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

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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.

 

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.

 

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.

 

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.

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

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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.

DXC Technology lands award in the Middle East, highlighting long-standing core strengths of its solution suite for the health payer sector

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In 2016 United Arab Emirates (UAE)-based insurer United Insurance Co. (UIC) hired a new CIO and tasked him with digitally transforming the company’s IT infrastructure and operations to a cloud-based infrastructure (see below for a snapshot of UIC). Within the CIO’s first five months, UIC migrated its core IT applications (e.g., Office 365) to the Microsoft Azure cloud. The initial digitization of UIC’s IT foundation was successful, and the insurer then proceeded to seek out systems integration vendors capable of fully deploying its core insurance applications, additional elements of its IT infrastructure, and other workloads to the cloud.

UIC eventually selected DXC Technology (DXC), citing DXC’s wide range of insurance-centric platforms, products and services as key differentiators that made DXC the optimal choice. UIC also noted DXC’s insurance solutions have been developed and used in the insurance market for several decades, including in many different geographies, further emphasizing how the breadth and depth of DXC’s insurance sector expertise are deeply woven into its industry platforms and make it a compelling choice for insurers seeking digital transformation. UIC chose Integral, DXC’s open standards-based, end-to-end insurance solution spanning the entire insurance life cycle, and was able to quickly deploy core functions to the cloud, including customer and agent administration, proposal capture, claims and policy processing, and accounting. DXC’s Integral Life application has already been deployed, and in 2Q18 UIC announced that DXC’s Integral Health solution will soon go live.

In TBR’s view, DXC offers payer clients a robust suite of solutions developed over a long tenure serving the insurance sector, but despite strong insurance sector offerings DXC does not appear to be replicating the success with UIC with other insurance clients in its core U.S. market. While global payer IT spend is accelerating as insurers digitize operations to enhance connections with policyholders and increase customer loyalty, DXC risks losing out to competitors with similar scale and experience in the insurance IT sector if it fails to stabilize operations in its central markets.

 

 

UIC is a Dubai, UAE-based insurer established in 1998. UIC provides retail and commercial insurance products in areas including life, health, automotive, property, engineering, liability and marine to commercial enterprises and government entities in the UAE and the Middle East. UIC saw digital transformation as critical to its ability to differentiate in a highly competitive insurance market while ensuring that the company was prepared for the inevitable industry embrace of digital insurance.

Cyber-sweet Carolina: Capgemini’s new SOC

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Last month my colleagues Bozhidar Hristov and Elitsa Bakalova joined me for a chat with the Capgemini executives who are leading the company’s new security operations center (SOC) in Columbia, S.C. Drew Morefield and Ninad Purohit explained that the new SOC will become part of a global network of 10 SOCs and close to 4,500 cybersecurity experts. Listening to Morefield and Purohit explain the firm’s offerings and capabilities, starting with an acknowledgement of the overwhelming volume of data and existing, often fragmented, cybersecurity programs and policies enterprises have in place now, we gained an appreciation for Capgemini’s approach to digital strategy and end-to-end cybersecurity capabilities.

We also discussed scale and global reach. In North America Capgemini has a satellite R&D-centric SOC in Dallas that is used as a technology incubator and an experience center. Morefield and Purohit noted that Capgemini will further expand its SOC resources and security services capabilities in North America in the coming months with facilities in Foxborough, Mass. (home of the New England Patriots) and San Diego that Capgemini will gain after the acquisition of Leidos Cyber is complete (subject to anti-trust and Committee on Foreign Investment in the United States approvals expected this month).

So why Columbia, S.C.? Quite simply, a combination of prime real estate and readily accessible talent. In a previous acquisition, Capgemini took over a physical structure ideal for a SOC and a new Advanced Technology Development Center. Perhaps more importantly, Columbia itself hosts the University of South Carolina, a natural pipeline for young talent, and the area includes three military installations, a perfect source of experienced cybersecurity veterans. In Capgemini’s words, “high-quality people, a central location, and the best technology.”

OK, so will Capgemini use the new SOC as a draw for new clients, not just new talent? Morefield and Purohit said the security practice would mirror strategic efforts across the global company by focusing on expanding its footprint with existing clients, particularly those that “already believe in Capgemini, have trust with” the company, and are looking to change their cybersecurity services vendor or posture.

Does this new SOC set Capgemini apart from the competition? Maybe not, but so what? The company does not need groundbreaking or unique security offerings to win new work with existing clients, the target market for the Capgemini security practice. The company needs talented people, excellent facilities and access to the best technology through alliances, all complemented by global scale and global delivery. Cementing those fundamentals, building partnerships with the university through recruiting and with the greater Columbia community by investing in veterans, and continuing to expand capabilities and scale globally should sustain double-digit growth and reward Capgemini’s decision to invest in cyber, along with digital and cloud.

Now we need to go visit. (For additional insights, read our blog on EY and special report on Accenture.)

Telecom IoT and edge computing: Developing focus areas in the telecom industry

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As we look to 2019, TBR’s Telecom team has completed some insightful brainstorming sessions where we discussed industry trends and topics. We identified two nascent areas about which we are receiving increased questions and will spend more time researching as we move into the new year: telecom IoT and telecom edge compute. We welcome input, ideas and discussion as we dive deeper into these focus areas in 2019.

Coverage of these markets will be global in nature and will include insights on both operator and vendor positioning and strategies. Additionally, TBR will examine where companies are making money and spending money in these markets. Research will focus on business models and how they are evolving for Internet of Things (IoT) and edge compute, operator and vendor sophistication, and traction of IoT and edge compute businesses. There will be particular emphasis on leading companies: how they are making money in the market and where they are investing to position for success. We will examine market use cases and verticals to identify areas of opportunity.

Telecom IoT

The IoT market will scale up over the next five years as module prices decrease, IoT-optimized networks are built, and businesses and consumers realize the benefits of connecting their “things.” Communications service providers (CSP) will play an integral role in the IoT ecosystem as it is built out, and their revenue from IoT will grow as they pursue traditional and new business models in this market.

Telecom edge compute

Edge computing has become a major area of interest and investment in the telecom industry, driven by the need to improve user experiences as well as enable and support new business models. CSPs are also keen to invest in edge computing as a cost-efficient solution, with 5G as well as the cloudification and virtualization of networks driving the build-out of edge compute environments.

When your car becomes your smartphone, who handles your cybersecurity risk?

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In discussing EY’s recently released Global Information Security Survey with the firm’s Americas Cybersecurity leaders, TBR heard a compelling case for an industry-led approach to anticipating the future of cybersecurity and overall risk. The EY leaders noted the firm echoes its overall industry-led go-to-market approach in cybersecurity, adding that understanding security gaps to be addressed by a company in contrast to security gaps necessarily tackled by the industry as a whole could be the key to properly meeting clients’ current and future cybersecurity risks. Anticipating future cybersecurity needs within the context of an industry’s specific emerging trends — think cars becoming connected, forcing auto manufacturers into the software and connectivity business — could help clients answer their most frequent question, “How do I make smart capital allocation decisions with respect to cyber?”

Echoing sentiments TBR has heard from other consultancies, most notably PwC and Accenture, the EY leaders added that clients increasingly want to know more than just what is best in breed and what minimally meets regulatory requirements. Clients ask what cybersecurity startups and technology-centric companies have developed, what best practices can be learned across multiple industries, and, tellingly for EY and its competitors, what EY can bring to the table. On the last point, TBR has seen a substantial shift in the way EY develops and deploys technology, particularly cross-practice solutions (such as cybersecurity within a supply chain engagement). As we reported from Toronto this summer and the previous year in New York City, EY has fully embraced consulting in an assets-based digital transformation age.

Still to come: How EY will utilize the findings from its survey to move the needle on boards allocating more resources to cybersecurity, and how the firm will attract, train and retain cybersecurity talent, particularly as nontraditional vendors increasingly move into EY’s cybersecurity space.  

What’s going on in Texas with Atos?

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TBR’s Patrick Heffernan and Boz Hristov share highlights from a November 2018 visit to Texas to hear directly from Atos and Syntel executives on their strategies and expectations for 2019. Boz brings up Atos’ competitors and how the acquisition of Syntel could change the competitive landscape. Patrick discusses what scale will mean for Atos and how a client’s comments during the event demonstrate how critical this Atos-Syntel pairing could be.

 

Check out other videos from TBR by visiting  https://www.youtube.com/user/TBRIChannel.

 

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Services Weekly Preview: December 3-7

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As we wrap up the quarter, just a few key items are left including the four reports listed below, the Management Consulting Benchmark and predictions for 2019.

Here’s what’s coming this week:

Thursday: Our semiannual deep dive on DXC Technology’s healthcare IT services (HITS) practice includes our assessment that DXC’s long-awaited return to HITS growth remains elusive in the face of stubborn post-merger disruptions and poor contract performance. However, we had expected the company’s recent traction in APAC and select European markets would work in concert with rebounding IT spending patterns in the U.S.-based payer sector, the ongoing bull market in life sciences IT investment, and DXC’s acquisition of Molina Medicaid Solutions to launch a period of renewed HITS revenue growth. The report also includes scenarios on DXC’s acquisitions and the company’s activities in the Middle East.

Friday:

  • In our mid-November initial report on Cisco Services, TBR noted that the company sustained growth in 3Q18 by attaching services to Cisco’s growth initiatives around next-generation solutions. Our full report will explore the drivers behind that growth and include scenarios around streamlining headcount in the Customer Experience business, which includes Cisco’s software, subscription and services activities; transforming clients’ IT operations at speed and scale utilizing predictive services powered by artificial intelligence and machine learning; and expanding cloud-related offerings by partnering with Google Cloud, SAP and Amazon Web Services.
  • With SAIC’s earnings release slated for Friday, TBR will be looking to see if the company conformed with our July assessment that SAIC needs to address federal priorities as a low-cost alternative in IT modernization, platform integration and training, as well as expand into underpenetrated areas of the federal market organically and/or through acquisitions.
  • Finally, our semiannual look at NTT DATA’s HITS practice will acknowledge that the 2017 acquisition of Dell Services’ healthcare assets was a major undertaking, but is now complete and has significantly enhanced NTT DATA’s capabilities across multiple healthcare segments. In addition, the report includes scenarios around alliances and virtualization in the healthcare IT space.

AWS shakes up the private cloud infrastructure market with Outposts

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Outposts enable AWS to meet clients’ demand for private cloud

Amazon Web Services (AWS) unveiled at re:Invent in Las Vegas its new Outposts on-premises cloud infrastructure, which will enable AWS to become the sole cloud infrastructure provider for its clients. The underlying Outposts infrastructure closely resembles AWS’ public cloud data center infrastructure. Since the infrastructure will be similar, it is conceivable AWS will be able to tie customers’ public and private clouds together seamlessly, fulfilling customers’ desire to deal with one less vendor for their IT needs. AWS will deliver, install and maintain Outposts for customers.

The sheer volume of AWS public cloud customers creates a large base to sell Outposts to and takes aim directly at private cloud data center providers. Outposts will also directly compete with Microsoft Azure, and will generate accretive hardware revenue for AWS.

An advantage AWS has over infrastructure vendors is economies of scale, which will enable AWS to sell massive infrastructure volumes for low margins — much like an original design manufacturer — and become a price leader against OEMs such as Dell EMC and Hewlett Packard Enterprise (HPE). AWS also plans to arm its channel partners with the necessary capabilities to sell these infrastructure solutions, further enabling large sales volume. Moreover, AWS is better equipped than other infrastructure vendors such as Dell EMC and HPE to attach the necessary services to provide connectivity between public and private cloud environments due to its expertise in the public cloud space — and will gain the higher-margin sales to boot. IBM has strong services capabilities but lacks the commoditized infrastructure and customer volume to match AWS’ strategy. TBR notes that pricing details of Outposts have not yet been determined.

VMware gets a piece of the AWS Outpost pie with the VMware Cloud variant

VMware and AWS collaborated to provide VMware Cloud on a variant of AWS Outposts, which will be offered by VMware as a managed service. As this creates a conflict of interest for Dell Technologies, TBR believes Dell Technologies has its sights set on the higher-margin sales generated from VMware Cloud and will forego the loss of lower-margin hardware sales to gain it.

Although AWS’ announcement may seem like bad news for the private cloud infrastructure OEMs, the good news for them is that AWS’ Outposts will not hit the market until 2H19, giving the infrastructure players some time to develop solutions that can compete with AWS as it moves into the data center hardware market.

Digital and Compaq: A cautionary tale for IBM and Red Hat

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Big mergers bring big risks: Compaq and Digital Equipment Corporation, a tragicomedy

Compaq proved in the early 1980s you could buy non-IBM hardware and not get fired in the process by creating a portable PC that could be lugged around by weightlifters. Ultimately, Compaq struggled trying to move up the stack into the peer-to-peer networking space, as Dell and Gateway undercut Compaq’s undercutting of IBM PC price points, and made a big acquisition of Digital Equipment Corporation to buy enterprise server direct sales and services. But culturally, Compaq choked off the very assets the company desired by imposing volume business sales cost controls onto an enterprise-selling organization. In the end Compaq wound up being absorbed by Hewlett-Packard Co. (HP), which has acquired many hardware companies over the years.

What are the lessons learned for IBM-Red Hat?

IBM has decided to invest one-third of its market cap in acquiring Red Hat for $34 billion. Essentially IBM bought the ecosystem engine necessary to create the flywheel effect of IP services and support. There are synergies, to be sure, on the support of open foundations that have accelerated product commoditization in ways that benefit customers and pressure technology vendor business models across the entire technology spectrum. At issue will be which pieces of two different cultures and business best practices prevail, for, as Peter Drucker famously said, “Culture eats strategy for breakfast.”

What can IBM learn?

Red Hat pioneered the business model of monetizing services around free products. This stands diametrically opposed to the best-in-class blue suit selling model made famous by IBM and increasingly less relevant in the digital economy. Red Hat generates 75% of its revenue through the channel. Given that scale matters less, IBM has to improve its downmarket selling motions. Red Hat best practices should be imported into the current IBM selling motions as quickly as reasonably possible.

Red Hat also has near-zealous support among the developer community. Again, allowing Red Hat leadership to help shape new developer programs, run the Red Hat way from the wealth of IBM assets, will be critical lest those supporters migrate to another Linux distro such as Suse or Canonical.

What can Red Hat learn?

IBM has enterprise trust to solve critical technical integration problems soundly and securely. It likewise has access to more CxO decision makers in the enterprise. Success of the proposed acquisition will be as much adding more product to an existing sales channel as it will be to tailor messages to the decision makers while preserving the uniquely ardent support Red Hat has with the teams writing the code.

More to follow from TBR

A more extensive TBR Business of One special report, IBM-Red Hat economic implications: Is disruptive state the new steady state?, will be out shortly, written with Professional Services Practice Manager Patrick Heffernan. Recent commentaries are also available by Cassandra Mooshian, Big Blue opens its arms, and its wallet, to Red Hat; and Michael Soper, Red Hat can save CSPs from themselves.