Deeper convergence of mobility, broadband and video services creates revenue opportunities and disruption for CSPs

The digital era is bringing fundamental, disruptive changes to traditional business models for communication service providers (CSPs), including telecom operators and cable providers, as the mobility, broadband and video industries converge more deeply. These shifts are driven by the following trends, which will gain further traction over the next several years:

  • The rise of cable mobile virtual network operators (MVNOs) — New entrants including Xfinity Mobile and Spectrum Mobile are attracting wireless customers via low price points and the convenience of being able to enroll in multiple services through a single provider.
  • Preference for over-the-top (OTT) video — The popularity of OTT services including Netflix, Hulu and HBO Now are contributing to video subscriber losses for cable providers and bundling opportunities for wireless operators.    
  • Wireless as a broadband replacement — Over the next several years, customers will gradually substitute traditional fixed broadband connectivity with wireless-based services due to enhanced 5G and LTE-Advanced coverage, fixed-wireless services, and increased data allotments for mobile hot spots.

These trends create both revenue opportunities and disruption for CSPs as cable providers have opportunity to take market share from telecom operators and vice-versa. Cross-selling multiple services enables CSPs to maximize revenue opportunities per customer while also helping to reduce churn. Conversely, the deeper convergence within the telecom and cable industries will create greater challenges for CSPs as broadband and video access will become more commoditized, which will make competitive pricing more crucial to attracting and retaining customers.

Graph showing 3Q18 postpaid phone net additions

Cable MVNOs are disrupting the mobility industry

Comcast’s Xfinity Mobile has emerged as a stronger player within the U.S. wireless market as the brand has garnered over 1 million customers since launching in mid-2017 and has been able to consistently outperform AT&T and Sprint in postpaid phone net additions the past several quarters. Contributing to Xfinity Mobile’s success is the low price of its unlimited data plans, which are currently undercutting prices from all Tier 1 U.S. operators, for the underserved market of single-line customers. Xfinity Mobile is also attracting customers by offering pay-as-you-go pricing for $12 per GB, which provides price-sensitive customers who consume minimal data an alternative amid the market’s emphasis on unlimited data plans.

Xfinity Mobile will become a stronger competitor in the U.S. market over the next several years as it expands its retail footprint and Comcast gains additional broadband customers to which it can cross-sell wireless services. Spectrum Mobile, which became available across Charter’s footprint in September, will also disrupt the U.S. wireless market by offering similar pricing incentives as Xfinity Mobile. Additionally, Altice USA plans to launch an MVNO offering in 1H19 that will focus on serving bring-your-own-device customers, giving the company the opportunity to cross-sell mobility services to its current residential base of over 4.5 million customers.

Chart showing single-line postpaid unlimited data plans

To counter disruption from cable MVNOs, operators can capitalize on the value proposition offered by their unlimited data plans, which bundle in popular OTT streaming services as well as other incentives including high-speed data tiers for mobile hot spots. Telecom operators are also relying on the discounts provided to multiline unlimited data accounts, which are not currently offered to Xfinity Mobile and Spectrum Mobile customers, to undercut cable MVNOs.

Chart showing video services bundled with unlimited data plans

Wireless begins to disrupt the traditional fixed broadband market

Significant enhancements in wireless technology over the past few years, such as the inception of 5G, which makes millimeter-wave spectrum viable for commercial use, as well as the inventions of carrier aggregation, 256 QAM and massive MIMO, have made it economically feasible for CSPs to offer mobile broadband as an alternative to traditional fixed broadband services.

Though Verizon was a major driver of this trend with its early use of 5G fixed wireless, TBR expects more CSPs will begin to leverage their wireless assets to provide similar services in 2019 and beyond. AT&T, with its Netgear Nighthawk 5G Mobile Hotspot, essentially provides a nomadic ultra-high-speed broadband connection leveraging 5G. T-Mobile is also looking to jump on the bandwagon, arguably in a much bigger and more market-impactful way, especially if its proposed merger with Sprint is approved. Regardless of whether the deal goes through, T-Mobile intends to leverage its mix of low-, mid- and high-band spectrum assets with the aforementioned wireless technologies to provide its own mobile broadband as an alternative to fixed broadband services.

A new phase of price competition for internet service could come to North America due to wireless. TBR also expects this trend to unfold in other developed and developing markets, especially where fixed access is not widely deployed. Offering wirelessly delivered, high-speed internet services could become a major new business for telecom operators that are in countries where internet penetration is relatively low.

Consumers will reap the greatest benefits from cable and telecom industry convergence

Though CSPs have the opportunity to create new revenue streams from the deeper convergence of mobility, broadband and video services within the cable and telecom industries, these benefits are largely outweighed by the competitive challenges spawned by industry convergence. Consumers will reap the greatest benefits from cable and telecom industry convergence as they gain more flexible service options as well as the ability to enroll in additional services from a single provider. The competition created from cable and telecom industry convergence will also spur CSPs to become more competitive in their wireless, broadband and video pricing to maintain market share.

CSPs accelerate NFV and SDN investments ahead of the 5G era

Communication service providers (CSPs) are ramping up NFV- and SDN-related investments to realize greater cost savings and efficiencies, according to Technology Business Research Inc.’s (TBR) 2H18 Telecom Software Mediated Networks (NFV/SDN) Customer Adoption Study. This increase in investment will be driven by two underlying factors: CSPs under pressure to realize cost savings as their connectivity businesses remain under pressure and 5G pushing CSPs to pull forward their NFV and SDN road maps.

5G is greatly enhanced when using virtualization, especially when enabling and maximizing the benefits of network slicing and achieving better RAN economics. Though most CSPs intend to initially deploy the non-standalone (NSA) standard of 5G, which tethers 5G radio with EPC, an eventual upgrade to the standalone (SA) standard, which tethers 5G radio to a 5G core, will become a reality in the early 2020s. 5G core is inherently virtualized, and CSPs will be keen to prepare their networks to fully maximize the benefits of utilizing a virtualized network architecture, including, but not limited to, increasing agility, flexibility, visibility and cost efficiency.

 

 

TBR’s Telecom Software Mediated Networks (NFV/SDN) Customer Adoption Studyprovides an in-depth examination of how operators are planning, preparing and executing to succeed in the NFV and SDN market. TBR surveyed 50 people in operations, procurement and IT roles at 25 of the leading Tier 1 telecom service providers worldwide to gain insight into their NFV and SDN adoption plans. The study includes insight into service provider strategy, as well as service providers’ perceptions of supplier positioning and key benefits and obstacles.

5G-readiness spend and migration to new network architectures spur the TIS market to growth in 3Q18

According to Technology Business Research, Inc.’s (TBR) 3Q18 Telecom Infrastructure Services (TIS) Benchmark, the TIS market grew as communication service provider (CSP) investment in areas tied to 5G-readiness increased. CSPs are rearchitecting their networks leveraging NFV, SDN and the cloud as well as implementing new business models, which requires growing spend across a broad range of professional services. Deployment services spend grew slightly, but the market will strengthen as the 5G spend cycle ramps up over the next couple of years, although the spend intensity will be lower than during the LTE cycle. RAN suppliers Nokia (NYSE: NOK), Ericsson, Huawei, ZTE and Samsung will capture incremental TIS market share as they drive high volumes of services attached to their 5G RAN. This is already occurring to some extent as CSPs densify networks as part of their 5G-readiness strategies. Though 5G will require significant hardware spend, the aggregate amount will be lower compared to LTE, which will drive vendors to explore new market areas, such as Industry 4.0.

The managed services market was flat year-to-year in 3Q18 as a decline in outsourcing was offset by growth in the out-tasking market. Generally, vendors are exercising pricing discipline when determining which outsourcing contracts to take on in an effort to improve margins. Ericsson is currently leading the way in this regard as it evaluates 42 contracts for exit or rescoping. Huawei, ZTE and CCS have been less concerned with price and are focused on consolidating the outsourcing market. Other vendors, including those that are historically hardware-centric with little to no footprint in the managed services market, are increasingly playing in out-tasking as they will manage applications deployed in CSP networks. Ciena (NYSE: CIEN) is an example of this trend.

 

 

TBR’s Telecom Infrastructure Services Benchmark provides quarterly analysis of the deployment, maintenance, professional services and managed services markets for network and IT suppliers. Suppliers covered include Accenture (NYSE: ACN), Amdocs, Atos, Capgemini, CGI, China Communications Services, Ciena, Cisco (Nasdaq: CSCO), CommScope, CSG International, Ericsson, Fujitsu, Hewlett Packard Enterprise (NYSE: HPE), Huawei, IBM (NYSE: IBM), Infosys (NYSE: INFY), Juniper Networks (NYSE: JNPR), NEC, Nokia (NYSE: NOK), Oracle (NYSE: ORCL), Samsung, SAP (NYSE: SAP), Tata Consultancy Services, Tech Mahindra, Wipro (NYSE: WIT) and ZTE.

AT&T 5G moves forward, as carrier pursues cost savings

Nevertheless, AT&T and Verizon, which plans to launch its 5G mobile network next year, are unlikely to slow down their rollouts, said Chris Antlitz, an analyst at Technology Business Research Inc., based in Hampton, N.H. That’s because delivering a high-speed internet service over 5G technology is a lot cheaper than on 4G.

“5G will be widely deployed across the states, and it’s going to be deployed as fast as the telcos can get it out,” Antlitz said. “5G is far superior from a cost-per-gigabyte perspective compared to 4G.”

 

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Ericsson Turnaround Could Limit Growth Potential, Says TBR

“‘Though Ericsson’s focused strategy has proved to be a viable approach to stabilize the company, return it to profitability, and provide incremental organic growth, the key concern will be how sustainable that stability and growth will be over the long term,’ wrote Chris Antlitz, a senior telecom analyst at Technology Business Research (TBR), in a new report.

“Antlitz cited Ericsson’s focus on the wireless access domain that he noted was undergoing significant competitive disruption due to the launch of 5G networks and increased use of virtualization technologies. He explained that Ericsson’s focus could allow it to take market share from rivals, particularly Nokia, Huawei, and ZTE, but that business trends like virtualization, cloud, and white box could impact those efforts down the road.

“‘Ericsson is betting its [Radio Systems RAN gear] will offset the impact of these adverse trends and hasten its shift to a more software-centric entity with a more recurring, license-based software model that carries relatively high, sustainable margins, but this shift will take years to unfold, and there is significant legacy business at risk of disappearing in the interim,’ Antlitz noted.”

U.S. 5G investment supports non-China-based vendors as Huawei and ZTE face increasing headwinds

Nokia and Huawei are well-positioned to win as operators overhaul architectures in the 5G era, but most of the spend to date is on 5G radios, with Ericsson at an advantage due to market perception of its software-upgradeable Ericsson Radio System RAN. The network must ultimately be overhauled to fully realize 5G’s potential, but it will take CSPs many years to evolve their networks end-to-end, and the current focus — and 5G-related capex spend — will be on 5G radios. In the 5G RAN space, TBR believes Ericsson leads in market share. Nokia and Huawei, however, have broad portfolios that enable them to enter 5G accounts from multiple domains.

Graph showing 3Q18 revenue, year-to-year growth and operating margin for vendors in TBR's Telecom Vendor Benchmark

 

 

The Telecom Vendor Benchmark details and compares the initiatives and tracks the revenue and performance of the largest telecom vendors in segments including infrastructure, services and applications as well as in geographies including the Americas, EMEA and APAC. The report includes information on market leaders, vendor positioning, vendor market share, key deals, acquisitions, alliances, go-to-market strategies and personnel developments.

Ericsson’s turnaround is in process, but sustainability of business is in question

TBR perspective

Though Ericsson’s focused strategy has proved to be a viable approach to stabilize the company, return it to profitability and provide incremental organic growth, the key concern will be how sustainable that stability and growth will be over the long term.

Ericsson’s focus on the wireless access domain tethers the company to the whims of that market, which is undergoing significant disruption as 5G and virtualization take hold and as operators increasingly shift capex budgets from connectivity infrastructure to building digital businesses, limiting Ericsson’s growth potential. Though there is room for Ericsson to take market share, particularly from Nokia (NYSE: NOK), Huawei and ZTE by leveraging its software-upgradable Ericsson Radio System (ERS) RAN gear, Ericsson is not immune to adverse business trends impacting the broader RAN market, namely legacy decommissioning, virtualization, openness, cloud and white box.

Ericsson is betting its ERS will offset the impact of these adverse trends and hasten its shift to a more software-centric entity with a more recurring, license-based software model that carries relatively high, sustainable margins, but this shift will take years to unfold and there is significant legacy business at risk of disappearing in the interim.

With the architecture of the network fundamentally changing to be virtualized and cloudified and communication service providers (CSPs) focused on relentless cost efficiency and TCO reduction, Ericsson will have to carefully balance its shift from the old world to the new reality, whereby forklift RAN upgrades become lower scale and targeted, and innovation and value migrate to the software layer. This has significant implications for Ericsson’s hardware and close-to-the-box services businesses, both of which are optimized to operate at high scale for efficiency and profitability.

TBR notes Ericsson and its close rival Nokia are pursing different paths during the 5G era. While Ericsson focuses on its core business of selling RAN and mobile core directly to service providers, Nokia is taking an end-to-end infrastructure approach and is building out a dedicated business unit with a full suite of resources to directly sell to enterprises. Though Industry 4.0, 5G and digital transformation are underlying themes that find commonality between the two vendors, their divergent tracks are noteworthy.

 

 

Ericsson (Nasdaq: ERIC) hosted its annual Industry Analyst Forum in Boston, bringing along a range of executives to provide an update on the company’s corporate and business unit strategies, with a focus on Networks, Managed Services and North America. Key topic areas included 5G, Internet of Things (IoT), automation and artificial intelligence (AI). Following the main session, analysts could attend three tracks — Network Evolution to 5G, AI and Automated Operations, or 5G and IoT Industry Innovation — and then participate in one-on-one speed meetings. The tone of Ericsson’s 2018 analyst day was upbeat as the company sees early signs that its turnaround plan is yielding results, evidenced by its 3Q18 earnings results in which organic revenue growth returned and margins improved markedly. Ericsson remains committed to its transformational restructuring and focused strategy, which are key pillars of its turnaround plan.

HCL Technologies’ reinforces technical and engineering roots with the addition of IBM Software products

HCLT’s acquisition provides entry into emerging areas

Building off its long-standing partnership with IBM, on Dec. 6 HCL Technologies (HCLT) announced the acquisition of seven IBM Software products for $1.8 billion. The acquisition, which is expected to close in February 2019, includes IBM’s AppScan, BigFix, Notes/Domino, Connections, Digital Experience (DX), Unica and Commerce as well as 10,000-plus existing clients. Each product falls into one of three focus areas: security (AppScan, BigFix); multichannel e-commerce (Commerce, Unica, DX); and collaboration (Notes/Domino, Connections). While these offerings directly tie to HCLT’s Mode 3 products and platforms, they mostly complement Mode 1 and Mode 2 services and solutions, creating the opportunity for HCLT to upsell and cross-sell new services as Mode 2 includes the company’s emerging technology portfolio offerings (i.e., Digital & Analytics, IoT WoRKS, Cloud Native Services, and Cybersecurity & Governance, Risk and Compliance [GRC]).

In August 2017 HCLT and IBM announced an expansion of their partnership, creating five IP products around automation and DevOps solutions, supported by HCLT’s $780 million investment. The partnership intended to shift HCLT’s infrastructure into emerging areas while maintaining growth. The five products developed through this extension of the partnership were included among the seven announced in the planned acquisition. HCLT’s engineering team supported the original product development and will now support the integration of the acquired assets into the HCLT portfolio as well as the development of additional emerging technologies.

Compare to peers

HCLT acquires peers that enhance and build out its core capabilities around emerging technologies. For example, HCLT acquired H&D International Group (June 2018); Butler America Aerospace LLC (January 2017); and Geometric Limited (April 2016) to improve its engineering and R&D skills. HCLT further expanded its business process services offerings and systems integration capabilities by purchasing C3i Solutions (March 2018) and Alpha Insights (September 2017); and Urban Fulfillment Services LLC (April 2017). The acquisitions also support HCLT’s shift from legacy technologies. HCLT’s planned acquisition of the product sets from IBM will elevate the security, commerce and collaboration expertise in HCLT’s portfolio. Peers such as Cognizant, Infosys, Tata Consultancy Services (TCS) and Wipro have also been executing an active M&A strategy in areas such as digital design to support transformation engagements (e.g., Wipro’s acquisition of Syfte and TCS’ acquisition of W12). Additionally, Cognizant purchased Advanced Technology Group (ATG) and SaaSfocus to add Salesforce advisory and integration services.

What does this mean for HCLT?

Short term

Pending the acquisition’s close, HCLT integrates the solutions within its Mode 3 products and platforms business and onboards new clients. Following the addition of IBM’s salesforce around these products through the acquisition, HCLT will benefit from a more seamless transition for clients currently under the IBM brand as it gains the specialists and salesforce maintaining the client relations as well as a quicker sales turnaround. Further, HCLT will focus on pursuing new client relationships using Unica, AppScan, Commerce and Big Fix to create additional revenue streams from the products formerly under the IBM umbrella. However, HCLT will seek to cross-sell the application capabilities of Domino/Notes to its existing client base.

Long term

HCLT plans to enhance Mode 1 and Mode 2 services and solutions using the acquired products by adding its security, commerce and digital marketing expertise. The products will enable HCLT to leverage a SaaS delivery model for its infrastructure management engagements, supporting the company’s shift into higher-profit software-driven services. HCLT will also improve its position within a variety of vertical markets as the products will bring existing product users, building its expertise around environment management. While the products will add SaaS capabilities, HCLT could benefit from pursuing a strategic partnership with a consulting vendor, such as PwC, or further expanding its relationship with IBM to access consulting services. The addition of services would improve HCLT’s ability to integrate the acquired products within its existing client relationships and transition clients into a different delivery model. This would allow HCLT to increase its client-facing expertise, enabling the company to work more closely with clients and coinnovate within transformation engagements. The additional client base creates the opportunity for HCLT to increase the volume of transactions and accelerate revenue growth, but HCLT will need to quickly onboard new clients and effectively communicate new offerings to transition engagements with existing clients and capitalize on the additional products and market.

2019 Cloud & Software Predictions: More purchasing will be driven by intelligence rather than deployment

In 2019 customers will care less about deployment, vendors will buy more, and both sides will become more intelligent

As 2018 comes to a close, it is good to look back at some of the long-standing questions that have been settled during the year:

  • Not all workloads will move to cloud; in fact, some will move back to on-premises delivery methods.
  • There will be no single cloud that rules all others, even if Amazon Web Services (AWS) remains the IaaS front-runner.
  • Wholesale migrations of legacy workloads will not occur quickly or easily.
  • The IT department will play an important role in cloud adoption moving forward.
  • Cloud needs to deliver short-term, immediate value for customers to consider adoption. The days of yearslong implementations are over.

The market is far from mature, however, as 2019 promises even more changes. Cloud remains a generic term for many customers, but they know just how many options are now available. A growing choice of delivery methods, combined with a much-improved management tool set, will drive pervasive hybrid adoption. These options allow customers to focus more on the solution, regardless of the specific cloud delivery method, that best fits their use case. Greater customer adoption is also creating more urgency among cloud providers, which will force more acquisition investments and riskier purchases as leaders scramble to best position themselves to claim share of the growing market. Lastly, the overarching trends around analytics, artificial intelligence (AI) and machine learning will become increasingly pervasive. Combined, these developments should redefine the cloud market yet again during 2019.

Opportunities for wireless subscriber growth remain plentiful for U.S. operators

Cable providers are disrupting the U.S. wireless market

Subscriber growth for U.S. Tier 1 operators is being limited by the growing momentum of Comcast’s Xfinity Mobile brand, which outperformed AT&T and Sprint in postpaid phone net additions in 3Q18 and now has a base of over 1 million subscribers. Xfinity Mobile will become a stronger competitor in the U.S. market over the next several years as it expands its retail footprint and Comcast gains additional broadband customers to which it can cross-sell wireless service. Spectrum Mobile, which became available across Charter’s footprint in September, will also disrupt the U.S. wireless market by offering similar pricing incentives as Xfinity Mobile.

 

TBR’s U.S. & Canada Mobile Operator Benchmark details and compares the activities of the largest U.S. and Canadian operators, including financial performance, go-to-market initiatives and resource management strategies. Covered companies include AT&T (NYSE: T), Verizon (NYSE: VZ), Sprint (NYSE: S), T-Mobile (Nasdaq: TMUS), U.S. Cellular (NYSE: USM), Rogers, Telus and Bell Mobility.