see Figure 5). Text/SMS 64% Landline/ fixed voice Instant 54% messaging 46% E-mail Mobile Social 74% voice networking 73% Frequency of use Postal 43% service 10% VoIP MMS 11% 9% Mobile e-mail (on smartphone) Voice 12% conferencing Video calls 5% 7% -15% -10% -5 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Percent of customers (25 and younger) who expect to increase/decrease use of serviceNote: Size of bubble: Percent of respondents who expect to use service every day.Source: IBM Institute for Business Value Global Telecom Consumer Survey, 2009; N= 7722.Figure 5: OTT communication services are challenging Telco-controlled services, especially for people age 25 and under.
  10. 10. 8 Telco 2015Between 2008 and 2013, Internet data traffic is expected to Services – Overall, PSTN circuit-switched lines will continue toquintuple, largely as a result of significant increases in the decline, although some emerging countries may noticeconsumption of Internet video.18 While in 2008 file sharing short-term growth in fixed lines as they “catch up” with theaccounted for the majority of Internet traffic at 56 percent, this rest of the world. Increasingly, VoIP will replace fixed-voicewill decline to 31 percent by 2013, with Internet video access lines in mature economies. Further, as penetration ofreplacing it as the largest contributor to online traffic at 46 mobile VoIP accelerates, the proportion of provider-managedpercent.19 mobile VoIP will also increase. A previously skeptical industry will overcome fears of cannibalization and will begin toHowever, the largest growth area by far will be mobile transition from outright prohibition, through models imposingbroadband, with a forecast CAGR of 130 percent from 2008 to surcharges and, finally, on to formal partnerships with over-2013 as the penetration and use of Smartphones, MIDs, the-top providers like Skype. Mass migration to mobile VoIP,Netbooks and tablet devices increase (see Figure 6). however, is unlikely until HSPA and Long-Term Evolution (LTE) networks are deployed more widely to address known limitations around usability, availability and quality of service.Mobile Internet/data traffic (Petabytes/month) 2184 Middle East and Africa Shared capability services that enable interoperability across Latin America fragmented communication tools will become standard as Central and Eastern Europe several industry initiatives become a reality, like GSMA’s Rich Western Europe Communications Suite (RCS) and GoogleVoice, which enables Asia Pacific users to link all their phones together into one central commu- North America nications network. 130% 1076 Access – With forecasts of nearly 800 million fixed broadband CAGR subscribers and over one billion mobile broadband subscribers by 2015, basic broadband will be available to most households around the world, and levels of penetration will be similar to 483 television in advanced markets.20 207 85 The race for mobile broadband appears to have been decided 34 in favor of LTE – one of two broadband access technologies 2008 2009 2010 2011 2012 2013 telecom providers identified as critical to invest in over the next five to ten years (see Figure 7). In December 2009, NordicSource: Cisco Visual Networking Index, June 2009,; carrier TeliaSonera deployed what it claims are the world’s firstIDATE, IBM institute for Business Value analysis. two commercial LTE networks, offering maximum throughputFigure 6: Use of video and other data services will grow as Internetdata and mobile broadband consumption soar.
  11. 11. IBM Global Business Services 9 Industry structure and regulation – Increasingly, the source ofCritical access technologies for telecom providers 2010 - 2015 new infrastructure competition will be external: from govern- FTTx 71% 27% 2% ment, municipality, local housing associations and utility companies. In France, a law passed in 2004 allows local4G/LTE 67% 33% authorities to act as telecom providers, and around half of the 3G 44% 48% 7% €2.1 billion invested in backhaul networks in sparsely xDSL 43% 48% 9% populated areas since then has come from public financing.23 CATV 27% 39% 34% All across Europe, municipalities – and even housing associa- tions – are investing in local access networks. By December 2G 20% 42% 38% 2009, nearly 60 percent of FTTH/B projects across EuropeWiMAX 8% 38% 54% 11% 9% 23% were being led by municipalities, utilities or housing associa- Critical to success tions, with incumbent and alternative telecom providers Neutral accounting for the rest.24 For example, the city of Amsterdam,Source: IBM Telecom Executive Survey 2009. Not critical to success in partnership with two private investors and five housing associations, has invested €18 million in building a fiber-to-Figure 7: The race for mobile broadband appears to have beendecided in favor of LTE. the-home broadband access network to initially connect nearly 40,000 households.25speeds of 20-80 Mbps.21 A number of major providers, In developed markets, both mobile and fixed termination ratesincluding Verizon, KPN, NTT Docomo, AT&T, France will continue to decrease. The EU’s long-term vision is toTelecom/Orange, Telstra, Vodafone, Telus and Rogers, have reduce mobile termination rates (MTR) in member states toannounced early commercial deployment plans for LTE. levels comparable to fixed termination. At the same time, theGlobal subscribers are expected to reach nearly 400 million by boundaries defined by access (i.e., fixed, mobile, cable, Internet)2015.22 will fade as an increasing number of players offer a combina- tion of products.Business model – Over the forecast period, fixed voice communi-cations will increasingly be monetized largely as features of Existing remedies for enforcing local access competition willbroader connectivity packages, rather than as standalone be replaced with the deployment of next generation accessservices. Providers will seek new revenues by providing open (NGA).wholesale interfaces to drive innovation on their networks. Asenvironmental sensitivities progress, the “green” practices oftelecom providers will become sources of revenues as they helpcompanies in other industries reduce their CO2 emissionsthrough new services such as mobile virtual private networks, The race for mobile broadband appears to havevideo and teleconferencing capabilities and machine-to- been decided in favor of LTE.machine communications.
  12. 12. 10 Telco 2015Critical (uncertain) variables • Premium connectivity: What is the opportunity for premiumIn addition to the trends we’ve outlined, a number of poten- connectivity features (e.g., guaranteed low latency, security, ortially high-impact variables exist with outcomes that are, as yet, a more robust content delivery network)? Will increaseduncertain. From these, we have selected 13 whose contrasting available bandwidth to third-party solution providers reduceoutcomes signal distinctly different scenarios for the future. the need for premium features?These variables are placed in context with the industry trendspreviously described: Access • Ultra-fast broadband availability: Deployment of ultra-fastUsage: broadband networks requires high levels of investment.• The future of voice: Will voice communication volumes Taking into account their commercial viability and the continue to decline, substituted by asynchronous and/or regulatory environment, how much coverage can be online data communications (e.g., SMS, social networking, effectively achieved over the next five to ten years? instant messaging, IP voice), or will drastic price cuts, superior • Open versus closed devices: Will providers continue to subsidize convenience, and new voice usage applications (e.g., human- handsets, or will unlocked and open devices prevail? Will a to-machine voice communications, high-definition voice) standard open device platform emerge, or will the industry trigger a voice “rebirth?” continue to support competing device platforms, including• OTT versus network-optimized content: How will the battle be Apple, Symbian, Google Android, Windows and Palm OS. waged with over-the-top providers? Can telecom providers deliver and monetize unrivalled user experiences through Business model network-optimized features (e.g., multi-sensorial, 3-D, • User-funded versus third-party funded: Will user-funded immersive reality) to derive value alongside over-the-top (subscription) revenues continue to dominate, or will Telco be (OTT) providers? able to gain significant revenues from third parties, such as• Siloed versus unified communications: Will consumers finally advertisers, in a two-sided business model? Can providers make the leap to embrace unified communications across adequately and legally monetize subscriber information (e.g., fixed, mobile and online, or will shared capabilities across socio-demographic, presence, preferences)? stand-alone fragmented communication tools be a sufficient • Service pricing models – voice and connectivity: What will be the trade-off between simplicity and freedom of choice? predominant service pricing models? Single-service metered? Monolithic bundles structured for key subscriber segments?Services Abundant (all-you-can-eat) pricing for connectivity and voice?• New verticals: What is the opportunity for telecom in industry Differentiated tiered pricing based on quality/speed? Will verticals such as healthcare, smart grids and financial services providers be able to generate premium prices for ultra-fast beyond basic connectivity? What form is this likely to take, broadband (FTTH and LTE) compared to current broadband and can Telcos beneficially enhance the vision of an services? increasingly instrumented, interconnected and intelligent world to create value?
  13. 13. IBM Global Business Services 11• Machine-to-machine (M2M): Will provider revenues continue Four industry scenarios for Telco 2015 to be based primarily on maintaining high ARPU across a These variables can be grouped into two industry dimensions finite number of accesses, or on ramping up M2M services – addressable market growth and competition/integration based on an infinite number of connected objects? structure – as shown in Figure 8.Industry structure and regulation Addressable market growth: This covers all the variables related• ServCo/NetCo versus vertical integration: Will the industry be to future sources of revenue growth. Will there be a rebirth of organized by separate service companies and network the blockbuster revenue generator of voice, or is this destined companies, or will vertically integrated providers prove to be to be replaced by content, broadband connectivity and new the only viable model to generate sufficient shareholder value? service areas in selected industry verticals? Will communica-• Network sharing versus outsourcing: Will passive infrastructure tions fragmentation dissipate value, or create new opportuni- sharing become the norm? Will providers go beyond passive ties with increased demand for shared capabilities? infrastructure sharing and share the active network, too? Will network outsourcing become the norm?• Regulation: What will be regulators’ goals over the next five-to-ten years, and how will they impact the industry’s Competition/ integration business models? After two decades of liberalization of Addressable structure telecom markets around the world, is competition self- market growth Open versus sustaining, making ex-ante provisions dispensable? Or will new closed devices The future of networks, market consolidation and new business models voice Premium Network sharing require the (re-)introduction of a number of ex-ante remedies. connectivity versus What is the future of net neutrality? The industry appears Silo versus outsourcing unified divided over its long-term future. Nearly half of our communications Service pricing Vertical versus respondents expect regulators to sustain the commitment to model horizontal OTT versus integration neutrality over the next five-to-ten years. But over 40 percent network- anticipate the commitment will be abandoned or relaxed to optimized content Machine-to- User versus machine (M2M) third-party/ stimulate investment that improves customer experience/ Expansion into communications ad-funded quality of service.26 adjacent verticals Regulation Ultra-fast broadband availability Source: IBM Institute for Business Value and IDATE analysis. Figure 8: Variables that may shape the future of telecommunications can be grouped within two industry dimensions.
  14. 14. 12 Telco 2015Competition/integration structure encompasses uncertainties The interplay between the dimensions of addressable marketaround industry integration and open versus closed connec- growth and competition/integration structure produces fourtivity models. As regulatory change and technology develop- equally likely but contrasting future scenarios (see Figure 9).ments lower entry barriers for new entrants to deliver innova-tive services, will the service structure be based predominantly It is important to note that these scenarios are potentialon packaged end-to-end delivery or open access platforms with outcomes for markets at national or regional levels and not amultiple service providers? Will the vertically integrated model set of strategic choices to be made by individual telecomsurvive as providers increasingly share infrastructure and providers. The purpose of the scenario-envisioning process isoutsource significant parts of their business, including not to rank the probability of individual scenarios or attempt tonetworks, to external providers? Will demand for new service make predictions, but to provide a framework to enablecombinations impel infrastructure providers to open up their executives to assess what it would be like to operate in eachnetworks and enable third-party providers to leverage capabili- potential scenario and to build capabilities for success forties to deliver new experiences? Is the fragmentation of the whichever scenario prevails over the next five to ten years.industry – with independent national and regional providers –sustainable when the main competitive threats are expected to Table 1 (see page 14) describes contrasting outcomes forbe from global over-the-top communications providers? uncertain variables and sets out plausible consumer behaviorsHow will future regulation impact industry structure and and industry/market dynamics for each scenario.competition? Expanding Clash of Giants Generative Bazaar Addressable market growth Results from carrier cooperation and alliances (such as RCS) that pave Pervasive, affordable, open connectivity is enabled for a person, the way for global consolidation in response to increased competitive device or object, unleashing a wave of generative innovation. A threats from over-the-top providers. Mega carriers expand markets co-operative of horizontally integrated network infrastructure providers through selected verticals such as smart grid and e-health for which (Net Co-op) emerges, based on catering to the needs of a multitude of they provide packaged end-to-end solutions. asset-light service providers that package connectivity with completely new services and revenue models. Survivor Consolidation Market Shakeout Declining/stagnant Occurs as a result of reduced consumer spending, leading to revenue Likely when CSPs expand horizontally in search of growth through stagnation or decline. Investor loss of confidence in the telecoms sector premium connectivity services sold to application and content providers, produces a cash crisis and triggers survival consolidation. and device OEMs. The vertical integration model is disaggregated and the industry fragments as governments, municipalities, etc., expand ultra-fast broadband to under-invested areas. Concentrated/vertical Competition/integration structure Fragmented/horizontalSource: IBM Institute for Business Value analysis.Figure 9: Four contrasting scenarios are possible, depending upon the interplay of trends and variables.
  15. 15. IBM Global Business Services 13Scenario realization triggers – economic, technology,regulatory, marketEach of the four scenarios described is triggered by a distinct Each scenario is triggered by a combination ofcombination of factors across several dimensions: economic/ factors across several, technological/investment, regulatory/competitionand marketplace/customer-related.Survivor Consolidation is likely to be triggered by a prolongedglobal or local economic downturn that causes consumers to Clash of Giants is triggered by the determination of telecomcut back spending, leading to intense price competition. providers to take on Internet communication providers,Constrained access to and high cost of capital leads to reduced identified by 76 percent of telecom executives as the greatestinvestment. competitive threat to their businesses over the next five to ten years – well ahead of traditional cable and content providers. InAlternatively, a prolonged economic downturn may invoke a an industry essentially fragmented by geography and nationaldifferent response from telecom providers, investors and regulations, the ability of Telcos to engage global OTTgovernments that leads to a different outcome – the Market providers that are relatively unencumbered in their reach willShakeout. Private equity investors may acquire ailing telecom require global alliances, cooperation and standardization of theproviders and break them up. A shakeout may also be triggered kind the GSMA is leading for rich communication servicesby increased fragmentation resulting from greater involvement (RCS), the OneAPI global applications platform and Voiceand investment by governments, municipalities and infrastruc- over LTE (VoLTE), among others.ture players like utilities. The GSMA’s RCS initiative, for example, will enableSmaller or emerging providers may be compelled by circum- subscribers of telecom providers to exchange rich multimedia,stances to outsource more of their networks, and the industry such as video and photos, during a call, and will facilitatemay end up with the majority of its network infrastructure run shared capabilities, including a common personal address bookby equipment suppliers. Telecom providers may further augmented with real-time presence across providers, devicesoutsource other assets, including their business process support and networks.27infrastructure, and divest others, like their retail storenetworks. The business of telecommunications could be driven In response to the success of mobile application stores drivenby established retail brands with first-class sourcing, supply by the likes of Apple, 24 of the world’s largest mobile providerschain and customer management capabilities. teamed together in February 2010 to announce an initiative to collaborate on a wholesale platform for mobile applications with a single point of entry for developers.28 Forty organiza- tions in total within the telecom industry are supporting the One Voice initiative.29 Based on current open standards, this initiative defines the minimum mandatory functionality for interoperable IMS-based voice and SMS over LTE, which is needed to drive the global mobile industry toward a standard for delivering voice (and messaging) services for LTE (VoLTE).
  16. 16. 14 Telco 2015 Survivor Consolidation Market Shakeout Usage  Communications are“siloed” and fragmented  Communications are “siloed” and fragmented from a wide range of  Connectivity is personal and asymmetric, with more download than suppliers and aggregators. Consumers opt for over-the-top and user- upload generated content  Passive content consumption remains strong. In emerging economies  emerging markets, mobile money paves the way for other simple In communication remains voice-centric on mobile; Internet and data usage data applications catering to specific local market needs. is limited to large cities with sufficient data networks, but deployment of basic mobile data services, (e.g., mobile money, information advisory services) meets with success. Services  Services remain as today as Telcos fail to enter new industry verticals  There is greater focus on wholesale backbone business as well as and/or expand horizontally Information, Communication and Technology (ICT) services  Packaged connectivity and communications services prevail.  Telcos expand horizontally to offer premium connectivity services that enable content/application providers to offer OTT content services with adequate quality of service (QoS) and service level agreements (SLAs)  Emerging market providers focus on growing mobile data usage. Access  Ultra broadband availability is limited to 10-15 percent of households,  Government, municipality and alternative provider (e.g., local housing primarily in economically profitable, densely populated areas associations, utilities) initiatives increase ultra-fast broadband  smaller providers, active network outsourcing to NEPs and passive For household coverage to 20-25 percent in advanced markets sharing with one another is sustained for FTTx and LTE  Passive infrastructure sharing becomes the norm for most providers  Handset subsidies remain and telecom networks remain closed to for FTTx deployment and for 2G/3G mobile infrastructure optimization unapproved devices, third-party providers or applications/services.  Low-end, SIM-only, open devices co-exist with high-end devices, based on exclusivity periods and strategic partnerships with OEMs. Business  User-funded subscription revenues dominate and still rely upon  Multiple tariff packages, including metered and bundled, that appeal model maintaining high ARPU across limited number of accesses to different segments are supplied under a variety of market brands  Retail-driven with multiple tariff packages, including metered and bundled  Predominantly subscription-based but driven in part by wholesale, for different segments with an emphasis on cost control as devices, application and content providers leverage premium  Content market of limited value. Service providers absorb network costs connectivity from increased OTT content consumption or pass connectivity costs to  Ultra-fast broadband (FTTH and LTE) offers are priced at levels users. comparable to broadband connectivity, encouraging rapid migration  Open access models financed by government/municipalities in gray/ sparsely populated areas. Industry  Consolidation of declining private-sector players in advanced markets;  Some Tier-2 providers divest network and assets to focus on structure competition typically revolves around a limited number of large integrated customers and brand players as fixed and mobile pure-plays disappear  Multiple service provider brands emerge to package low-cost, no frills  emerging markets, a duopoly of mobile service providers is the norm In services targeted at specific consumer segments  Large mobile-centric providers from BRIC successfully gain footholds  Major device manufacturers provide communications services as across emerging regions (e.g., Africa), replicating their low-cost models. MVNOs in major markets  handful of NEPs manage networks for a significant percentage A (more than half) of global telecom providers. Regulation  is, with ongoing uncertainty As  Strong access obligations on infrastructure and strong net neutrality  NGA investment is stifled by very restrictive regulation or uncertainty stance undermine investment incentives  Providers reduce rollout speed and geographic coverage of NGA.  Local not-for profit network initiatives and governments/municipalities provide open access.Source: IBM Institute for Business Value analysis.Table 1: Characteristics of each of the four possible telecommunications scenarios.
  17. 17. IBM Global Business Services 15Clash of Giants Generative Bazaar Users adopt shared capabilities (e.g., presence, contact list) and enhanced rich  Advanced users mix and match communication tools; most adopt open shared multimedia communication booms capabilities (e.g., presence, contact list) across voice and online communication. significant portion of consumers purchase packaged digital content and A Enhanced, rich multi-media communication is the norm in advanced markets lifestyle services (e.g., healthcare, payments, security, energy management)  Usage extended to any object for personal and professional use by individuals and from providers third parties Voice services dominate in emerging markets and extend to the remaining  Seamless and ubiquitous access across devices and networks. population at the base of the pyramid. Providers gain sizeable commercial traction for packaged end-to-end solutions  Open approach triggers new connectivity needs for OTT providers delivering for strategic verticals. Some premium network-optimized entertainment industry-specific solutions (e.g., wellness and smart grid services) but no end-to-end services (e.g., multi-sensorial, 3-D, immersive reality) gain commercial success packaged Telco “vertical” offering Shared communications capability (e.g., RCS) becomes standard feature  Premium connectivity (e.g., guaranteed low latency, security, CDN) for OTT providers offering.  Local applications that meet emerging market specificities boom  Voice HD  Shared communications capabilities  Large-scale machine-to-machine communications. Next generation access infrastructure sharing extends coverage to 40-50  Widespread fixed and/or mobile ultra-broadband availability, with coverage of 50 - 60 percent of households percent of households Providers enter strategic partnerships with selected device manufacturers for  Open devices (e.g., unlocked phones, Netbooks) dominate market as providers customized devices with support for proprietary service, network and platform retreat from handset subsidization features.  Open and standardized device platforms supported by Net Co-ops and device manufacturers. Voice communication services are free for users who pay for shared  Voice services continue to be paid-for on mobile, but fixed communications become capabilities an embedded feature of connectivity Retail dominated, based on customer ownership and delivery of end-to-end  Wholesale-driven with premium connectivity a key feature for revenue generation. targeted services and experiences based on network and customer insights Providers are able to generate premium prices for ultra broadband (FTTx, LTE) New revenues from packaged end-to-end digital content and lifestyle services  OTTs collaborate with network providers and pay carriage fees or share revenues in Emerging market providers focus on optimizing their asset utilization by return for network-optimized delivery to enhance end-user experience growing voice revenues through more users at the base of the pyramid.  Providers ramp up M2M to generate low ARPU for an infinite number of connected objects  Co-ops supply analytics to service providers for platform advertising and Net improved customer experience. Active global industry alliances and standards, some of which pave the way for  co-operative of infrastructure providers support a myriad of asset-light service A global provider consolidation providers such as VNOs, OTTs, banks, utilities, governments, etc. European and North American providers consolidate at regional level (e.g., two  Vertically integrated models replaced by horizontal model with NetCo/ServCo or three pan-European providers) separation OTT players integrate backwards and build out own fixed networks in selected  Passive infrastructure sharing, but no network outsourcing. geographies. Others are successful in bidding and acquiring spectrum for mobile Some emerging market providers enter mature markets. Light-touch regulation on infrastructure to encourage infrastructure competition  Evolution to Internet-style model with light-touch regulation for Telcos endorsement by regulator of strong net neutrality positions No  Abolition of the majority of sector-specific services regulations, creating a level Telcos develop a portfolio of premium services (e.g., 3-D TV) but have to carry playing field in services for Internet and Telco players competing OTT services.  Structural separation of access networks with wholesale open access to best-in- class services and applications from any provider  Open access is the norm.
  18. 18. 16 Telco 2015Other events that may trigger a Clash of Giants scenario Scenario revenue and profitability outlooksinclude integration of OTT players into the network. Eric The 2015 scenarios each have different revenue profiles andSchmidt, CEO of Google, announced in February 2010 that include varying levels of contributions to the overall mix fromGoogle will be building an ultra-high speed optical network communications (voice and basic data), connectivitywith speeds of 1 Gbps to connect up to 500,000 consumers in (broadband, legacy and enterprise) and digital media/content.the United States, enabling them to download a high-defini- We have designed a revenue and profitability model for eachtion movie in less than five minutes, or watch live 3-D video scenario based on assumptions of penetration and ARPUservices.30 growth for fixed voice, mobile voice and data (SMS), VoIP/ VoBB, fixed broadband (including dial-up), mobile InternetGenerative Bazaar is predicated on the break-up of the vertical and broadband, machine–to-machine connectivity, IPTV andintegration model, resulting in some form of structural mobile content services.separation of Telcos into distinct network (NetCo) and services(ServCo) businesses. It is unlikely that there will be many In a Survivor Consolidation scenario, fixed-mobile substitutioncompeting NetCos in any one country, but rather a handful of accelerates, mobile penetration slows and ARPU declines asproviders that will form a co-operative (Net Co-op). This consumers move to control spending on telecom services and/co-operative will be based on a viable funding model to or turn to VoIP/VoBB alternatives. Despite the downturn, fixedsupport open access infrastructure (see Appendix 2 for and mobile broadband penetration increases modestly asexamples of emerging net co-op models). providers offer competitive “all-you-can-eat” bundles and users opt for free OTT services. Paid content services, however,The Net Co-op may also emerge through the deliberate decline.intervention of national governments, as currently exemplifiedin Australia and Singapore, or through voluntary cooperation As governments and municipalities participate more actively inof infrastructure providers such as in the Netherlands (see extending ultra-fast broadband capabilities and fixed connec-Appendix 2, page 22). Generative Bazaar depends on wide- tivity penetration, this potentially triggers a Market Shakeoutspread deployment of ultra-fast broadband and the availability scenario. Overall ARPU declines sharply, but premiumof connectivity with pervasive and ubiquitous access supporting connectivity services enable OEMs and content providers tothe proliferation of Smartphones, Netbooks, MIDs and large bundle content or device-centric applications with connec-volumes of other connected devices. This would serve to tivity.accelerate the explosion of new services and applicationsemerging to support the increasingly digital economy and In Clash of Giants, while fixed voice penetration continues topersonal lifestyles. decline, overall voice revenue erosion is contained as consumers increasingly adopt and pay for end-to-end packaged services and enhanced rich communication capabilities. Consumers come to accept network-optimized vertical industry applications and digital lifestyle services from telecom providers. Providers in emerging markets are successful in extending communications to many more people as ultra-low- cost handset penetration increases.
  19. 19. IBM Global Business Services 17PSTN line losses accelerate sharply, along with significantdecreases in ARPU as providers migrate consumers to Global GDP versus telecom growth scenariosmanaged VoIP offerings in a Generative Bazaar scenario. VoIP/ 7%VoBB use is widespread as connectivity becomes part of the Global telecomfabric of society and is bundled with all broadband/connec- 6% Generative Bazaar 5.3%tivity packages. Users pay only for communications aggrega- 5% 4.5%tion and shared capability services across multiple tools. GrowthPhenomenal growth in mobile broadband continues, and 4% Clash of Giants 3.3%nearly all mobile users in advanced markets have data connec- 3% Global GDPtivity plans across multiple devices. In emerging markets, Market Shakeout 1.8% 2%mobile broadband is the de facto Internet platform as mobiledevices become the users’ portable digital identity. OTT video, 1%applications, services and digital content services boom as a Survivor Consolidation 0.2% 0%result of open access infrastructure. There is also a significant ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14ramp-up in the penetration of M2M services as low tariff Source: International Monetary Fund (IMF), World Economic Outlook Database, October 2009,packages enable profitable network connectivity of objects and; IBM Institute for Business Value and IDATE analysis; 2004 - 2009 growth forecasts are based on IDATE “World Telecomsensors. Service Market,” 2008 Edition, January 2009, revision in July 2009; forecasts for. 2010 -2015 are IBM Telecom 2015 scenario forecasts.Regardless of which scenario dominates, PSTN revenues Figure 10: Generative Bazaar represents the most optimistic growthdecline. Likewise, fixed and mobile connectivity/broadband outlook.revenues increase in all scenarios. Overall, the financial modelsuggests Generative Bazaar is potentially the most profitable, A critical potential industry shift is the overall composition ofwith the highest revenue and growth prospects. However, it is the telecom revenue mix as the once-dominant PSTN voicealso the most challenging scenario because of the dramatic business disappears and mobile revenue growth stalls. In 2008,degree of change it will demand from the industry. Clash of the proportion of total industry revenue in advanced marketsGiants may, indeed, be more a plausible and natural evolution attributed to communications (PSTN Voice, VoIP/VoBB,in a recovering/slower-growing economy, even if revenue and Mobile Voice and SMS) was approximately 75 percent, versusprofitability potential is less than in Generative Bazaar (see 24 percent for connectivity (fixed broadband, dial-up Internet,Figure 10). legacy corporate data services, mobile broadband and machine- to-machine revenues) and 1 percent for content.31 With the growth in broadband and the slowdown of communications revenues, this split is likely to shift, with a greater share going to connectivity.The most promising scenario will require afundamental change in industry structureand result in a shift in revenue mix, withconnectivity supplanting communicationservices as the dominant contributor.
  20. 20. 18 Telco 2015The four scenarios show contrasting revenue composition Critical success attributes and imperativesoutcomes (see Figure 11). Survivor Consolidation and Clash of The scenarios should not be treated as strategic aspirations orGiants retain the current revenue mix structure, even as their choices by any specific provider. They are significantly influ-share of connectivity increases. In Market Shakeout, parity enced by a number of highly dynamic external factors,exists between communications and connectivity in the overall including government policy, regulation, technology evolution,revenue composition. However, Generative Bazaar reflects a industry dynamics and the state of the local/global economy.model that is opposite the dominant model of today. Connec- Collectively, industry players in specific markets or regions cantivity revenue becomes most prevalent in the mix. PSTN voice shape and influence these outcomes, but the imperative is fordeclines, and fixed voice communication is offered virtually for telecom providers to focus on the attributes for success for thefree as a standard service in mobile and fixed broadband scenario most likely to emerge, and to begin to take action nowpackages. The demand for access grows, fueled by the prolif- to best position themselves for the future.eration of smart devices, including machine-to-machineconnectivity supporting growth in sensing and automatedresponse capabilities. 69% 49% 64% 35% 75% Communications 60% PSTN voice, VoIP/ VoBB, mobile 49% voice, SMS revenues 2015 30% 31% Connectivity Developed Fixed broadband, dial-up markets Internet, legacy corporate data 1% 2% 5% 5% service, 3G/mobile broadband and machine-to-machine Survivor Market Clash of Generative revenues Consolidation Shakeout Giants Bazaar Content 85% 80% 81% 63% IPTV and mobile content (music, 24% video, mobile TV, games, advertising) 1% 2008 2015 34% Emerging 14% 20% 18% markets 3% 1% 0% 1%Source: IBM Institute for Business Value and IDATE analysis.Figure 11: Although revenues shift from communications to connectivity in all four scenarios, the substitution is highest by far in theGenerative Bazaar.
  21. 21. IBM Global Business Services 19To be successful in a Survivor Consolidation scenario, telecom Summary and conclusionsproviders will have to achieve scale, reduce cost-to-serve, After a decade of unprecedented change, where the phenom-contain voice ARPU erosion, secure a significant proportion of enal growth of mobile telephony has given rise to an era inthe ultra-fast broadband market and increase share of high- which anyone who wants – and can afford – telephony has it,value customers. the industry is at an inflection point as it postures itself for future growth . . . or survival. Unless the telecom industry isIn a Market Shakeout scenario, successful telecom providers able to reinvent itself as it did with mobile telecommunicationswill be those that have clear and distinctive roles in a frag- in the 1990s, the next few years could usher in a period of flat/mented and horizontally integrated industry; a powerful brand/ declining growth as opportunities for industry growth based onreputation; viable premium connectivity propositions for increasing customer penetration gradually diminish.third-party application providers; agile, flexible and reconfigu- Continuing along this path favors the emergence of a Survivorrable processes and infrastructure; and the ability to provide Consolidation or Market Shakeout scenario, both of which areubiquitous and cost-effective ultra-fast broadband access. likely to yield very low levels of growth.The providers likely to be successful in the Clash of Giants A return to strong growth requires the telecom industry to actscenario will include those with the ability to effect collabora- collectively to create the necessary conditions for thetive inter- and intra-industry alliances; deliver innovative and emergence of the more profitable scenarios, Clash of Giants ordifferentiated network-optimized experiences based on Generative Bazaar. They can do so by focusing their strategicend-to-end packages; and enhance the role of service providers priorities on those capabilities required to deliver on thein adjacent vertical markets to achieve competitive cost critical success attributes for these growth scenarios, including:structures and scale. • Global industry collaboration on common capabilities,Success in the Generative Bazaar scenario will be dependent enablers and platforms to facilitate innovation and improveon the provider’s ability to achieve structural industry separa- competitiveness with global OTT providerstion; a pervasive open network access infrastructure; support • Enhancing the role of the service provider to enable newfor third-party application/services innovation; a dynamic business models in adjacent vertical markets such as e-health,business design; and the ability to leverage advanced customer smart grids, transportation, retail and bankingand network analytics. • Pervasive and open access connectivity for any person, object and a multitude of devices, optimized to deliver large dataFor a more detailed view on the capabilities required to volumes cost-effectivelysuccessfully achieve the attributes for each scenario, pleasereference Appendix 3 on page 23.
  22. 22. 20 Telco 2015• Value propositions for third-party application and asset-light To be ready, providers will need to watch for the key scenario service providers with a range of coarse to granular wholesale triggers we’ve described, understand the requirements for connectivity offers, open interfaces to network capabilities and success in each of these contrasting environments, begin to services enablers, and infrastructure support for common address execution gaps and nurture critical capabilities that are business process services (e.g., billing, CRM), along with a common across all four scenarios. These include a cost-effec- viable commercial model tive ultra-fast broadband deployment strategy, business• Harnessing information and business insights to reduce optimization based on more advanced network and customer complexity and costs and to deliver new customer experiences insights, more effective cost management and embracing a that enable new business models. highly collaborative culture.