Analysis: A year of deconstruction and reconstruction

Open and shared access networks will redefine the telecommunications industry

There was a time when each new year a beach—blonded and sunwarmed industry would return from holiday, take its time to warm up and only get into stride mid—February.

Not so in 2010.

In the first six weeks alone, we had 18 companies delivering 33 compliant and non—compliant bids for the Government’s Ultra—Fast Broadband programme. As well, the Commerce Commission made its long—awaited (and controversial) recommendation on mobile termination to Government.

And there was, of course, the XT outages. Forgive the cynicism, but rarely in the course of technological endeavour has so much news airtime been given to so much opinion backed by so little fact, beyond the XT outages themselves.

Amidst all this noise and bloodletting, it is easy to lose sight of the bigger picture for 2010.

IDC believes 2010 will be a year of modest economic recovery for New Zealand’s telecommunications industry — but this will not mean a return to pre—recession status quo. Instead, with the new decade and gradual recovery comes a new era for a sector which has to redefine itself for growth.

A key driver is the shift towards open and shared access telecommunication networks. It began with operational separation: it will be entrenched with the government’s fibre programme. Coupled with this is the explosion of mobile devices, platforms and applications, and the continuing disruptive impact of “over the top” internet providers and online services. The erosion of high margin voice revenues will accelerate, continuing to flatten topline growth. And while the shift to new IP—based services will accelerate over time, telcos will be challenged by new competitors seeking a share of that growth.

It means new business models. Network ownership will cease to define competitive advantage — customer reach and services capability will. These challenges are, of course, not new for the telco sector. But IDC believes the strategy to date of incremental adaptation to these pressures will have to shift to more fundamental transformation, if telcos are to ride this wave.

In the short to mid—term, IDC expects to see new traction in the managed network services segment, as economic pressures ease. The growing complexity of corporate networking, coupled with the demands of Telecom—IT convergence and the relentless pressure to reduce costs in the enterprise will continue to stimulate interest in outsourced managed services. This will also support further take—up of hosted and managed IP telephony and unified communications over time.

In the residential market, mobile will increasingly be integrated with home bundles as segmentation becomes more granular in the targeting of families, professionals (“pro—sumers”), home workers and single households. New types of on—demand video services will emerge, but quality and depth of purchased content will continue to be an inhibitor given the continued dominance of Sky. The competitive focus will expand from main cities to regional centres.

Nonetheless, revenue growth will remain elusive — there is no single silver bullet to deliver growth, but rather multiple incremental services opportunities.

In the longer term, we expect to see consolidation for scale at the physical and transport levels. IDC believes we will ultimately see one primary national open access passive network, potentially integrating smaller fibre networks.

This will be complemented by a mix of fixed wireless networks for infill and regional/rural coverage. Sitting atop this will be only a small number of layer 2 and layer 3 wholesale/retail providers offering managed data, backhaul and transit services ranging from the simple to sophisticated. In the new fibre world, this may become the new industry bottleneck.

The boundaries between fixed and mobile services will continue to blur: the ability to integrate and manage mobile networks and solutions with fixed—line services will be a critical differentiator.

Communications (from voice to video) will increasingly be embedded into a wider range of applications and functions — but the internet—shaped expectations of getting more for less (or nothing) will continue to challenge business models and revenues.

Watch out for new types of alliances and mergers for capability and scale — particularly amongst second—tier telcos. We expect Vodafone to launch its new 360 platform, and Telecom to follow with Yahoo Mobile (once XT issues are resolved). TelstraClear will roll out a triple—play TV, broadband and voice services outside of where it has cable coverage.

Telecom will need a tie—breaker — potentially the sale or IPO of a business unit — to return value to shareholders as topline revenue growth proves elusive.

In the past two years New Zealand’s telco sector has been re—energised, with new competition, a newly—regulated industry structure and new investment driving activity. But the reality of competing in a small—scale, low—growth market has led to price and margin pressures with few growth opportunities.

Hence redefining the telco role in this new converging environment requires tough decisions. How quickly should you migrate from legacy services? Can new network investment be monetised? Will richer wholesale services deliver growth — or prove a short—cut to commoditisation? Who are our partners and competitors in this emerging ecosystem?

Don’t expect radical change in 2010 — the industry will continue to be operationally focussed.

Nonetheless, the pressures outlined here will force the deconstruction and reconstruction of the industry over the next decade. Now is the time to prepare.

Nelson is telecommunications research manager for IDC New Zealand

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Tags IDCNetworking & Telecomms IDbroadbandRosalie NelsonTelecommunications

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