Monday, November 9, 2015

Telcos Face FANGS

Netflix, Amazon, Facebook, Google and Skype (FANGS) obviously illustrate both new ways to satisfy consumer and business needs, as well as the fundamental shift in communications ecosystems.

The reason service providers worry incessantly about over the top apps and products is that value largely has, in fact, shifted to third party apps. The reason carriers worry about becoming “dumb pipe” providers is that, by design, they have become layer one and layer two providers.  

So the health of legacy services are an issue for tier-one telcos and cable TV companies in both consumer and business segments. Declining fixed network telco voice revenues, declining cable TV video revenues and declining mobile voice and messaging revenues are symptoms.

But creating new roles in “next generation” services are the flip side of the legacy services decline. And it appears those twin issues--legacy decline and the effort to create viable new roles in next generation service ecosystems--also are driving asset decisions.

Enterprise revenues offer a mixed picture. “Next generation” and data services generally are the bright spots for all service providers. Legacy services are under pressure.

“Telco revenues from strategic ICT services are growing faster and, according to our calculations, will overtake legacy service revenues in 2018,” according to David Molony, Ovum principal analyst.

Most observers likely would agree that business customers remain a mainstay of tier-one service provider revenue streams.

What specific roles service providers can assume in the new ecosystem is the issue. And some of the revenue trends illustrate the changes.

Without much doubt, service providers are seeing the impact of changes in customer preferences. Enterprises are buying fewer legacy products and more IP-based and cloud services. That is why Verizon and AT&T routinely report margin pressure and gross revenue declines in their enterprise legacy long-haul and access businesses.

In the third quarter, Verizon global enterprise revenue declined 4.9 percent and on a constant currency basis was down about three percent. In the global wholesale business, revenues declined 5.1 percent in the third quarter.

“In both businesses we continue to see similar trends impacting growth, with secular declines in legacy transport revenue and competitive price compression in other services,” said Shammo.

At AT&T, third quarter results included weakness in legacy business services. “Business wireline revenues were down due to pressure from legacy services, said John Stephens, AT&T CFO. Business segment “strategic business services” (IP and data services) grew 12.6 percent, year over year.

In contrast, AT&T “strategic business services” revenue grew by more than 12 percent year over year.

Verizon “Global Enterprise” revenue was down 4.9 percent in the third quarter 2015, year over year.  Global Wholesale revenue declined 5.1 percent year over year in the same quarter.  “In both businesses we continue to see similar trends impacting growth, with secular declines in legacy transport revenue and competitive price compression in other services,” said Fran Shammo, Verizon CFO.

Those trends simply point to a market that has changed. Networking arguably has become more vital. How networking is done, and the products and services sold to satisfy networking needs, have changed.

And those changes increasingly make possible new sources of value supplied “outside” the traditional telecom ecosystem. Or, more accurately, the telecom ecosystem now is part of the Internet ecosystem.

Decades ago, reasonable people could argue about whether the next generation network “would be the Internet” or not. Today, though managed services persist, it is hard to escape the logic that the Internet ecosystem is the big picture and the former telecom ecosystem is part of the Internet ecosystem.

That probably tells you most of what you need to know about where value lies.
source: Wall Street Journal

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