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Seven areas of uncertainty in the enterprise communications market

Tom Rebbeck Research Director, Enterprise and IoT

"The enterprise market is crucial for operators, but general trends in this market are often poorly understood outside of enterprise divisions of operators."

The enterprise communications market is crucial for operators –it generates at least 20% (and in some cases more than 40%) of revenue for most incumbents. However, general trends in the enterprise market are often poorly understood by industry stakeholders who are outside of enterprise divisions of operators, partly because the operators do a bad job of explaining developments. Many vendors have a limited grasp of the opportunity, which leads to (sometimes contradictory) misconceptions. For example, some vendors see enterprise communications as a market that has strong growth potential, while others assume that the legacy services are in persistent decline and that operators are ill-placed to ride new waves of growth.

This article, aimed at vendors and other interested observers, explores the various areas of uncertainty in the enterprise communications market and, wherever possible, uses data to provide clarity.

Uncertainty #1: Operator revenue from enterprise services

Growth in the enterprise market largely depends on operators generating new IT revenue (for example, cloud, security, managed services) more quickly than legacy revenue (for example, fixed voice) declines.

The signs are that the different forces are starting to balance. Operator revenue from the enterprise market is improving – of all operators that report this data, enterprise revenue was flat during 2017 – but this comes after several years of decline for most operators in high-income countries.

Figure 1: Enterprise revenue growth rates by operator, 2016–2017 

Figure 1: Enterprise revenue growth rates by operator, 2016–2017

The market for basic voice and data services is largely saturated in high-income countries. Businesses that want a broadband Internet connection or mobile phone already have one. Very high-speed connectivity has the potential to provide revenue growth, particularly as enterprises continue to migrate workloads to the cloud, but growth in basic connections is limited, and increases in usage are often offset (or more) by price declines.

To avoid competing purely on price, operators have two related levers to pull.

The second lever depends on the first. Operators will struggle to sell more IT products to a base that is not satisfied with the core product.

For vendors that want to support the operators in the enterprise market, this has two implications. Firstly, vendors need to demonstrate how they can help operators improve customer satisfaction. Secondly, they need to show how they can support operators in their quest to sell more IT products.

Uncertainty #2: The cloud opportunity

Cloud service providers, such as Alibaba Cloud, Amazon Web Services (AWS) and Microsoft Azure, are reporting staggering rates of growth, exceeding 100% per year in some cases (see Figure 2). Operators that report cloud revenue (and most do not) are recording some growth, but it is typically a modest 10%–20% per year.

Figure 2: Year-on-year revenue growth by cloud service provider, 4Q 2016–4Q 2017

Figure 2: Year-on-year revenue growth by cloud service provider, 4Q 2016–4Q 2017

Operators may draw two opposing conclusions from this:

  • avoid the market because an operator cannot compete with the likes of Amazon
  • try to get a share of the market (although most operators do not have the global scale, the developer capabilities or the risk profile required to invest heavily in taking share in this market).

Instead of competing head on, operators need to explore smart ways of working with these big infrastructure providers to offer solutions to existing connectivity customers, most of which do not have the resources or desire to buy and manage hosting directly from the likes of AWS, Google and Microsoft.

Equally, these global Internet players do not have the resources or desire to offer locally managed professional services. The model for AWS, Azure and the others is to sell products, not professional services. Also, many enterprises will want a mix of on-premises, private and public cloud solutions, with public cloud from a range of providers.

This creates an opportunity for operators, but one not without challenges. Helping enterprises define their cloud strategies, migrate and manage applications, and manage multiple cloud providers, is largely a professional services business, an area where operators have historically had a mixed record. It is also difficult to scale down these services to smaller enterprises. KCOM is one of several operators that is grappling with this opportunity.

Also, spend on these cloud services is still small, relative to the core operator business. We estimate that spend on IaaS that is addressable to telecoms operators (rather than IaaS sold directly to ISVs) globally will grow to USD21 billion in 2022, or less than 10% of market for voice and connectivity (which we forecast to be around USD250 billion, also in 2022).

For vendors, the opportunity will be to help operators to automate the cloud migration and management process. Vendors should also try to integrate established cloud services (storage, compute) with telecoms-related solutions, such as SD-WAN and unified communications, as Huawei is doing. Finally, for the long list of vendors with their own cloud propositions, (such as Huawei, Oracle, SAP and the better-established players) operators can be attractive partners.

Uncertainty #3: The impact of SD-WAN solutions

Technologies and their value chains are often initially provided by a single company, before this breaks down as competing solutions and standards emerge. In the telecoms market, operators have gone from providing the connectivity, hardware and services to customers to often providing just connectivity.

SD-WAN would appear to be an extension of this trend; with it, elements of connectivity can be 'unbundled'. For a wide-area network, rather than operators being the only possible providers, a service can be provided by another entity or even procured and managed by the enterprise itself. This could cut the telecoms operator out of the value chain and leave it with a smaller share of the connectivity spend. Furthermore, the lower cost of provisioning SD-WAN and the increase in supply options should lead to a reduction in price.

This is possible, but we believe that most enterprises will not want the cost and complexity of managing a service that provides them with no competitive differentiator. Most enterprises will look to third parties to manage connectivity, and telecoms operators will be in prime position.

However, the greater threat to telecoms operators is the reduction in price. While some enterprises may want the new features that SD-WAN enables, more will be interested in lower prices. Telecoms operators, and the vendors that supply them, have two options to maintain revenue.

  • Increase the number of end points. SD-WAN will be able to expand the potential market by adding more end points to a wide-area network, rather than simply replacing existing MPLS networks with a lower-cost solution. IoT may be an example of this. As part of its contract with Siemens, Orange will connect IoT devices to the same SD-WAN as other end points.1
  • Add extra services, such as security to recoup lost revenue. The hope is that total spend from the enterprise will remain constant, but satisfaction will increase and churn decrease. Vendors need to provide examples of operators that have successfully maintained revenue by taking this approach.

The uncertainty surrounding the impact of SD-WAN means that operators may be reluctant to adopt it, unless forced to do so, for example, by a disruptive competitor. These disruptive competitors will hope to gain some short-term advantage but, as all operators launch similar versions of the same technology, it will be difficult to maintain a sustainable advantage.

For vendors, the threat of competitors winning business from their customers will help support the initial case for adoption, as we have seen in recent years. However, the onus will be on vendors to put forward a more positive investment case for SD-WAN by showing how this increase in potential addressable market can more than offset any decline in price.

Uncertainty #4: Impact of 5G

A central argument for the development of 5G is that network slicing will enable new opportunities in the enterprise market. Network slicing means that part of the network can be dedicated to a given use case, for which higher service levels are offered. For example, a manufacturing use case could be provided with reliable, high-bandwidth, low-latency connectivity. Based on this powerful capability, an operator could position itself to take a greater share of the spend on that use case.

The argument has two weaknesses.

  • Operators will be able to charge a premium only if there is scarcity and yet 5G will offer more capabilities to all users. A potential risk of 5G is oversupply, not the opposite. Given the massive amount of capacity that could become available 'as standard' across the network, the number of applications that need a dedicated slice may well be small. For example, the number of highly advanced robots used in manufacturing probably counts in the tens of millions – a tiny proportion of standard connections. The size of the market for applications that need, and are willing to pay for, a service that is better than the standard 5G offer is far from clear.
  • The argument depends on telecoms operators moving along the value chain. As discussed above, the history of technology value chains mostly sees them fragmenting rather than unifying. That said, where we do see unified value chains, the impetus for investment is typically driven by parties that will use the technology for their own business, rather than from pure suppliers. Think, for example, of Facebook and Microsoft investing in undersea cables. We may only see the potential of 5G being exploited where the beneficiaries also invest in the telecoms network, something that could happen in China with China Unicom.

When promoting the idea that 5G can support telecoms operators' ambitions in the enterprise market, vendors need to answer questions not just about the technology and what is possible, but what this would mean for the value chain and the operator role. Many operators have a limited understanding of vertical markets. Vendors may be able to deepen that understanding and thereby boost their own market positioning.

Uncertainty #5: The impact of Amazon, Facebook and other 'hyper-scaler' players

Amazon's Chime is an enterprise unified communications solution. Facebook has Workplace. WhatsApp has its Business App. Internet players are already present in the enterprise communications market.

The threat, at least for telecoms operators, is that the Internet players will move from these products to full-scale propositions (possibly through acquisition) and in doing so will compete with telecoms operators directly.

We believe that this threat is easy to exaggerate. As with the consumer market, operators will rebalance tariffs away from services and on to connectivity. Unlike consumers, who are willing to work with many different messaging and communications services, businesses typically want a limited number of options that work together, and often want a provider to package these services, usually with some sort of service-level agreement and support. Operators are well placed to continue providing this, as long as they can offer the most popular features more quickly than these Internet players can gain influence among enterprises.

The key risk from services like Facebook Workspace is that their adoption reduces the space that telecoms operators can enter. Slack, an enterprise collaboration tool, has been highly successful with a certain type of company but is largely a niche product; most companies have not heard of it and do not use it. However, once Slack is adopted, it is difficult for other providers to displace it because it becomes entrenched in an organisation's way of working.

Embedded in this view, is the misconception – held by some vendors – that unified communications is a single product. While 'unified' may be the ambition, it is really a collection of many different services and solutions, some of which work together. Operators may not need to provide a full suite of features but just a subset that most of their customers want and will use.

The role for vendors in the unified communications space is to help operators provide a simple and coherent communications offer. It does not need to match all the features offered by the Internet players. Most enterprises do not want flashy features. They want simple solutions that work with limited support. Vendors need to promote the simplicity of their solutions and the fact that these solutions have features that enterprises will actually use.

Uncertainty #6: The ICT opportunity in the micro and small business segment

We believe that some operators are ignoring the ICT opportunity with small enterprises. These operators believe either that this segment of the market is too small or that it is too difficult to serve to justify the effort. In consequence, these operators focus their efforts on medium or large enterprises.

However, we believe that the already-significant micro and small enterprise spend on IT services will grow to EUR10 billion in Western Europe alone (an increase of 50% compared with 2017). With their current approach, telecoms operators will win less than 10% of this spend. To provide some perspective, by 2022 we expect IT services provided to micro and small businesses to be worth 40% of the spend on fixed broadband, a market that is forecast to be flat.

Vendors have the opportunity to help operators understand this market and help to deliver packages of solutions that can be sold as simple options on top of basic connectivity packages. For this market, as with unified communications, ease of use will probably be more important than features.

Figure 3: Micro and small enterprise spend by service and provider type, 2022

Figure 3: Micro and small enterprise spend by service and provider type, 2022

Uncertainty #7: The IoT opportunity

Some operators and vendors assume that IoT will be a massive source of new growth for telecoms operators. For example, Huawei has been quoted as saying that by 2025 operators will earn 20% of their revenue from IoT. The GSMA has said that IoT will be a USD1.1 trillion revenue opportunity for telecoms operators by 2025 , which is around USD200 billion larger than the mobile industry.

However, other telecoms industry stakeholders have largely ignored the IoT opportunity for telecoms operators. For example, equity research analysts are only now starting to consider IoT in their valuation models.

Figure 4: IoT revenue and as a share of total revenue, by operator, 2017

Figure 4: IoT revenue and as a share of total revenue, by operator, 2017

For the operators that report IoT revenue, IoT revenue accounts for between 0.4% and 1.6% of total revenue and is growing at around 15% a year. Our longer-term expectation is that operators can realistically expect 3% of revenue from IoT, and some will achieve 5% or higher. These figures will not transform what an operator is (in the way that the GSMA or Huawei figures would suggest), but it could more than counter any decline in the legacy business. The importance of IoT is a matter of perspective.

The support that vendors can provide to operators will vary significantly by operator, but almost all need assistance that goes beyond technology and includes help understanding the needs of different vertical markets, support with standards, partnership management and to build the business case.


1 For more information, see www.orange.com/en/Press-Room/press-releases/press-releases-2018/Siemens-AG-extends-contract-with-Orange-Business-Services-for-global-SD-WAN-infrastructure-to-support-its-digital-transformation.
For more information, see www.capacitymedia.com/Article/3786701/IoT-to-create-20-of-telco-revenue-by-2025-says-Huawei.
3 For more information, see www.gsmaintelligence.com/research/2018/05/iot-the-1-trillion-revenue-opportunity/670/.