Update: Download your free copy of TBR’s Top Telecom Predictions for 2024 special report, Telecom Industry Retrenches in Response to Macroeconomic Pressures

Telecom industry will face an unprecedented level of uncertainty and risk in 2023

Top 3 predictions for Telecom industry (CSPs) in 2023

1. Global telecom industry enters rationalization phase
2. CSP investment in 5G infrastructure enters post-peak phase
3. Cablecos build out their own cellular networks in the U.S.

CSPs face a confluence of headwinds in 2023

2023 will likely be one of the most uncertain and challenging periods in the telecom industry’s history. A confluence of negative shocks will concurrently impact the industry next year, with telcos and cablecos bearing the brunt of the impact and vendors suffering knock-on effects.

The challenges communication service providers (CSPs) face are large in magnitude, broad in scope and occurring simultaneously. They include the following:

• Rising interest rates: After more than a decade of unprecedented low interest rates — thanks to key central banks’ quantitative easing (QE) strategies, which were originally enacted to combat the global financial crisis of 2008-2009 — CSPs now face rapidly rising interest rates as central banks aggressively pivot to quantitative tightening (QT) to combat inflation. This reversion of interest rates portends challenges for the telecom industry due to record leverage in the sector.
• Inflation: General price increases across the global economy pose a risk to CSPs’ input costs, especially around labor and energy. Average revenue per user (ARPU) is struggling to keep pace and new revenue sources remain elusive, squeezing CSPs’ margins.
• Lack of 5G ROI: Despite spending several hundred billion dollars in aggregate thus far on spectrum and infrastructure for 5G, there remains no clear path to ROI for CSPs, further deteriorating CSPs’ business fundamentals.
• Technological complexity: New technologies and architectures (e.g., open vRAN and network slicing) are proving to be more complex and expensive to deploy than originally anticipated, posing a business risk and hindering CSPs from evolving into digital service providers.
• Energy costs: Supply shortages and rising energy costs pose a risk to the ability to run telecom equipment and are likely to impact CSPs’ margins as energy is one of the largest components of CSPs’ opex.
• Supply chain disruption: Sourcing parts remains a challenge, delaying the timing of infrastructure deployment and fueling inflation. Talent remains in short supply and is expensive, especially for new skills that are required for digital transformation. In addition, the worsening geopolitical environment and continued COVID-19 lockdowns in China threaten to create new and persistent supply chain bottlenecks.
• New competitors: Especially hyperscalers, which are capturing new value created from key enablement technologies, including 5G, multi-access edge computing (MEC) and AI and machine learning (ML), as well as upending the traditional connectivity business model
• Labor strikes: Strikes are likely to occur as unionized labor rallies for wages that keep pace with inflation. Strikes pose a risk to CSP operations and margins; TBR notes this issue mostly impacts CSPs in the U.S. and Europe, where unions in the telecom industry are most prevalent.
• Economic recession: The global slowdown that began in 2H22 (mostly driven by QT) is highly likely to morph into a global recession in 2023, portending adverse demand-side impacts for CSPs and their vendors. Bad debts are likely to increase, and consumers and businesses are likely to optimize the telecom services they purchase.

The impact of these challenges will be partially mitigated by government stimulus (much of which was greenlighted during the COVID-19 pandemic), which continues to directly and indirectly power the global economy (e.g., subsidize capex, support low-income households, backstop consumer and corporate credit markets), though the impact of the economic support is waning.

TBR’s convictions that the telecom industry will look very different by the end of this decade continue to strengthen, with current events laying the groundwork for structural changes in the composition of the telecom industry and the business model for connectivity. Economic gyrations and other challenges have a history of driving significant changes in the market, at a broader scope and much faster pace than what occurs during stable market conditions. The current situation will prove no different.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Update: Hear TBR’s 2024 predictions for the IT infrastructure industry in this January 2024 video with TBR Principal Analyst Angela Lambert

Strategic investments will combat impending headwinds

Top 3 predictions (and emerging trends) for IT Infrastructure in 2023

1. The storage market will remain extremely competitive as vendors invest to provide the most flexible platforms
2. User consoles are the OEM frontier for establishing an edge-to-cloud ecosystem
3. Managed services are eyed as a profit preserver

Building a diverse ecosystem is key to maintaining relevance and protecting against share losses

In a continuation of a multiyear trend, the go-to-market efforts of the IT infrastructure have focused little on the infrastructure itself and increasingly on becoming an integral piece of organizations’ edge-to-cloud strategy. Infrastructure vendors are honing their ability to deliver outcome-based solutions in hopes of being seen as solution providers rather than transactional sellers. While the vision appears to be relatively straightforward, the successful execution ultimately relies on significant investment in engineering operating systems and management platforms to function across edge, data center and cloud environments, plus investments in engineering joint solutions with cloud vendors and ISVs that can satisfy a broad range of customer needs.

Executing on the ecosystem strategy is critical to infrastructure vendors for three key reasons.

1. The burden on IT organizations to manage infrastructure has only increased since the pandemic, necessitating new solutions to automate and offload operational tasks.
2. Volumes of data generated continue to grow, with significant activity happening outside of centralized data centers in edge locations, warranting new strategies for deploying and managing infrastructure and integrating it with other solutions.
3. Preserving revenue growth and profitability will require a revenue diversification strategy that emphasizes solutions and services that add value beyond the hardware itself, which will be particularly important as customers pull back on infrastructure spending in 2023 over economic concerns.

Competition among infrastructure vendors will be stiff as ever going into 2023 as the market navigates revenue challenges driven by cautious enterprise spending, leaving vendors hungry to increase their relevance and value to customers outside the traditional data center.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Update: Hear TBR’s 2024 predictions for the federal IT services industry in this January 2024 video with TBR Senior Analyst John Caucis

The bull market in federal IT will continue in 2023

Federal government IT Services predictions and trends going into the new year

1. Federal agencies accelerate demand for commercially developed digital technologies, particularly cloud computing
2. Cybersecurity investment accelerates to defend an ever-expanding threat landscape and combat rising cyber disruption in federal IT
3. Acquisitions continue at a slow pace in the federal IT M&A market during 2023

Federal IT spend is poised to surge to new highs on the back of digital modernization and cybersecurity investment

The Biden administration’s federal fiscal year 2023 (FFY2023, ending Sept. 30) budget looks to be a windfall for federal IT contractors, with a double-digit year-to-year increase in civilian IT spending, significant expansion in cybersecurity outlays across defense and nondefense sectors, and generous funding boosts for public health IT infrastructure and veteran care. Other technology priority areas include 5G and broadband connectivity, AI, enhancement of space capabilities and IT systems modernization.

IT spending growth will be most robust in the civilian segment, where the White House has requested nearly $66 billion for technology investment, up 12% over FFY2022 levels. Digital transformation and cybersecurity enhancement initiatives will receive prioritization, the latter driven largely by the 2021 Executive Order (14028) mandating that federal agencies fortify cyber defenses. Zero-trust security will feature heavily in civil agency IT cyber strategies to secure supply chains, improve incident response and reporting, and minimize workforce-related security risks.

During the first year of the Biden administration, federal IT contractors with significant footprints in the Department of Defense (DOD) were concerned that the emphasis on the president’s domestic agenda would result in significant slowdowns, or even cuts, in defense spending. This scenario did not play out, as proposed DOD outlays in the president’s FFY2023 defense budget rose by tens of billions of dollars over FFY2022 levels, including a 2.3% increase for IT and cyberspace activities funding that will push total DOD IT spending to nearly $58 billion in FFY2023, up from the $56.6 billion enacted in FFY2022.

Like their counterparts in the civilian sector, DOD agencies are looking to adopt zero-trust approaches to shore up the security of enterprise IT and communications networks, and other critical military infrastructure. Enhancing IT-related space capabilities (e.g., missile warning and navigation systems, and advanced satellite communications) will also receive funding increases, and the DOD will also increasingly utilize AI, analytics, big data and next-generation mapping technologies to study the national security implications of climate change.

Against the backdrop of record levels of technology investment spanning civilian and defense agencies alike, federal IT contractors are confident the federal IT market will remain growth friendly through 2023.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Complexities in developing and managing digital transformation (DT) have fueled tremendous opportunity for vendors across IT and services over the past five to seven years. With the market likely facing another slowdown in the next six to nine months, it will become even more imperative for vendors to rely on the trust and relationships they have built within their clients’ organizations.

With the pendulum swinging back and forth between where DT programs originate — from top-down to grassroots and back — vendors have had the chance to build portfolio and sales motions that appeal to broader buyer personas.

Prediction No. 1: As clients graduate beyond digital transformation, vendors scramble to stay relevant

Principal Analyst Boz Hristov: This trend evolved through the first nine months of 2022. While digital transformation has been a trend for years now, the reality is that more people have talked about it than have taken action, with a plethora of pilots but a scant number of transformations at scale — and most buyers have yet to realize that addressing change management issues frequently trumps addressing technology complexities.

Resolving internal politics creates an opening for consultancies. However, consultancies must be careful about how they approach such opportunities as the expectations of the stakeholder ecosystem have evolved and legacy sales tactics might not work in today’s environment and could potentially backfire and pressure trust and brand.

Executing on their promises without making buyers feel like they are being sold on a particular solution will enable consultancies to build the foundational trust necessary to increase client stickiness, resulting in increasing managed services sales, the North Star that vendors from across the spectrum seem to be following these days.

Additionally, opportunities around Agile coaching, especially among buyers who are further along in their DT programs, continue to create openings for IT services vendors and consultancies. To succeed, vendors must account for the evolving nature of in-house IT departments, which often face internal challenges and may sacrifice tech to gain leadership buy-in and sponsorship of a particular program. We do not anticipate that these trends will slow down and/or be resolved anytime soon, especially as many buyers are just starting to invest in their DT programs.

Prediction No. 2: Funky chairs only matter if you can physically sit in them — The resurgence of innovation and transformation centers

Practice Manager and Principal Analyst Patrick M. Heffernan: If IT services and consulting clients often failed to meet their highest expectations around innovation pre-pandemic, relying on screens to innovate only exacerbated the gap between incremental change and true transformation. Post-pandemic, both clients and the people leading innovation and transformation engagements want to return to in-person sessions, understanding that creativity, serendipity and ingenuity rarely happen in Zoom or Teams meetings.

Three cautionary notes on the stampede back into physical experience centers for design thinking sessions:

• The “been there, done that” attitude started to show up in our Voice of the Customer research — and while clients may be clamoring to be in-person again, they are going to want assurances their time will be well spent.
• While we are seeing a resurgence of in-person engagements, we do not expect a similar push to open additional new physical centers, at least not in the near term. The pandemic allowed IT services vendors and consultancies to hone their virtual delivery skills and the metrics around these centers — both of which may contribute to reduced enthusiasm for new physical centers.

Hybrid isn’t it. We were wrong when we predicted all parties involved would embrace hybrid engagements, mixing on-site and remote participants. While some vendors took that approach in the latter months of the pandemic, most now realize the most effective sessions come from either all in-person or all-remote engagements. In hybrid, one set of participants inevitably get a suboptimal experience, so an increasing number of vendors are abandoning hybrid altogether.

Prediction No. 3: New generation of business leaders expect business transformations, not digital ones

Boz: TBR recognizes that both technology and services vendors — particularly those that are publicly traded and must meet Wall Street’s expectations for profitable growth — will not slow their pace of introducing new concepts or portfolio offerings. New opportunity areas like sustainability and the metaverse are on the horizon, and we have observed virtually every vendor we cover make either a large investment or a splashy PR announcement in one or both of these areas.

While these investments drive technological progress, vendors must be careful about how they pitch such offerings, as buyers are usually focused on short- to mid-term issues like transforming business models rather than long-term boiling-the-ocean type of issues. Evolving business priorities vary by industry, which puts further pressure on vendors to demonstrate their value without coming across as too generally focused.

At the same time, buyers seek to diversify risk, which further compels vendors to think about operating as an ecosystem enabler, rather than adopting a “we can do it all” mindset. In TBR’s view, the most successful vendors are those that stay true to their strengths instead of coming across as pushy salespeople. This approach enables them to gradually expand mindshare and wallet share by engaging in challenging discussions about risk sharing rather than simply taking orders.

Getting internal buy-in from vendors’ leadership and establishing a runway that is long enough to try such tactics without being pressured to meet 90-day reporting goals will be key.

Predictions is an annual TBR series examining market trends and business changes in key markets. 2022 covered segments included cloud, telecom, devices, data center, and services & digital.

While 2022 has required IT infrastructure vendors to focus on demand hurdles, including supply chain challenges and growing backlogs, vendors have also continued to invest in expanding their portfolios to capture greater wallet share from customers and create more diversified revenue streams.

Vendors’ portfolio strategies largely center on finding new ways to entrench themselves more deeply into customers’ IT ecosystems, helping to maintain hardware share while also opening up software and services revenue opportunities. During 2022 we have seen the honing of hardware subscription offerings, expansion of ecosystem relationships, and a race to develop competencies in edge compute use cases, all of which data center vendors hope will keep demand steady with market uncertainty looming in 2023.

Prediction No. 1: Infrastructure vendors’ ‘as a Service’ offerings will gain traction as the offerings are refined for specific use cases

Principal Analyst Angela Lambert: Half of this prediction has come true. Without question, IT infrastructure vendors are seeing a boom in the adoption of “as a Service” offerings, with high growth rates across new customer acquisitions and annual recurring revenue being reported by the likes of HPE GreenLake, Dell Technologies APEX and Lenovo TruScale. While most vendors entered the subscription services space via Storage as a Service, in 2022 we have seen additional tailoring of portfolios to better align with overarching vendor strategies. Examples include:

• HPE GreenLake released a series of Network as a Service capabilities, officially integrating its high-growth Aruba Networks portfolio into the GreenLake ecosystem.
• NetApp Keystone was first to market with a hybrid cloud offering that allows customers to reallocate spend between on-premises infrastructure and NetApp public cloud services as resource needs change over time, which aligns to the company’s objective to drive growth through cloud software.
• Pure Storage reorganized its subscription business, renaming Pure as-a-Service to Evergreen//One to better integrate with the company’s other support and maintenance subscription offerings under the Evergreen brand.

On the other hand, while IT infrastructure vendors’ subscription services continue to be refined toward standardized offerings for specific use cases, TBR’s research shows the market is challenged by vendors’ desires to go to market with standard packages that are easier to sell and customers’ desires to customize the packages for their specific needs.

This has led to a high proportion of Hardware as a Service deals being scoped and sold on a custom basis instead of a more transactional model akin to Infrastructure as a Service. Successful vendors will meet customers in the middle by building standard services categories that contain modular services components, which can be easily added or removed in the sales process. After all, the ability to customize and control remains a key value proposition of on-premises infrastructure relative to public cloud.

Prediction No. 2: Hardware vendors embrace the ecosystem

Angela: Go-to-market strategies focused on promoting end-to-end solutions and software-centric capabilities over messaging about hardware features is a persisting trend, with the current spin highly centered on hybrid and multicloud themes. This requires a highly partner-centric strategy, and IT infrastructure vendors have continued to announce enhanced partnerships with the likes of VMware and Red Hat as well as deepening relationships with Microsoft Azure and Amazon Web Services (AWS).

One emerging trend among IT infrastructure vendors not mentioned in our 2022 predictions is embracing a broader ecosystem of customers to increase their relevance and influence in previously untouched IT groups, particularly developers within customer organizations who ultimately influence decisions on where applications are hosted and how they are built. From an execution standpoint, IT infrastructure vendors are focused on automating aspects of spinning up new projects via on-premises infrastructure, supporting a range of container-based technologies and building developer communities within their own ecosystems.

Prediction No. 3: Vendors will carve out niche specialties under the broad banner of edge compute

Angela: IT infrastructure vendors have indeed focused on targeting specific edge compute use cases in 2022, although most appear to be targeting the same verticals, which may call into question the ability to develop niche capability from a hardware-centric solutions perspective. Retail and manufacturing emerged in 2022 as the most popular verticals for developing edge compute solutions, with healthcare a distant third.

After being plagued by labor shortages for the past two years, the retail industry has accelerated its investments in edge compute to help transform the brick-and-mortar experience. Vendors are supporting retail transformations by a range of retailers, from big-box retailers to quick-service restaurants and convenience stores. Edge compute solutions can help employees work smarter by automating the ordering and checkout processes, assisting customers with finding inventory and enhancing in-store app experiences. Beyond the in-store experience, data collected through edge deployments is also used to refine merchandising strategy and redesign store layouts to optimize customer experience.

The manufacturing industry is also a top target for building edge compute solutions based on market size, a high rate of adoption of operational technologies, and a strong connection between manufacturing edge solutions and increased customer ROI. Safety, quality control and preventive maintenance are use cases commonly addressed by vendors, many of which rely on computer vision and the ability to analyze real-time data streams.

Ultimately, adoption of modern edge compute use cases is still on the horizon for many businesses, with TBR’s Infrastructure Strategy Customer Research indicating that only about one-quarter of businesses are investing in edge today, and nearly 40% are evaluating future edge investments, signaling growth opportunity for years to come.

Predictions is an annual TBR series examining market trends and business changes in key markets. 2022 covered segments included cloud, telecom, devices, data center, and services & digital.