The Jamison Group

Economists have come to call today’s global recession the Great Disruption.  In the telecommunications industry, this downturn might be better termed the Big Squeeze.  In order to grow, the industry must invest—now—but to survive the slowdown, companies are being forced to cut back on spending.  It’s a classic squeeze play that has everyone second guessing the future. In fact I have run across quite a number of people in the communications industry who are asking themselves, “Is this 2001 all over again?” That year, of course, will long be remembered as the time a terrorist attack sent the industry plunging to the depths of what has been called “The Nuclear Winter of Communications.”

I will argue that there is a fundamental difference between the situations in 2001 and today, however. Then, there was a lot of buzz about the potential of the Next Generation Network, but the viability of many of the next-generation services and the reality of the business models around them was far from proven. Today numerous data points attest that next-generation services such as mobile data, mobile broadband, metro Ethernet, and IPTV are highly desired by customers and offer very real revenue streams for service providers. Ivan Seidenberg, Chairman and CEO of Verizon Communications, the world’s second largest carrier, commented on a Citigroup webcast on January 7, 2009, that he sees a $125B growth opportunity for his business through 2013 coming primarily from next-generation services. In a New Year’s message posted in early January 2009, Hiromi Wasai, President and CEO of the world’s third largest carrier, NTT Communications, also sees “further expansion and enhancement” of broadband and ubiquitous communication services even in 2009, along with expansion in internet businesses driven largely by consumer generated media. He further observes that “times such as these … stimulate the wider use of information and communication  technology among corporations looking to improve their productivity and consumers looking to spend more wisely.” According to noted industry research firm Light Reading, Deutsche Telecomm exceeded all targets for its IPTV rollout in 2008, growing its subscriber base from 150,000 to well over 500,000 in Germany alone, and adding another 220,000 subscribers in nearby nations. Another highly regarded industry research firm, Infonetics Research, predicted in December that growth in mobile broadband services will continue and that in fact cellular mobile broadband suppliers will surpass wireline broadband subscribers by 2011.  

But perhaps the most sweeping comment has come from The Yankee Group, which states in a recent press release that the “Consumer Appetite for Anywhere Connectivity Will Drive $1 Trillion Global Market by 2012.” By “anywhere connectivity,” the Yankee Group means that people want to be able to connect to friends, business associates and media from their mobile devices, anywhere they happen to be, exactly the way they would do in their own offices or living rooms. This desire on the part of consumers will drive a trillion-dollar services opportunity for the carriers by 2012.

So what is the catch? Only that infrastructure investment is required to deploy these exciting new services and gracefully handle the resulting increase in traffic. Infonetics Research observes that network traffic driven by mobile data services has created 400% to 800% year-over-year traffic increases in some geographies. Light Reading reports that US internet users watched 13 percent more online videos in December 2008 than in November 2008, bringing the total viewings to 14.3 billion. But in addition to the pure numerics of the traffic increase, services such as packet-based voice and video raise entirely new expectations for quality of service across the network in order to deliver an acceptable user experience to the end customer. This places tremendous pressure on the operators to upgrade their networks -- exactly at a time when revenues are pretty much flat and spending is tightly constrained. Again according to Infonetics Research, carriers will reduce their capital expenditures by 2% in 2009 versus 2008 levels.  

Hence the title of this post. To reach the pot of gold represented by this trillion-dollar market, carriers must invest now, but due to fiscal conservatism resulting from the current macroeconomic bloodbath they must reduce their capital expenditures versus 2008 levels. They will need to figure out how to do more with less, how to ruthlessly prioritize their spend to fund critical initiatives needed to reach this new revenue stream. To the extent that they can effectively innovate and offer real solutions to the carrier’s conundrum, network equipment providers and other players wishing to do business with the carriers will reap substantial rewards, even in 2009. For those who cannot, the next couple of years look like a rough ride..

Linda Thompson, Principal

The Jamison Group

Transforming Business Performance