Ovum - 2012-01 - Telecom Trends 2012

© Copyright Ovum. All rights reserved. Ovum is an Informa business.1

Telecoms Trends for 2012

Clare McCarthy, Practice Leader, Telco Operations

[email protected]

January 2012

OT00060-007

© Copyright Ovum. All rights reserved. Ovum is a subsidiary of Informa plc.2

Table of contents

Introduction

Ovum Telecoms practices

Macroeconomic outlook

Market outlook

Economic and capex trends

Mobile telecoms services

Fixed telecoms and broadband services

Operational impacts

Impact of regulation

Technology trends

Network infrastructure

Components

Devices and platforms

Service trends for telcos’ customer-facing business units

Consumer

Enterprise

Wholesale

Super themes for 2012


Introduction


Introduction

This presentation provides an overview of the most important trends impacting the telecoms market over the next 12 months.

Each Ovum Telecoms practice has contributed its view on the areas to watch, which relates to one of three categories:

the market outlook, which examines economic, strategic, operational, and regulatory factors

technology trends, which looks at the development of fixed and mobile infrastructure, components, and the expected changes at a device level

service trends for telcos’ customer-facing business units (consumer, enterprise, and wholesale) within telcos.


Ovum Telecoms practices


Macroeconomic outlook

In September 2011, the International Monetary Fund (IMF) released its latest GDP growth projections, as shown in Table 1. While the global economy returned to growth in 2010, the IMF revised its growth projections for 2011 and 2012 downwards, with many mature markets now expected to experience growth rates of just 0%–3% per year in the medium term.

Table 1: GDP growth: 2009–12 (at constant prices)

2009 2010 2011* 2012*

World -0.66 5.11 3.96 4.00

Eurozone -4.25 1.79 1.62 1.09

France -2.63 1.38 1.65 1.40

Germany -5.08 3.56 2.73 1.27

Greece -2.34 -4.35 -5.00 -2.00

Italy -5.22 1.30 0.64 0.32

Spain -3.72 -0.15 0.78 1.12

UK -4.88 1.35 1.14 1.58

US -3.49 3.03 1.53 1.78

Japan -6.28 3.96 -0.47 2.30

China 9.22 10.33 9.47 9.04

India 6.77 10.09 7.84 7.53

Brazil -0.65 7.49 3.77 3.63

Russia -7.80 4.00 4.29 4.08

* IMF projections

Source: IMF O V U M


Macroeconomic outlook (2)

The Eurozone is set to see growth rates slow dramatically as concerns over the ability of some countries to manage their debt burdens grow, and the exposure of banks across the region to this debt threatens the existence of the Euro itself. Even if the Eurozone manages to avoid a recession, growth in mature markets in the medium term is likely to be severely constrained by the impact of a further downturn in Europe being felt around the world.

For European telcos in particular, 2012 will see leaner businesses with lower cost bases develop. Investments will be targeted at core activities such as network upgrades, and CFOs will demand cost savings elsewhere in the business to fund them. Pressure will mount on telcos to consider managed services, the sharing of spectrum and networks, and further consolidation to close funding gaps.

Emerging markets in Asia-Pacific will also feel the impact of the difficult economic climate, particularly those countries that export to Europe. The Asian Development Bank recently cut its growth forecast for emerging economies in Asia, as well as for China, South Korea, and Indonesia. China’s economy is beginning to slow as policies designed to bring inflation under control succeed at a time when demand from Europe is falling.


Market outlook


Economic and capex trends

GDP growth in 2Q11 was lower than forecast in the US and Europe, despite strong growth in the telecoms industry.

There are currently heightened concerns surrounding the recovery of the global economy due to: continued housing problems in the US; banking/debt issues in Europe; a slowdown in economic growth in China; and the limited impact of government and central bank intervention.

Another recession or economic slowdown would have a negative impact on the telecoms industry.

-30

-20

-10

0

10

20

30

40

50

Year-on-year change in

quarterly revenues (%)Operator revenues Operator capex

Wireline infrastructure Optical components

Operator revenues 17% 16% 12% 0% -8% -8% -4% 7% 7% 3% 2% 2% 6% 11%

Operator capex 14% 29% 18% -2% 0% -22% -10% 0% -11% -8% -2% 2% 16% 17%

Wireline infrastructure 23% 24% 14% 6% -10% -15% -13% -4% 6% 10% 16% 17% 15% 20%

Optical components 14% 24% 13% -6% -20% -22% -16% 2% 29% 34% 40% 41% 27% 15%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11


Economic and capex trends (2)

The seasonality of capex, with fourth-quarter “budget flushes”, has remained steady. Globally, fourth- quarter capex makes up approximately 30% of the full-year total. The grey columns in the chart on the left illustrate the fourth-quarter budget flushes.

Average capex growth has increased year-on-year for the past three quarters. A low 2009–10 baseline and the depreciation of the US dollar are factors in this, but operators’ confidence in the economic recovery and the need for new infrastructure have had a greater impact.

* Grey columns mark fourth-quarter periods.


Source: Ovum

Economic and capex trends (3)

Global capex predictions

In 2010, Ovum forecast that mobile capex would grow by 14.6% in 2011, and that fixed capex would increase by 2.8%.

Actual 1H11 capex growth was in line with Ovum’s optimistic scenario, with mobile and fixed capex growing by 19.8% and 9.8% respectively year-on-year.

We estimate that total capex in 2011 will be $320–330bn, which will be an increase from $280bn in 2010.

Due to continued economic weakness and signs of margin trouble at some vendors in 2Q11, we expect capex to record a modest increase of approximately 4% in 2012.

A small decline in 2012 is also possible due to the difficult economic conditions in Europe.

The BRIC segment is now larger than Europe (excluding Russia), and only slightly behind North America in terms of contribution to global capex. China accounted for approximately 60% of BRIC capex in 2Q11.

Global operator capex

0

50

100

150

200

250

300

350

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011*

2012*

Capex ($bn)

Fixed Mobile* Forecast figures


Mobile telecoms services Emerging markets continue to drive connection growth

Ovum expects global mobile connections to reach 7.8 billion in 2016. This will be driven by growth in emerging markets, particularly in Africa and the “big three” Asia-Pacific markets (China, India, and Indonesia). Africa and the “big three” Asia-Pacific markets accounted for 44% of total global connections in 2010, and this proportion will increase to 51% by 2016.

Connections growth in the US is the fastest among mature markets

Connections in the US will grow at a compound annual growth rate (CAGR) of 4.3% between 2011 and 2016, reaching 396 million connections in 2016. This will be the fastest growth rate among mature markets. Connections growth in the US will be driven by the continued uptake of mobile broadband connections.

Revenue outlook highlights the need for revenue stabilization

Global mobile service revenues will grow at a CAGR of just 1.9% between 2011 and 2016 to reach $1,047bn by 2016. This slowdown in revenue growth and the ongoing uncertainty in the global economy highlight the need for operators to embrace measures to stabilize their revenues.

ARPU in emerging and mature markets will find a floor

While ARPU continues to fall in most markets, it will reach a floor as operators deploy tariff innovations to halt the decline. Mature markets have led the way with changes to data pricing, and this strategy will be extended to emerging markets in the next five years.

Voice remains the key service

Total global voice revenues are forecast to decline at a CAGR of -0.9% between 2011 and 2016, falling from $658bn in 2011 to $628bn in 2016. However, voice will continue to be the largest contributor to mobile service revenues, accounting for 60% of revenues in 2016.


Mobile telecoms services (2)

Data holds the key for future service revenues

Non-voice revenues will grow at a CAGR of 7.2% between 2011 and 2016 to reach $419bn as a result of strong mobile broadband growth. Over the next five years, non-voice revenues will stop supplementing voice revenues and will begin to replace them.

Mobile broadband will top the regulatory agenda

The regulatory agenda in the next five years will focus on how to provide access to cheap broadband services. This will influence policy on spectrum, roaming, and investment in next-generation mobile networks.

LTE will dominate next-generation access, but HSPA is here now

LTE connections are expected to reach 709 million by 2016 as support for mobile WiMAX continues to collapse. However, HSPA will be the dominant data-centric technology, with connections reaching 2.5 billion in 2016.

Competition, market saturation, falling ARPU, increasing data traffic, and regulatory issues will create market pressures

Operators will have to adopt robust responses to deal with market pressures. New business models that focus on adopting a LEAN role will dominate operator strategy. Network optimization, service and tariff innovation, and creative approaches to partnerships and M&A will also be important.

High-speed mobile data connections, by technology: 2009–16


Fixed telecoms and broadband services China’s focus on convergence highlights the need

for joined-up strategies

China’s impact on the telecoms industry will continue to grow over the next five years as the size of the market has a considerable impact on vendor strategy. Another notable aspect of China’s influence on the telecoms industry is the country’s approach of using ICT to drive economic growth. The Chinese government has an explicit strategy for convergence, and since July 2010, 12 cities selected by the State Council have launched convergence trials. While we believe that this will be a difficult process, the prominent focus on convergence by one of the world’s largest economies highlights that policymakers and regulators that have not been proactive in driving increased convergence will need to act quickly.

Operators must use broadband to leverage other players’ innovations

The shift to all-IP networks is increasing the opportunity for operators to develop and deliver services and content to the enterprise, public, and consumer segments. In a fiercely competitive environment, operators must optimize the role that they play in the value chain by taking advantage of the innovation and brands of other players. The telco’s role may vary considerably depending on the market opportunity and the positioning of the individual telco.

Supporting cloud services is the key to development

Telcos must look to sell their cloud services as part of a bundle in order to differentiate their offerings from pure cloud-service competitors such as Microsoft and Amazon. As a result, telcos must ensure that their marketing and sales messages highlight the benefits of a single supplier for all of an enterprise’s communications and IT needs. A partnership with an IT services provider can help telcos to achieve this, as can implementing a joint go-to-market approach such as those employed by SFR and HP or Telefonica and NEC.

Use quality and ease of use as VoIP differentiators

As VoIP now has a significant presence in mass-market consumer and enterprise service portfolios, telcos need to continue to grow VoIP services as part of their wider broadband strategies. However, new VoIP innovations such as embedded voice in social networking provide few revenue opportunities for telcos. Telcos’ monetization opportunity will lie in integrating voice subscriptions and minutes with service bundles, and using quality to differentiate from soft-client VoIP services.


Operational impacts

Reducing costs while improving customer service and customer experience systems will continue to be the main priorities for telcos in 2012.

More customer service functions will move online. Telcos see portals as an efficient, scalable, and homogeneous channel to maintain. Portals also improve customer service and satisfaction levels by allowing customers to access them 24/7.

Telcos will continue to leverage the customer service potential of social media, and will begin to move away from the current complaints forum.

The telco business model will change to support more agile, software-driven business processes. Clustered models will also be developed at a network and service level for the delivery of services.

What are your business priorities?

11%

13%

16%

38%

43%

56%

68%

39%

39%

28%

52%

38%

33%

25%

46%

43%

22%

10%

18%

11%

4%

4%

5%

34%

0%

1%

0%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Improve supplier relationships

Incentivize employees

Growth through entry into new geographic markets

Reduce costs

Growth through launch of new products and services

Improve efficiency

Improve customer experience and satisfaction

High priority Mid-high priority Low-mid priority Low priority


Operational impacts (2)

Although capital intensity will remain flat and opex will continue to come under pressure, telcos must ensure:

that they have robust network and service quality and availability

that any burden to resolve technical shortcomings does not fall on customer service functions.

Partnerships with suppliers will play an increasingly important role in the day-to-day operations of telcos. However, traditional network equipment provider partners are coming under greater threat from software vendors, systems integrators, and IT service providers. This is particularly the case in relation to the provision of customer experience management systems

Evolution of the scope of managed network services


Impact of regulation

Next-generation access (fixed and mobile)

Despite challenging economic conditions, investment in fixed and mobile next-generation networks continues at speed. Next-generation access (NGA) continues to dominate regulatory debate as significant investments are being made by the public and private sectors. How to incentivize investment is still a challenge for many governments looking to bring broadband to all of the population. Another challenge facing national regulatory authorities is striking the appropriate balance between creating competition and supporting investment. Determining how access will be granted to alternative operators and on what basis is central to this.

Fixed: The key issue for regulators will be the migration from copper to fiber, the access obligations being imposed, and what regulated pricing exists. Some countries will ask, what is the role of government in facilitating and financing rollouts?

Mobile: How regulators award spectrum for NGA, and the obligations they place on license holders will be key regulatory issues.

Forward looking regulatory policy

The relationship between regulators and policymakers is crucial to ensuring a dynamic industry that facilitates the entry of new market players and the evolution of existing ones. Whether this is between regulators and governments or regulators and super-national bodies such as the European Commission, there are a number of challenging issues ahead. At the top of the agenda sits universal broadband access, closing the digital divide, reforming ex-ante regulatory frameworks, and tackling cross-border issues such as international roaming.

Regulation of content

Introducing rules to ensure net neutrality, tackling illegal peer-to-peer file sharing, and the emergence of exclusive relationships between ISPs and content creators have all made the headlines recently. Regulators will need to take a new approach to tackle these ongoing regulatory challenges.


Technology trends



Service providers will continue to make the case for the value of the network, and vendors will improve network intelligence in support of this. Key initiatives include:

policy management/policy enforcement to improve the monetization and efficiency of both fixed and mobile networks

control plane extension and expansion (multi-domain, multi-layer)

fewer, more capable multi-layer network management systems

the continued evolution to flatter, IP-based networks and more flexible hardware and architectures (e.g. SDR, SON, and small cells; programmable optical modulation; vectoring/bonding; and hybrid solutions capable of evolution over time).

Many regions are still struggling with the cost of fiber access. As a result, vendors continue to improve copper and wireless products, and mobile broadband is increasing in popularity in emerging markets with small fixed footprints and low ARPU prospects.

Components

DSP, PIC,etc

Systems

QoS, low latency, flexibility, capacity, MS

integration

Networks

QoS, low latency, flexibility, capacity, automatic

provisioning

Applications

CDN and cloud computing services, value-added services

Costsavings

derive from integration at

all 3 levels

New revenuesources

Components

DSP, PIC,etc

Systems

QoS, low latency, flexibility, capacity, MS

integration

Networks

QoS, low latency, flexibility, capacity, automatic

provisioning

Applications

CDN and cloud computing services, value-added services

Costsavings

derive from integration at

all 3 levels

New revenuesources


Network infrastructure (2)

In 2012, the role of the systems integrator (SI) will expand due to service providers’ desire for:

fewer vendors to manage better end-to-end service management a solution to the growing complexity of service

requirements such as cloud service-level agreements.

Partnering will become an increasingly important skill for all vendors as they seek to create or become part of more complex ecosystems.

IP transformation experience will be a highly valuable commodity for SIs.

Vertical integration to lock in critical components innovation will continue for full-service vendors.

Chinese vendors will continue to compete with each other and expand outside of their home market as growth in China slows in many infrastructure segments. Their competitors will look to technology innovation and higher-level solutions to compete more effectively with them.

SMART = Services, management, applications, relationships, and technologyLEAN = Low-cost enablers of agnostic networksOEM = Original equipment manufacturer SI = systems integrator


Network infrastructure (3)

Segment Product dynamics Competitive dynamics Regional dynamics

Mobile RAN HSPA/HSPA+ dominates, even as LTE rollouts continue.

Continued pressure from Chinese vendors and the emergence of new form factors (e.g. small cells, and integrated radio/antennas).

Many countries still waiting on LTE spectrum availability will lead to increased interest in HSPA+. North America is currently a leader in LTE deployments.

Mobile core “Best of breed” and purpose built platforms will fight service router platforms for EPC dominance. 2G/3G products will evolve to EPC.

Competition will expand and shift to include newer players (e.g. Cisco) and newer platforms (e.g. Ericsson SSR 8000).

Regional packet core developments will be tied to RAN dynamics (LTE spectrum).

Optical networking

100G and OTN will be prominent in 2012. Packet (Ethernet, MPLS-TP) deployments will continue to grow. Submarine growth should return with 40G/OTN deployments.

INFN and Huawei will shake up the 100G market. Ciena will make significant gains in OTN. More vendors will look to make undersea deployments.

100G/OTN focus will be on North America, but China will also be a major market. Overall, BRIC countries will be an increasingly large part of global spending.

Service provider switching and routing

Router applications go “up the stack” (e.g. EPC, DPI, caching). Increase in EAD and agg. switches at the edge. LSP switches in the core for CSPs.

Cisco and Juniper will fight each other, but should watch Alcatel-Lucent, Ciena, Huawei, Tellabs, ZTE, and Ericsson.

Price remains a key factor in emerging markets, while performance is more important in mature markets.

Fixed broadband access

MSAP/MSAN platforms (PON, DSL) and CPE are emerging. Additional OLT functionality (aggregation, S&R, and storage). ONUs with integrated home gateways.

Huawei and ZTE are dominant. The are pricing OLT low to capture the Chinese ONT market, and are getting good traction in Eastern Europe. DSL vendors are pushing vectoring.

China is the largest PON market by far, but South & Central America and Eastern Europe are growing. Some DSL vectoring trials are taking place in Western Europe. US MSOs are likely to use EPON for business access.

Key trends by segment


Components

100G Coherent is growing, but will encounter challenges in 2012.

40G DWDM is ramping up, even without a single agreed upon modulation format. 10G is far from dead, with Tunable XFP also ramping up. Expect more life in 10G as Tunable SFP+

enters the market in one to two years.

Metro is fertile ground for 40G and 100G in 2012.

Novel non-coherent solutions are starting to emerge, but it is still unknown which will take hold and grow.

Access is pushing for PON network management improvements.

It will emerge whether the different OTDR approaches can provide a viable solution in 2012.

Client-side ports also need high bandwidth (40Gbps and 100Gbps).

Expect to see advances for higher density in 2012.

Carriers cannot afford to strand resources in the core network.

The solution is in colorless, directionless, contentionless ROADM with a flexible grid, but questions still remain over whether the market can solve the high cost problem in 2012.


Devices and platforms

Smartphones and tablet shipments will continue to grow strongly in 2012 and beyond.

In mature markets, smartphones will make up the majority of mobile phone shipments.

However, globally there will still be a market for non-smartphone devices connected to both broadband and narrowband networks.

In the smartphone market, Ovum expects Android to continue its domination. However, Windows Phone 7 (WP7) shipments will increase sharply as Nokia releases its WP7 handsets, and handset vendors begin to hedge their bets in light of the Google/Motorola deal.

In the tablet market, Android-based competitors to the iPad will start to gain traction. This will be helped significantly by Amazon’s entry into the market with the Kindle Fire.


Devices and platforms (2)

Smartphone software platforms will begin to power an increasing number of other types of Internet-connected devices.

Two device markets in 2011 demonstrated this trend:

tablet devices: iOS and Android

set-top boxes and Internet-connected TVs: Android

Other device markets will increasingly follow this trend, including:

telematics and in-car entertainment and navigation systems

digital cameras.

This is motivated by platform vendors and service providers looking to increase the addressable market for their applications and services.

Vendors are looking to recreate the app store economics on other devices.


Service trends for telcos’ customer-facing business units


Consumer

From digital to the cloud. In 2010, Ovum noted the increasing presence of application stores, and predicted that they would spread to a greater range of device types. This will continue in 2012, but a new aspect will involve the shift of consumer applications into the cloud. This will bring added value to the consumer experience through new, innovative payment models, and will provide flexibility over the content that applications provide. This trend will accelerate in 2012 as differentiation shifts from the content line-up itself to the quality of experience that surrounds it.

Split-screen applications. In 2011, considerable emphasis was placed on multi-screen content and applications. As players attempt to further improve user experience, they will look for ways to combine screens to create a more interactive platform. Initially, this will largely be focused on video content and combining the usage of personal devices with TVs. However, it is likely to spread to other applications and devices as the concept of the digital home starts to break into the early adopter market.

The move to a new wave of communications. VoIP and social messaging are not new applications. However, the range of devices that they are now available on, the ease of their use, and the simple network effects of the more popular brands mean that their use is accelerating to a level where they will have an increasing impact on traditional communications traffic, including email, mobile voice, and text messaging.

The shift in power in the connected home. Although content will remain a priority for consumers, the breakdown of traditional channels means that it will become increasingly difficult for players to differentiate their content offerings from their competitors’. With content becoming increasingly equal, service providers must find differentiation elsewhere, namely in devices, pricing, and quality of experience. Internet players and consumer electronics manufacturers are particularly strong in a number of these areas, and will be able to increase their power in the connected home. However, no player can complete the entire ecosystem on their own, meaning that an increasing range of partnerships will be forged over the next 12 months.


Enterprise

Glocal: global and regional services

Ovum recently asked CIOs at 100 multinational corporations (MNCs) if they would prefer to procure their network and telecoms services from one single global provider, on a regional basis, or on a national basis? Forty-two percent expressed a strong preference to source such services from a single global provider within five years. This points to increased interest in the global model, with only 29% indicating that they take such an approach now.

The desire to rationalize their supplier base, reduce the cost and complexity involved in regional procurement, and gain economies of scale is driving MNCs towards the global model.

Even for tier-1 companies, consistent global provision and services beyond EMEA and North America are a major challenge. However, corporate demand is there. It has been suggested that partnerships are one way to bridge the geographic gap, but Ovum believes partnerships – no matter how deep – are not enough.

Network investment is required, but how can a vendor support network investment in high-growth regions (BRIC and elsewhere)? And what business models could be deployed to ensure that telcos’ margins don’t unduly suffer as they invest to reap the rewards of growth in emerging markets?

Telco share of total contract values:

all deals (total: $16,902m)

BT Global Services $4,237.2m (25%)

Orange Business Services $3,323.7m

(20%)

T-Systems $3,312.2m

(20%)

Verizon Business $2,332.8m (14%)

AT&T $1,013.1m

(6%)

C&WW $730.2m (4%)

Telefonica $704.7m (4%)

KPN Getronics $333.5m (2%)

Global Crossing $286.1m (2%)Others

$586.5m (3%)


Enterprise (2)

M2M: rise of the machines

A huge opportunity exists to connect a growing number of devices to corporate systems, although doing so will be difficult.

Operators face the challenge of understanding what role they are best suited to play in the emerging machine-to-machine (M2M) value chain.

Telcos will all provide connectivity, but some will seek to be the link that connects devices through applications. Others will provide complex consultancy services. Treatment of M2M applications and revenue lines differs between telcos. In some cases, M2M revenues are wholesale, and in other cases they are retail.

Ovum believes that most telcos will require assistance with network readiness and service delivery platforms. Vendors have a key role to play in this area.

In 2011, Ovum covered service provider strategies in M2M. In 2012, Ovum will produce comprehensive coverage on the Internet of things, including: analysis of vertical applications such as m-health, smart grids, fleet management, and connected cars; an investigation of vendor offers in M2M; and an examination of the opportunities that M2M provides to consumer goods, healthcare, and energy firms.

B2

B v

alu

e c

ha

in

Hardware customization and testing

Hardware manufacture

Integration of M2M solution

Applications development

Device provisioning and support

Applications support

Billing and reporting

Th

e M

2M v

alu

e ch

ain

Consulting/sales

Customer care

Customer

Connectivity

Connectivity monitoring and support

Operator core positioning


Wholesale

The commoditization and consolidation of the international wholesale market around fewer, larger specialists will continue in 2012 (e.g. the consolidation of the submarine cable/capacity market, and the consolidation of the international voice market).

New competitors will enter into national wholesale markets. These will largely consist of companies with existing backbone infrastructure that identify opportunities for earning additional revenues from the wholesale channel (e.g. cable companies).

An increasing number and variety of buyers of wholesale telecoms services will bundle, transform, or simply resell telecoms services to their retail customers (e.g. brands and content owners).

In 2012, the wholesale facilities and services that underlie and enable cloud services will gain increasing prominence (e.g. backhaul, data centers, content management, and distribution).

Integrated solutions

Applications

Security

Hosting and management

Voice and video

Transport


Wireline carriers

Mobile operators

Systems integrators

Content owners

Resellers

Virtual operators

Application owners

Wholesale telecoms:

from fiber to the future

ISPsWireline carriers

Mobile operators

Systems integrators

Content owners and distributors

Resellers

Virtual operators

Application developersISPs

Internet players

Ovum - 2012-01 - Telecom Trends 2012

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