You don’t have to be a psychic to see what’s coming for the telecom industry. A glut of providers is fighting it out on a fiercely competitive battlefield, and only the most creative and innovative among them are likely to survive. Increased consolidation and the deployment of more cloud-based offerings will be two visible investments that will differentiate the winners from the losers.
The Stage Is Set for Consolidation
The Wall Street Journal reports that global telecom mergers and acquisitions gained significant momentum throughout 2013. In Europe, where most of the action has taken place, the value of telecom M&A activity nearly doubled in the first six months of 2013 to almost $60 billion – more than any other sector, and nearly a fifth of all European M&A. Experts expect telecom consolidation to accelerate globally heading into 2014 in response to intense competitive pressures and increasing regulatory challenges.
Only a handful of operators dominate the Chinese and American markets, compared to some 10 in India and hundreds – yes, hundreds – across the European Union. Recent infrastructure-sharing partnerships between major Indian operators signal an about-face in that country’s hypercompetitive telecom business environment. In fact, the Telecom Regulatory Authority of India expects struggling operators to merge or be acquired by market leaders in 2014 in an attempt to improve the operators’ balance sheets and services.
Meanwhile, the EU’s Commission for the Digital Agenda is pushing disruptive legislation to create a single transnational mobile phone and Internet services market. Operators have been vocal in their opposition, but Commission Vice President Neelie Kroes lays it on the line, saying: “Revenues are down, investments are weak, expansion is unattractive. [Telecom providers] can't reach the scale to compete globally, while ordinary users just see poor connectivity, a narrow range of choices, and continued reminders of national borders…. The telecoms sector will ultimately benefit from this [legislation].”
There’s no doubt that consumers stand to benefit from these changes. Across Europe and other parts of the world, “bill shock” from unexpected usage fees—in part the result of unpredictable roaming charges—draws widespread consumer ire, to say nothing of connectivity issues that prevent consumers from accessing the massive amounts they continue to expect. But providers have plenty to gain, too. The Commission believes that access to new markets will more than make up for any loss in individual operator revenue.
EU regulators have a history of obstructing telecom consolidation, but Kroes believes that a loosening of strict M&A regulations can stimulate job growth and promote a more robust European economy. If that happens, and it looks like it will to some degree, European telecom consolidation will take off. And regulatory efforts will take off right along with it.
Already we see momentum: Vodafone (News - Alert), the second-largest mobile network operator in the world, just purchased Germany’s largest cable company, Kabel Deutschland. U.S.-based international cable giant Liberty Global, which recently purchased Virgin Media, also expressed interest in the German company. Hong Kong’s Hutchison Whampoa purchased Telefonica’s (News - Alert) Irish subsidiary in 2013 after acquiring Orange Austria in 2012. AT&T has made no secret of its interest in acquiring a European asset, and redoubtable brands Telefonica and EE were recently floated as possible targets.
While consolidation grabs headlines and shifts the balance of power in the industry, consolidation alone can’t possibly meet growing global demand for more data and increased service offerings at lower prices. If anything, massive consolidation can compound some of the very issues the commission hopes to curtail with its proposed regulations. On the other hand, the benefits of consolidation can be greatly enhanced with organizational agility, operational efficiency, innovative offerings, and faster time to market. And that’s where the cloud comes in.
Agility, Flexibility, and Innovation in the Cloud
Despite the attractive growth potential in market consolidation scenarios, global voice revenues are expected to fall below the 60 percent threshold this year, and many operators fear margins could shrink from the current 30 percent range to low double-digits over the next five years. The paradox of increased market opportunity and sharply declining margins combined with data-hungry, price-sensitive consumers forces operators of all stripes to reevaluate traditional telecom business models.
To extend and defend their value propositions, operators need flexible cost structures and dynamic new revenue streams; to break away from the pack and forge a path to future success, they must adapt to changing consumer requirements at both the operational and systems levels. Cloud-based delivery and software-as-a-service models can help. Cloud and SaaS (News - Alert) provide the repeatable processes and application-agnostic solutions that allow providers to boost long-term return on investment as they make their way into new markets.
Moving business and operations systems to the cloud offers the agility and efficiency telecom operators must embrace to develop and support next-generation products and services, particularly given the ongoing margin pressure and consumer demand for new offerings. Earlier inflection points in the market have largely been driven by one technology or one business change, but today’s context is driven by a confluence of disruptive new technologies that dramatically affect how, when, and where business gets done. The cloud supports innovation by reducing the time to profit for new offerings because the underlying infrastructure can more easily adapt to meet market change in near-real time.
It’s also important to keep in mind that moving to cloud-based models or over-the-top offerings doesn’t mean operators have to rip and replace existing B/OSS systems. Cloud-based service delivery supports flexible, enabling technologies that eliminate product and process density from the start. It also engenders entirely new business models, including all kinds of pay-as-you-go services. Providers can build new revenue streams, increase profit, offset revenue decline, and decrease margin pressure on traditional businesses – all of which are critical to the long-term growth and success of today’s operators, and all of which can be deployed without forcing operators to build new systems from scratch.
Once developed, services must be supported through flexible and efficient revenue-management capabilities with a mix of manual and automated standards, which are also supported by cloud-based delivery. Critical processes that include charging and billing, network mediation, and partner settlement can all be supported seamlessly and efficiently in the cloud. If done correctly, cloud-enabled services can deliver a sophisticated, comprehensive B/OSS engine – all from a secure, enterprise-grade cloud platform.
There’s no denying that the telecom industry has enjoyed a significant increase in demand for mobile devices this year, but 2014 is shaping up to be a year of change. Widespread consolidation and an accelerated shift to cloud services are two of the biggest change agents on the horizon—and agility, flexibility, and innovation are their watchwords.
Alam Gill is senior vice president of CSG Managed Services at CSG International (www.csgi.com).
Edited by Stefania Viscusi