How Will Global Telecom Revenue Sources Change Over the Next Two Years?

Looking at global telecom revenue sources over the next couple of years, some basic trends can be seen (click image for larger view).

Fixed network services other than broadband continue to decline.

Wireless revenues continue to grow, as does broadband access revenue.
Dial-up access revenue continues to decline.

Keep in mind that these are global, aggregate numbers, buoyed by huge broadband and especially wireless growth in developing regions. The patterns can be quite distinct in specific national markets.

In the U.S. market, it is conceivable that video and content revenues could be a somewhat significant factor over a decade-long time frame. Wireless growth will be highly susceptible to broadband and data services growth, balanced by a certain amount of "harvesting" of mobile voice revenue, which will decline, relative to broadband, over the decade.

It is worth noting that voice revenue trends have been through two fundamental cycles, with a third on the way. At one time, international long distance was the highest-margin product, followed by domestic long distance. That changed fundamentally between 1997 and 2007. Over that 10-year period, long distance, which represented nearly half of all revenue, was displaced by mobile voice services.

Since about 2000, fixed voice lines and revenue have been steadily declining, at least in the telecom service provider segment, with the cable segment able to grow the role of voice in overall revenue.

In the third change, mobile voice will follow a trend similar to that of long distance.

In each of the shifts already occurring, several things happened. Prices and profit margins steadily were compressed. And new competitors picked up significant share of the remaining business. In each of the three periods, the product has changed.

Between about 1997 and 2007, "long distance" became loosely coupled with local calling and local access. Long distance increasingly could be consumed "over the top," using prepaid calling cards or separate providers for "long distance" on a local line, for example.

Between 2000 and 2009, it became possible to use mobile phones to similarly displace both local and long distance calling, as well as to substitute mobility for fixed voice, while both over-the-top and IP-based calling options became available.

Over the next 10 years, both voice itself and long distance calling in the mobile and fixed realms likewise will be increasingly disaggregated and amenable to "over the top" consumption.

At the same time, the number of settings where voice is used likewise will disaggregate. Voice will be used as an embedded feature of many types of applications and experiences, using many types of terminals and featuring multiple revenue models.

How Much Will Global Telecom Revenue Grow in 2013?

Despite obvious stresses, global telecom revenue has tended to grow, in nearly every year. There tend to be dips when global recesssions occur, as in 2008, or in the wake of major market crashes, such as in the wake of the Internet bubble burst of 2000.

Global trends also are a mix of declining, flat to slow growth in developed regions, with growth in emerging markets.

Looking just at enterprise and government segment spending, 2013 looks like a one percent to two percent growth business in 2013. 

Global information technology spending is projected to total $3.7 trillion in 2013, a two percent increase from 2012 spending of $3.6 trillion, according to the latest forecast by Gartner.

But enterprise and government telecom spending actually declined in 2012, and might grow less than one percent in 2013, according to Gartner.

                      Worldwide IT Spending Forecast (Billions of U.S. Dollars)

	2012 Spending	2012 Growth (%)	2013 Spending	2013 Growth (%)	2014 Spending	2014 Growth (%)
Devices	676	10.9	695	2.8	740	6.5
Data Center Systems	140	1.8	143	2.1	149	4.1
Enterprise Software	285	4.7	304	6.4	324	6.6
IT Services	906	2.0	926	2.2	968	4.6
Telecom Services	1,641	-0.7	1,655	0.9	1,694	2.3
Overall IT	3,648	2.5	3,723	2.0	3,875	4.1

Source: Gartner (July 2013)

Fixed broadband is showing slightly higher than the overall telecom services rate. The impact of voice substitution is mixed as it is moving faster in the consumer sector, but slightly slower in the enterprise market, though, according to Gartner.

Gartner’s latest annual survey of 1,959 CIOs worldwide from all industries was conducted in the fourth quarter of 2012 and represents CIO budget plans reported at that time. It included 398 public-sector CIOs from all tiers of government around the globe.

But there will be significant regional differences. The United States, Eastern Europe, Middle East and Africa will grow much faster than Asia-Pacific or Western Europe as a whole, for example.

To be sure, other forecasts are more optimistic. As recently as two years ago some forecasters actually were suggesting global telecom revenues could double in just about five years. That now seems hopelessly wrong.

The global telecommunications industry was not immune to economic forces in 2012 that slowed growth from earlier predictions, according to Insight Research.

Spending for wireline services contracted in 2012, while spending on wireless services grew modestly.  

According to the new industry market study, telecommunications services revenue worldwide will grow from $2.2 trillion in 2012 to $2.7 trillion in 2018 at a combined average growth rate of 3.8 percent.

So Insight Research continies to be more optimistic than do Gartner or Forrester Research analysts.

Mobile subscriber growth compounded with rising usage  will raise wireless revenues by 31 percent from current levels, yet wireline revenues will remain flat until substantial economic recovery kicks in, Insight Research predicts.

Ethernet, cloud, and mobile solutions revenue will show double-digit annual percentage growth, though.

In North America, mobile revenues will grow by 35 percent and wireline broadband revenues will grow by 19 percent over current levels.

Flat Global Telecom "As Far as the Eye Can See"

The people who write press releases quite often are not subject matter experts. If they were, wildly incorrect headlines such as “Worldwide Spending on Telecommunications Services Is Forecast to Reach $1.6 Billion in 2020, According to IDC” would not appear in press releases. Global telecom revenue is closer to $2 trillion per year, almost every year. Ignoring the typo, the larger point is how flat revenue is going to be, globally.

source: IDC

Somebody was not watching closely enough. Earlier IDC press releases had called for $1,647 Billion in 2020. That’s $1.645 trillion. 

IDC’s 2018 forecast called for revenue of, you guessed it, about $1.62 trillion. 

Global Regional Services 2018 Revenue and Year-on-Year Growth
Global Region	2018 Revenue ($B)	CAGR 2018-2023 (%)
Americas	616	0.0
Asia/Pacific	512	0.8
EMEA	487	0.9
Grand Total	1,615	0.5

source: IDC

The wider point, though, is that global telecom revenue--despite faster growth in some regions--has become a slow-growth business once again, as was the case in the monopoly era prior to about 1985.

Hosted IP PBX Services Will Grow 300% to 2016

U.S. spending on unified communications technologies will increase by an average of 10 percent per year, led by spending on hosted IP telephony services, which will almost triple between 2011 and 2016, estimates InfoTrack.

Separately, Infonetics Research  predicts the number of seats for hosted business VoIP and unified communications services is on track to more than double between 2012 and 2016. Note that forecast includes both hosted IP telephony and UC. 

Among U.S. enterprises, defined as firms with 500 or more employees, spending on hosted IPT will grow at an average rate of 27 percent, which is almost two times faster than the average increase among U.S. SMBs (firms with fewer than 500 employees), InfoTrack says. 

These days, though, estimating the size of the global market for business IP telephony services offered by service providers is a hard question to answer. For starters, IP telephony can include sales of IP private branch exchanges, unified communications solutions and services, hosted IP telephony services, access services such as SIP trunking and fees earned for managing premises business phone systems.

With all of this, the global business IP telephony market will reach $20.8 billion by the year 2018, according to Global Industry Analysts. The problem, of course, is that it is tough to make sense of global estimates, especially without knowing in some detail which specific products are included in that figure.

The global market for hosted PBX (hosted IP telephony) services averaged between four percent and seven percent in the largest SMB markets, Parallels noted, as recently as late 2011.

Infonetics Research separately has forecast that the global SMB VoIP services market would grow to $76.1 billion in 2015 with total subscribers of 262 million. Keep in mind that the total global telecom services business accounts for about $2 trillion in annual revenue in 2012.

So hosted IP telephony would represent about four percent of global revenue.

In the United States, it has been estimated that around 500,000 SMBs currently use a hosted PBX service, representing an $800 million market. In a U.S. telecom service business of about $336 billion in annual revenue, hosted IP telephony represents about two-tenths of one percent of total industry revenue.

However, Parallels estimates that the majority of the current in-house PBX systems will migrate to hosted mechanisms over time, representing $3.9 billion potential market for hosted PBX.

At the moment, it remains the case that most business IP telephony is supplied by premises-based solutions.

So how big is the business IP telephony? It depends on who you ask, and what the assumptions are.

"In 2011, SMBs represented 46 percent of the U.S. installed base of IPT lines, but accounted for only 30 percent of the spending on UC applications,” InfoTrack says.

But over the next five years, the growth of SMB spending on UC apps will be more than twice the rate of U.S. enterprises, which represents the mirror image of what we project happening in the hosted IPT sector," said Ken Dolsky, Senior Program Director for InfoTrack.

As always, one has to keep the size of the installed base in mind when pondering such forecasts. Other researchers, including Parallels, have estimated that small and medium business hosted IP telephony penetration is still relatively small.

The global market for hosted PBX (hosted IP telephony) services averaged between four percent and seven percent in the largest SMB markets, Parallels noted, as recently as late 2011.

Infonetics Research separately has forecast that the global SMB VoIP services market would grow to $76.1 billion in 2015 with total subscribers of 262 million. Keep in mind that the total global telecom services business accounts for about $2 trillion in annual revenue in 2012.

So hosted IP telephony would represent about four percent of global revenues.

In the United States, it has been estimated that around 500,000 SMBs currently use a hosted PBX service, representing an $800 million market. In a U.S. telecom service business of about $336 billion in annual revenue, hosted IP telephony represents about two-tenths of one percent of total industry revenue.

However, Parallels estimates that the majority of the current in-house PBX systems will migrate to hosted mechanisms over time, representing $3.9 billion potential market for hosted PBX. 

US Hosted PBX Market – Source: Parallels SMB Cloud Insights Report, 2011

How Telecom Industry Will be Like the Airline Industry

Sometimes, you have to say what nobody really wants to hear. So here is a nugget from Bell Labs: By 2025, the global telecom service provider industry is going to shrink from 800 firms to about 110, lead by just five global giants, according to Bell Labs. That is a reduction of 86 percent, by 2025.

To use an analogy, the future telecom business (eight years from now) will look like the global airline industry. A handful of firms will operate globally. About a hundred firms will be local partners, affiliated with one or more of the global entities into a “network” such as “Star Partners.”

In recent years, three global alliances have gotten 73 percent passenger share.

source: ITC Infotech

There are other similarities. Both airline and telecom industries are nearing maturity (already mature in developed regions, still in growth phase in many developing regions) and facing declining average revenue per unit.

source: Ryanair

source: Deepak Nagi

In the telecom business, a new competitive landscape will emerge, characterized by “the emergence of a new global-local duality of new service providers with either global or local focus,” says Bell Labs. There will be 10 global service providers that offer global connectivity, cloud and contextualized control and content (C&C) services.

In addition, there will be  100 local cloud-integrated network providers that offer domestic, hyper-local connectivity, edge cloud and contextual C&C services.

“Stitching it all together: a global-local alliance framework that connects and interworks the local and global service providers, similar to that of the airline industry,” says Bell Labs.

Will you be working for one of those 110 firms in 2025? And, if so, what do you need to know, today, to get ready?

That is the key challenge that underlies “Telecom Week,” a five-day training program created by the Pacific Telecommunications Council and aimed at mid-career telecom professionals, regulatory staffs and C-suite executives who will have to evaluate what 5G means for their businesses.

The premise is that, within a decade, there will be a dramatic, stunning reshaping of the global telecom business, and that, to survive, telecom professionals, regulators and suppliers need to prepare right now, for a cataclysmic change.

Instructors for telecom week will be leading discussions of what will future networks--and your business--will look like in the future, and what must you do now, to get there.  

The strategic problems the leaders of tomorrow’s telecom companies be grappling with, and what can today’s middle managers do--now--to prepare for the day when they are part of those leadership teams, also are key.

Telecom Week, to be held in Bangkok beginning 18 September and concluding on 22 September, is an unparalleled effort by PTC to quickly train telecom professionals on the profound changes coming in mobile and fixed telecommunications, with two full days looking at mobile and 5G, and three days looking at the broader strategic context for the telecom industry.

By the end of the week, attendees will have learned what 5G means, where the industry is headed and how they need to think about a vastly-different industry, and new roles within their companies.

The program begins with two days of training on 5G/mobility, at Spectrum Futures. The program continues with three days of management training at PTC Academy, introducing mid-career professionals to the strategic issues they and their firms will face in the near future.

Attendees at each of the programs will earn a certificate of completion, as well as gain key insight on where the industry is headed, what will happen and how to prepare for the coming changes.

Register now for Telecom Week events Spectrum Futures and PTC Academy. Your future may depend on it.

2014 Telecom Revenue Growth Picture is Mixed

Of all the trends affecting the global telecom business since the advent of competition, nothing is more striking than  diverging strategy and revenue performance.

For example, telecom service providers in Asia and North America are posting three perent to four percent annual revenue growth, while revenues in Europe have been dropping for some years.

Moody's Investors Service has said  the outlook for telecommunications service providers is “stable” in the  Asia Pacific region, with “ moderate revenues and earnings growth” and  gradual declines in profit margins.

"The telecommunications companies that we rate in Asia Pacific should record average revenue growth of around four percent over the next 12 months to 18 months, a level which is broadly in line with average GDP growth rates in the region," says Yoshio Takahashi, a Moody’s analyst.

In contrast, Europe's telecom operators will see a fifth year of revenue decline in 2014, although operating margins will stabilize, helped by cost cutting and the end of regulatory cuts to mobile call termination fees, Moody's said.

About the best outcome would be “revenue stabilization” in 2014, Moody’s says, with the telecommunications service sector remaining on negative outlook.

"While we expect revenues to stabilize or marginally decline by zero percent  to -0.5 percent in 2014, it is not clear how sustainable any recovery will be," said Carlos Winzer, a Moody's Corporate Finance group SVP. "We have had a negative outlook on the sector since November 2011 and would expect to see a predictable and sustainable one percent to three percent annual revenue growth to make it stable."

Moody's estimates that the European industry's average EBITDA margin will be down approximately one percent in 2013, but will probably stabilize in 2014.

In Latin America, Moody’s think both 2013 and 2014 will be good years. Moody's says South African, Russia as well as Middle East, market trends are more stable than in Europe.

In the U.S market, the mobile segment of the business “will continue to generate strong levels of free cash flow,” acording to Moody’s.  Earnings (EBITDA) minus capital spending growth, a proxy for free cash flow, will accelerate to 13 percent to 15 percent in 2014 for the six largest carriers.

“We also expect overall industry EBITDA to gain eight percent next year as industry service revenues grow three percent to four percent,” Moody’s forecasts.

Moody's expects that prices in some of the most competitive European markets will continue to drop Integrated incumbent operators such as Deutsche Telekom, Orange, KPN, Telefonica and Portugal Telecom will fare better than companies with just mobile or fixed offerings.

That’s an important observation: the firms that will fare best own both fixed and mobile assets. The other obviously significant observation is that revenue growth rates now have diverged around the world, with some regions faring better than others.

Despite the tough European conditions, or perhaps because revenues are challenged, Moody’s forecasts an average capex/revenue ratio of approximately 18 percent or higher in 2014.

In Asia, Moody’s predicts mobile service provider capex will decline to about 20 percent of revenue in 2014.

But it is possible European capital investment could increase, especially as Vodafone begins to upgrade its networks and other competitors invest to keep up.

But Asia remains a bright spot for the global industry. Moody's forecasts average adjusted EBITDA margins in the region will contract by approximately 0.5 percent to one percent in 2014.

"Increased data usage on mobile phones will continue to drive the Asia Pacific industry's revenue growth, although rising mobile-penetration rates and competition will slow the pace of growth,” Moody’s said.

But profit margins will stay at 37 percent to 38 percent. The area to watch in Asia is financial leverage, which will remain “moderately high,” Moody’s says,  as the companies deploy excess cash to increase shareholder returns, rather than significantly reducing debt.

While specific in-market consolidation deals may be completed in the next 12 months to 18 months in Europe, Moody's does not expect a wave of cross-border consolidation.

The four largest integrated incumbent telcos, including Telefonica, Deutsche Telekom, Orange and Telecom Italia, are either in selling mode or do not have much flexibility or appetite to lead this process.

But that obviously should shift attention to U.S., Mexican or other potential acquirers.

The main point is that competition now has lead larger telecom providers to diverge, in terms of strategy, revenue models and actual revenue growth.