Telecom Industry Value Chain Turning On Its Head

Chris Lewis, SVP Telecoms Research, OVUM The accelerated rate of change in the telecommunications arena is always a topic close to the hearts of all stakeholders in the industry. Analyzing the different dynamics at play in the sector has never been so interesting. The former monopoly environment has been dragged kicking and screaming into an era of almost Adam Smith-like demand and supply, something that it was certainly a long way from even a few years ago. So, what has changed on both the demand and supply sides of the equation? First, the demand side has finally begun to exert its rightful role in an open economic market. Under previous regulatory regimes, the demand side was not properly represented. Indeed, the supply side dictated what was going to be sold. So, as user power begins to take its rightful place, consumer and business customers alike begin to drive new services and associated products. The key challenges for todays purchasers of business communications services and equipment are:

Mapping the increasingly mobile nature of employees onto the emerging mix of fixed and mobile services, devices and applications.

Bringing the cost of providing communications services under control: the "consumerization" of services within the business means that areas such as mobile and VoIP are increasingly taking control away from enterprise CIOs and exposing the business to both cost and security risks.

Rationalizing all of the communications systems and aligning them to business processes, making IT and telecom services a true part of the business and not something hidden below the ground.

Examining the degree to which third parties can be used to reduce the number of suppliers essential to delivering this new set of services and determining whom to trust. The supply side of the industry faces remarkably similar challenges. The days of designing and building its own telecom equipment are long gone and reliance on telecom equipment and software providers, as well as services from more IT-oriented players and integrators, means that the telco is caught in a dilemma as to whether it is a network company, a marketing company or a full, new-generation communications, software and media player. Its key challenges can be summarized as follows:

Telcos need to dramatically reduce the cost of bringing services to customers: investments in nextgeneration networks (NGNs) are critical to reducing the large number of dedicated and aging networks that today deliver against businesses various communications needs. In short, a new core is needed along with a new access layer that brings fixed and wireless options to the table.

Automation is highly important: telcos cannot afford to individually customize services for their enormous user base. Therefore, automation of service platforms, acceleration of product life cycles and portal access to service activation, monitoring and billing are critical.

The supply side must be rationalized: telcos need to reduce the number of suppliers used to build their service offerings. This includes the network and the business and operation support systems (BSS/OSS) needed to turn the network into a service platform.

At the same time, the telco faces the simple truth that unit prices for most services face significant downward pressure. So, this investment cycle for NGNs is critical to manage the decline in traditional revenue lines such as fixed voice and leased circuits as the delivery moves toward mobile voice and broadband services. Telcos need to find new revenue streams, but as they look around adjacent industries, they increasingly find either very competitive industries with lower margins or they confront barriers to entry in terms of expert knowledge and service capability. One of the most important changes needed in the telco side of the market is a new understanding of the relative role of communications services in the evolving converged telecommunications and IT marketplace. Telcos have been accustomed to owning the customer because services were a one-to-one relationship with customers; no third party was involved. Today, the telcos channel to market is increasingly dictated by the end user and the individual philosophy and psychology of sourcing the range of IT and telecoms services that go to support the business. We are entering an era of uncertain mixes of services some raw, some managed which fit into a continuum from the old do-it-yourself all the way to full old-fashioned outsourcing. Most business customers will fit into an uncomfortable middle ground for telcos, where the mix of managed services for any particular client will vary. Some will be provided on the customer premises, some on a hosted service basis from a telco, IT service provider or third-party data center. The communications component now has to take this broader context into account. Some CIOs and senior decision makers will have an IT bias. Some will have a rational split between telecom and IT. Whatever shape this takes, the telco has to be far more flexible and nimble in terms of wholesale and retail options. As a result, the channel strategy becomes an essential part of the mix alongside the increased emphasis on marketing new solutions-oriented offerings. In short, telcos need to decide where they fit in this new generation of communications services. There is a role for telcos supporting business-critical applications for the increasingly mobile workforce, but they also have to accept that users may well choose to use a more IT-oriented provider as the integrator and indeed aggregator of choice. So, the wholesale side of the telco becomes more important, as does the development of a fundamentally lower cost platform across which all of these retail and wholesale services are delivered. Unit prices need to come down, service levels need to go up. The good news is that there is an increasing demand for communications services. Increased demand and volumes do not, unfortunately, always equate to equivalent increases in revenue, but the business worlds need to reduce its cost of delivering communications services does result in more opportunities for delivering adjacent services such as infrastructure management, hosted voice and other corporate applications and especially overall cost management. So, the two sides of this equation do face very similar challenges going forward. Listening to the customer is the most critical aspect of the telcos challenge, while users need to understand their own real needs before putting too much pressure on the telco and communications equipment and software players. There are always two sides to a story.