Sometimes it is worth stepping back and seeing what the industry data that we track at Analysys tells us about what is actually going on in the telecoms industry.
A good starting point is the report on electronic communications published annually by the European Commission. According to the 2006 report¹,EUR289 billion in revenue from electronic communication services (including fixed telecoms, fixed data, mobile telecoms and cable) was generated during 2006, which represented 44.5% of ICT spend in Europe.
Interestingly, this amounted to a 2.3% increase compared with 2005, which was a significant decline from the 3.8% growth of the previous year.
Growth is dependent on the ability of an organisation to innovate and to successfully launch competitive and attractive new services. Achieving growth raises many issues for operators, service providers, equipment vendors and organisations that support the delivery of telecoms services. I want to highlight three things that are particularly difficult for organisations, but are imperative for growth:
- Organisations need to deal with the issues that are specific to legacy transition. Most telecoms service providers and network operators are offering a portfolio of services – a mix of legacy and new. Legacy services tend to decline through a mixture of obsolescence, substitution by new services, and pressures of competition and price. While this decline can be painful, it can be managed to achieve a soft landing – provided the organisation recognises legacy transition issues and has the will to manage them.
- Organisations need to invest in new propositions and services, many of which go outside their traditional scope and competence. The commercial realisation of new services requires access to assets, including content and new sources of disposable spend. This could include truly new spend (of which there is not much) and substitution spend, which is open to not just telecoms operators and service providers but also to “over the top” companies (for example, Google), IT companies, entertainment companies and others.
- Telcos need to acknowledge that they are running organisations that consist of at least two components, each with different investment and operating characteristics. A network infrastructure requires capital investment and generally exhibits a medium to long-term return profile (this could require sizable investment if a next-generation access upgrade is to be deployed). However, retail organisations generally have a different investment profile and short to medium-term return characteristics.
There is no getting away from the fact that legacy matters and it does have to be actively managed, especially where it provides a significant source of free cash flow. It is all too easy to forget that cannibalisation of one’s own services could be a valid option at a certain point in time. The presence of legacy cash flow creates an inherent tension between the need to invest in new services and to preserve the old for as long as possible.
Investing in and operating network assets is different from running retail service organisations. The financial and operational structure of companies that do both must accommodate this diversity, especially where the prioritisation and distribution of capital investment is concerned. The move to next-generation services makes this much more difficult as it breaks down the direct relationship between investment in infrastructure and retail services. So far, most investment in next-generation assets is justified through cost savings, but it is difficult to build the case when it is not possible to define the risk characteristics of future retail services that would utilise the infrastructure.
There is no doubt that this is a challenging time and all of the factors mentioned above are accelerating in importance. Their implications cannot be ignored and the response must be to proactively recognise risk. Telecoms industry growth that is lower than historic levels is a fact of life and it will increasingly follow the trend of overall economic growth. However, there will continue to be products and services that grow quickly and capturing these with advantage must be part of the future mission of any telecoms company.
Analysys's research programme will address many of these issues over the coming months. Our output will include reports on the reality of a next-generation environment, including wholesale and handling legacy. We will also produce content on the development of the media/telecoms axis and continue to look at developments in Central and Eastern Europe. As ever, we welcome your contributions and feedback, especially on market developments and the topics you feel we should be researching.
1 Commission of the European Communities, European Electronic Communications Regulation and Markets – 2006 (12th Report) (COM(2007)155).