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Telco Enterprise Comms Under Threat From Cloud Rivals

James Crawshaw
9/1/2017
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To misquote Andy Grove: "Only the digital will survive." Consumers have already gone digital, whether it be their physiological needs (Just Eat), social belonging needs (Facebook), Esteem (Twitter), or self-actualization (MOOCs). Telecom operators are embracing digitalization too by increasing the agility of network operations, improving customer engagement, facilitating new service offerings, and enabling internal innovation (adoption of DevOps and a fast-fail mentality).

General industry is obviously pursuing the same digital agenda. The risk for telecom operators is that although they are generally ahead of other industries in terms of digitalization, they risk losing their enterprise communication business to cloud providers (AWS, Azure, etc) who are becoming of increasing strategic importance to enterprises.

According to the Huawei-sponsored IDC white paper (Cloud Enterprise Communications -- Serving Digital Enterprises): "the cloud era has arrived whether traditional service providers and vendors are ready or not. Many traditional service providers are concerned that the rise of cloud may lead to the elimination of traditional distributors and service providers."

The white paper defines cloud enterprise communications as the integration of "enterprise communications technology with cloud computing and Internet technologies." Cloud enterprise communications ensures the traditional enterprise-level service standard while adding quick delivery, pay on demand, flexible deployment, self-service and open APIs. Telecom operators do provide cloud enterprise communications services today but generally telcos are not famed for their quick delivery, flexibility and openness. This creates an opportunity for more nimble players to enter the enterprise market and take share away from the telcos.

According to IDC, the global enterprise communications market was worth $27 billion last year and is set to grow at a CAGR of 9% to 2019. Such growth forecasts are a surprise when one looks at the recent financial performance of the telecom industry heavyweights.

  • AT&T reported Business Solutions revenue down 3% year-on-year for the quarter ending June 2017 due to declines in legacy wireline. AT&Ts total business wireline revenue fell 6% while the non-legacy portion (41% of total wirelines business revenue) grew 8%.
  • Verizon's enterprise revenue for the quarter ending June 2017 was down 4% on the prior year after adjusting for the XO acquisition. Verizon blamed the decline on legacy products and pricing pressure.
  • Deutsche Telekom reported domestic revenue from business customers up 1.5% year on year for the quarter ending June 2017. Mobile revenue grew 4%, IT revenue increased 14% but fixed-line business revenue fell as customers moving to flat-rate plans for voice.
  • Vodafone reported enterprise revenue up 1.5% for the quarter ending June 2017 with stable service revenue in Europe offset by "robust" growth in emerging markets. Enterprise fixed service revenue grew 3.6% due to market share gains and now represents 30% of Vodafone's enterprise revenue.

    This sample of operator results suggest that if there is growth in enterprise communications it is coming from emerging markets, not the US and western Europe. Indeed, China Mobile saw a 29% increase in its corporate revenue in 2016 though to what degree this was due to market share gains is unclear. China Telecom doesn't disclose its enterprise revenue though it did disclose government and enterprise access lines in service fell 1% in 2016.

    IDC breaks the enterprise communications market into two categories: cloud/hosted and on-premises. They estimate the cloud/hosted portion overtook the on-premises portion for the first time in 2016 at $14.0 billion and $13.0 billion respectively. Surprisingly, IDC forecasts the on-premises market to continue growing at a 5% CAGR from 2016 to 2019. Although this is slower than the 13% growth they predict for cloud/hosted the fact that on-premises would grow at all seems optimistic.

    Supporting the estimate that cloud/hosted services have passed the halfway mark in terms of revenue contribution, the white paper presents the results of a survey on unified communications implementation. Only 43% of respondents said their UC was on-premises while 39% said it was in the cloud and 18% said it was a dedicated hosted solution. In terms of plans for the next two years it is no surprise that the expected usage of on-premises is set to decline (to 35% according to the survey) while that of cloud is set to increase (to 49%).

    The growing popularity of cloud communications, or unified-communications-as-a-service (UCaaS), is borne out by the financial performance of companies such as RingCentral and 8x8. RingCentral's revenue rose 30% year on year in the quarter ending June 2017 while 8x8 grew revenue 18% (excluding disposals). Similarly, BroadSoft (which sells UCaaS through telecom operators on a white label basis) grew its revenue 9%.

    To retain their existing large enterprise customers, telecom operators will need to increase their industry vertical expertise. Plain vanilla connectivity services are easily commoditized. By customizing cloud services and providing a more holistic solution to business customers' needs (voice, data, security, video, collaboration, enterprise social networking) traditional telcos can increase their chances of winning in this market. Failure to do so may mean telcos' share of that $27 billion enterprise communications market continues to slide.

    This blog is sponsored by Huawei.

    James Crawshaw, Senior Analyst, Heavy Reading

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