Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
We recently attended Capacity CEE 2012 in Prague, where regional wholesalers and their retail customers shared their perspectives on the market. There was, of course, a lot of fighting talk from the industry, with many participants bullish about the growth opportunity inherent in video, high-definition voice and cloud services. It is clear to us that capacity and connectivity services, the core business of many wholesalers, remain under fierce pricing pressure which is creating huge challenges for most players. The long-anticipated consolidation has not occurred at the pace the industry expected, and many players appear to be locked in a struggle to outlast competitors. In this context, we heard of interesting – but in the short term probably unrealistic – ideas on re-arranging the relationship between telcos and over-the-top players into one where the latter pay telcos additional charges for carrying all the extra traffic their services generate.
A battle to be the last man standing
Competition is intense for both new and existing business. Price erosion remains relentless in CEE too, and it is not confined to legacy services such as Voice or IP transit, but also new services such as carrier Ethernet. Many service providers are being left with little choice but to offer 40% to 50% price reductions at contract renewal in order to keep a contract. Yes, there is customer appetite for faster or better products, with growing demand for 40 gigabit per second or 100 Gbps circuits from customers that used to buy 1 Gbps or 10 Gbps circuits, but this is only partially offsetting the impact of price erosion. Yet amid the perception of commodity status of many of these products, any revenue gains from the better products seem to be quickly eroded by an array of competitors hungry for business.
In this market environment, many players are sprinting as far as sales effort is concerned, but standing still in terms of revenue growth and often going backwards in terms of margins. Indeed, we note that many wholesalers are on razor-thin or negative margins which, combined with their stagnant revenue growth rates, do not inspire hopes of great prospects for attractive return on investment in the near future. What then is the end game for the CEE wholesale market?
The conference did note that the long-anticipated consolidation has not quite materialized at the expected scale in the region. There are still far too many players competing for a limited amount of non-captive business. We think the fact that many of the leading CEE wholesalers (such as Deutsche Telekom, KPN and Telekom Austria) have wholesale foundations in the captive business from their sister companies is part of the current structural rigidity in the industry, as many players are prepared to compete for non-captive business on a marginal cost basis. That is fine to get a short-term boost to the top line, but brings poor overall margins and return on investment. That said, players such as Deutsche Telekom could well act as more aggressive agents of regional wholesale consolidation, much in the same way as in the retail markets in CEE.
HD voice, video and cloud services will not provide the growth nirvana
We heard some enthusiastic pronouncements that traffic growth driven by video, as well as higher value services such as HD voice and cloud services, will be the answers to the wholesalers’ growth conundrum. Video traffic is growing rapidly, and is one of the key reasons for wholesale customer demand for higher speed data circuits. HD voice is proving interesting to many enterprise customers and mobile operators, even though few are prepared to pay a premium for it. Yet on the whole, it is hard to see HD voice or video traffic growth compensating for the willingness of many wholesalers to aggressively discount their services when pressed by an intensely competitive bidding process – unless there is a change in the crowded industry structure we have in place today.
The other possible growth avenue for wholesalers is charging OTT players such as Google and Facebook fees for the rapidly growing network traffic volumes their services generate. Indeed, we note resentment from some telcos at having to carry ever-growing traffic volumes at the same or declining prices, while these players enjoy huge revenue growth and margins. However, we think this is a prospect that telcos in general, and wholesalers in particular, will struggle to advance quickly. Ultimately, the challenges come from the old demand and supply equation; as long as there is a market where players are willing to offer ever-lower prices for ever-greater bandwidth, revenues and margins will continue to be squeezed.
Angel Dobardziev is a Practice Leader, managing Ovum’s research on Emerging Telecoms Markets. In this role Dobardziev leads Ovum’s research on technologies, services and operator and vendor strategies in the fast growing telecoms markets of the emerging economies. Dobardziev’s current research and advisory focus is on mobile technologies, strategies and services. Dobardziev’s most recent work including studies on mobile broadband technologies in the growth markets, mobile banking services, mobile content and applications and dynamic pricing strategies and solutions.