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Telco vendors need to look to new verticals for new revenue streams

Vendors will need patience if they are to enter the new vertical markets, and they need to realise that it isn’t going to replace existing revenue, but provide a profitable supplement.

As their customers continue to adapt to an ever-more challenging environment, traditional telecoms vendors are increasingly looking ‘over the fence’ at other industry verticals to see what new business is available. Vendors such as Cisco, which has a strongly established user base in enterprise networking, already have a presence in the market – whereas for others such non-telco business is relatively new. Vendors need to be aware that the procurement process in these verticals will be different and competition from other providers (e.g. systems integrators) is already strong. Vendors may need to develop new partnerships to enter these new vertical markets. It will take time for vendors to build such new relationships – there isn’t an immediate, large revenue opportunity to pursue. Vendors will need patience if they are to enter the new vertical markets and they need to realise that it isn’t going to replace existing revenue, but provide a profitable supplement.

Vendors should diversify because margins and opportunity are limited in the telco space

Many of the long-established telco vendors have undergone significant restructuring in the last decade to maintain their market position and profit margins. One option for telco vendors has been to target those industry sectors in which a communications network is pivotal to the successful delivery of goods and services. Obvious examples include the broadcast media industry, utilities and the public sector – including government and public safety. Machine-to-machine (M2M) is another area that has applications in numerous sectors and is therefore potentially attractive.

Vendors are looking to diversify from traditional markets to new verticals because:

  • managed services offer limited growth. Some vendors have moved strongly into supplying operators with managed operations including managed field force. However, there is a natural limit to the managed operations business in telecoms for vendors to address.
  • low-cost vendors are extremely competitive. Low-cost manufacturers, particularly China-based vendors, have also made successful market entry and have had a significant impact on the business of the traditional telco vendors.

There are two key differences when selling to new sectors

Vendors need to bear two main factors in mind when considering addressing other industry sectors.

  • Organisations in these verticals tend to procure a managed network solution incorporating other value-added services and IT solutions, rather than discrete networking components or systems.
  • Other solution providers, typically systems integrators, business process outsource partners and some communications service providers, already have mature relationships and significant experience with companies and organisations in these industry verticals.

Vendor propositions need to be different (i.e. they need to be complete solutions) and these propositions can offer a higher margin than simply selling equipment. This is important for vendors as they consider how to combat the threat of new market entrants in their traditional telco markets. It also means that vendors should incorporate capabilities such as network design, build and operational support in their proposed solutions for new customers.

Vendors need to be open to partnerships

In approaching the market, vendors need to be open to new approaches. We suggest that vendors:

  • consider partnering. The route to market in new sectors will not necessarily be direct for vendors, because they lack the track record or capability of a lead partner to provide some of the necessary skills in new procurements. The right approach is for vendors to seek partnerships with those with existing traction in the target sectors. We propose that vendors play to their strengths and select from the managed operations model that many have employed successfully with communications service providers. Systems integrators and operators already active in the vertical markets sometimes lack resources and struggle to achieve scale or cost efficiency and it is here that vendors can most effectively help.
  • recruit sector specialists. Vendors will need to develop appropriate go-to-market approaches to meet the specific needs of the organisations and these will typically be vertical-specific. Telco vendors should recruit sector specialists rather than automatically relying on the same people and methods that have been successful when serving the telco industry. These specialists will help them to better understand the needs of the verticals and put them in a better position to take full advantage of the opportunities they present.

If you would like to discuss this topic further, please contact Mark Main.