Telecoms.com periodically invites expert third-party contributors to submit analysis on a key topic affecting the telco industry. In this article Bengt Nordstrom, CEO of telecoms consultancy Northstream, examines the challenging market conditions faced by telecoms vendors and how they must adapt to new realities.
The sharp increase in mobile data uptake over the last eight years has not delivered a similar increase in the profits and performance of the telecom equipment vendors who build operators networks. What does the future hold for the global telecoms equipment market, and the companies involved?
A declining market
Ericsson and Nokia’s recent Q215 results were received positively by analysts, but this was largely due to favorable currency trends rather than commercial performance – underlying growth for both companies was actually negative. Market leader Ericsson now runs with an operating margin of 6-8%: it’s also currently undertaking yet another cost reduction program.
It’s a trend that we can expect to continue: the latest report from telecoms research firm Dell’Oro Group (July 2015) forecasts a 2% annual decline in the global mobile infrastructure market between 2014 and 2019.
What are the reasons behind this decline? Firstly, large-scale rollouts of LTE networks in the US and China, the world’s two biggest economies, are coming to an end. In China, operator rollouts of LTE are reaching their peak. Meanwhile, in the US, both Verizon and AT&T have announced their intention to slow down their capital spending after years of intense LTE investment.
More mobile data
At the same time, mobile subscriptions worldwide will grow at 5% and the rise in mobile data will continue at a rate of 45% CAGR up to 2020 (source: Ericsson Mobility Report, June 2015). However, the likelihood of continued exponential data growth is debatable, at least in a mature market like the US. The latest CTIA Wireless Industry Survey shows only 26% data traffic growth between 2013 and 2014. Since most network data traffic is from users watching video content, it might be that users are finding it difficult to spend any more hours in the day consuming mobile services.
Regardless of the rate at which data consumption is growing, CAPEX investment by operators is projected to grow globally at just 1% between 2013 and 2019, with most of this growth coming from emerging markets. In contrast, mature markets such as North America and Western Europe have already slowed to a halt and show negative CAPEX growth for this period.
Revenue trends for the period also highlight the problem for operators to monetize data. Globally, revenues are set to only grow by 1.6% annually up to 2019: once again, it will be emerging markets, and not mature ones, that will deliver this growth (source: Ericsson). This is a clear sign that mobile broadband (like voice before it) is on course to become a commoditised service that offers operators only limited opportunities for differentiation.
A maturing market
It’s therefore high time to acknowledge that the network equipment market, after almost thirty years, has transformed from a fast-moving, high-growth emerging sector into an established mature market that delivers much lower returns.
The explanation for this is quite simple. Thirty years ago we had no mobile subscriptions and no mobile networks: today we have 7.1 billion mobile subscriptions worldwide and networks that cover 90% of the world’s population.
The success of the mobile industry was built with investment money attracted by the promise of lucrative growth prospects. In those early days, telecoms vendors made a fortune selling expensive infrastructure equipment for operators to build their networks.
However, those days are at an end: technology advances means that today, every node in the network not only costs just 10-20% of what it did 15 years ago, but can also handle 100x more network traffic.
No new networks
With 90% of the world now covered by mobile networks, new rollouts are also coming to an end. Operators simply have no need to continue building out their macro networks at the same rate and scale as previous years.
Installing new infrastructure – for example, to deliver better coverage in rural areas: or to improve indoor coverage levels – is expensive and delivers only limited returns. Add in the paradox of the sharp rise in data traffic versus flat revenues for operators, and it’s easy to understand why operators are struggling to find new ways to boost margins and deliver growth.It’s this quest for better margins and an uptick in growth that explains the current trend for operator consolidation and the popularity of network-sharing deals. Of course, for equipment providers, these developments mean that their operator customer base is actually now shrinking.
From standardisation to commoditisation
Today’s global mobile telecoms sector could never have achieved the growth and the success it has without standardisation in the industry. This was vital in the early days in order to build a truly international market. Today, however, standardisation serves vendors rather less well. Infrastructure equipment has become a standardised commodity where large scale is all that matters. As a result, we now only have three global vendors competing in a market of ever-decreasing margins and returns.
These vendors today face a reality of declining volumes and intense price competition. The response by market leadersHuawei, Ericsson and Nokia has been to switch their focus from hardware to software, and also to expand into services, protect margins and increase the scope of each contract within their main business.
The search for future growth
But declining growth within their traditional main business means that the strategic priority now for all major vendors is to identify drivers for future growth. The proposed route to growth includes new and expanding technologies like small cells, cloud, SDN and NFV, data analytics, security, 5G and the Internet of Things. But to what extent these new technologies will deliver wider growth for telecom vendors is still unclear.
The indicators are mixed. For example, the market for small cells is already increasing rapidly. According to Dell’Oro, the small cells market is expected to double in value this year, from USD$350M to USD$700M, and will become a multi-billion dollar business by 2018. However, this in turn indicates the decline of RAN investments to a zero-sum game, in which less expensive small cells increase and expensive macro cells decrease in number.
The Internet of Things (IoT) has also for the last few years been the subject of much attention and hype, with industry analysts and commentators identifying it as a disruptive technology and making bold predictions about its growth prospects, with anything from 25 to 50 billion IoT connections expected by 2020.
We should certainly expect sizeable growth from the IoT. But the real question is, who will profit most from it? Many believe that the main beneficiaries will be global chip and device manufacturers and system integrators. For telecom vendors to benefit from the IoT, they must expand beyond their core business and increase their offerings in analytics, security and cloud services.
With cloud services and system integration also earmarked as growth sectors, the once separate telecom and IT vendor worlds are seemingly on a collision course towards an integrated ICT market. Telecom vendors face a new reality where software giants like IBM, HP and Microsoft are expanding into the telecom space. With the emergence of IT as a major element in the telecom industry, traditional telecom vendors must do likewise, and successfully establish sales channels beyond their traditional customer base, the operators.
A critical phase
The telecoms vendor market is at a critical phase in its evolution. We are entering an era in which it’s simply no longer possible for a traditional vendor to run a sustainable business based solely on selling standardized telecoms equipment to mobile network operators.
Telecom vendors must identify and target new markets and revenue sources – but they won’t be alone: in every area of potential new growth, they’ll have to confront well-established global IT players equally keen to address their own future growth challenges. With the market poised in this way, it’s likely that the next wave of consolidation we’ll see will take place between IT and telecom vendors.
Bengt Nordstrom is CEO of strategic mobile telecoms consultancy Northstream, which he co-founded in 1998. A former CTO and Executive Director of Hong Kong mobile operator SmarTone, Bengt has also held senior management positions at Ericsson, Comviq and consultants Netcom. In addition, Bengt was a member of the Executive Committee of the GSM Association and chaired the GSMA’s Asia Pacific Interest Group.