The Managed Services Post-Mortem, Part 1
Heavy Reading has been tracking the managed services market segment for a number of years, kicking off our coverage in August 2010 with a report entitled "Turnkey Networks: The Future of Managed & Professional Services." (See Heavy Reading Sees Managed Services Growth.)
And given a lot has happened during the past three years, and as we get ready to launch some new managed services research, I thought it would be interesting to go back and look at some of the key findings from this report and conduct a report post-mortem of sorts. (We'll follow up with a second article, Pt II no less, looking at the other key findings.)
So, here goes, with the 2010 findings and analysis in bold and italics, followed by a current evaluation/status:
Key finding 1: The managed services market is growing strongly, and will become even more important to network equipment providers (NEPs) in the future. Growth rates in professional and managed services have been exponential since 2005 and today account for 35 percent to 48 percent of total revenues at traditional telecom equipment vendors. This figure is forecast to reach 60 percent within the next seven years.
Status: Time will tell: The 35 to 48 percent range addressed the major vendors -- Alcatel-Lucent, Ericsson AB, Huawei Technologies Co. Ltd., and Nokia Solutions and Networks (NSN) -- and included both managed and professional services. The question is: what will happen after LTE rollout revenue drops starts to drop off in four years?
Key finding 2: Wireless technology will continue to fuel the managed services market. In 2009, Heavy Reading estimated there were more than 4.2 billion wireless subscribers. Yet based on vendor claims of subscribers served, only approximately 31 percent of these are currently served by some form of managed agreement. By 2017, we forecast this number will increase to 45 percent.
Status: A tough one to call: Without question, the growth in managed services has been all mobile-driven, but the original 2017 growth projection may be slightly too aggressive since the number of mobile subscribers is now predicted to reach 8.5 billion by 2017, which makes it increasingly difficult to reach that 45 percent target. This next key finding will be an important factor…
Key finding 3: China could be the spark that propels the managed services market to the next level. While the outsourcing trend has yet to take hold, any decision to turn to managed services will have an immediate impact in a market that represents more than 770 million wireless subscribers, spread among just a few carriers.
Status: Hard to say: I definitely believe the potential is still there and we have seen some vendors opening new Service Center and NOCs in anticipation of uptake in China, but despite some deals starting to be signed -- for example, at China Unicom in 2011 -- the pace hasn't materialized (yet). (See AlcaLu Manages China Unicom 3G.)
Key finding 4: The adoption curve for managed services in wireline networks is also on the rise. While the wireline opportunity is more a "cap and decommission" legacy model -- in contrast to the "expand and upgrade" requirements of wireless operators -- the more than 900 million class TDM lines still in service represent a significant business opportunity.
Status: A miss: During the past three years, the focus on wireline networks, whether technology or managed services, has dropped off even faster than I had anticipated. The thinking here at the time in discussions with operators was that converged operators and fixed operators would look to managed services to make one final push to maximize the closing window from a revenue perspective for their fixed infrastructure. And while during this period there have been a few new managed services deals (VimpelCom in 2013, Telefonica Colombia in 2011, Netia in Poland in 2010), there certainly hasn't been the number originally expected. (See VimpelCom Picks Ericsson for Managed Services.)
Key finding 5: Major acquisitions are likely as competition intensifies in managed services. Given the competitive dynamics, very large acquisition or consolidation deals will be required in order for any one vendor to achieve true market dominance, and this possibility should not be discounted. Such deals would result in the creation of an entirely new class of network equipment provider -- a "SuperNEP" -- capable of controlling more than 40 percent of the managed services market.
Status: To be determined: Our research for the report at the time revealed that there was definitely some interest amongst the parties in putting together some large deals to gain market dominance. And three years later this shouldn't be discounted if some NEPs decide to sell off their managed services operations. If there is one thing that has become even clearer over the years -- scale in managed services is crucial.
Key finding 6: In the interim, growth potential will also drive the acquisition of smaller, niche players that can enhance the managed and professional services portfolios of Tier 1 NEPs. As a result, smaller, infrastructure-centric vendors are expanding their managed and professional services capabilities to maintain revenue streams and enhance their acquisition potential. The changing landscape will also lead to acquisitions that would not have happened just a few years ago: For example, the acquisition of smaller system integrators, hard to justify five years ago, now makes sense in a world of rapidly growing managed services revenue and declining infrastructure sales.
Status: Correct: It was clear when we were writing this report that all players were looking to expand managed services revenue opportunities and larger players were looking to acquire managed services enablers including systems integrators (SIs). The acquisitions are still ongoing but the focus seems to have shifted from network SIs to OSS/BSS SIs. For example, I would put the Telcordia (2011) and TeleOSS (2013) acquisitions by Ericsson in the latter category. We will discuss this topic in more depth in the next article. (See Ericsson to Acquire APAC Integrator, Ericsson + Telcordia: What the Analysts Say and Say Goodbye to Telcordia.)
— Jim Hodges, Senior Analyst, Heavy Reading