For this edition of Service Provider Views, I wanted to provide a broad perspective on the market. My last column was focused on one operator — Vonage — largely because their recent quarterly results warranted some timely discussion about where VoIP was going. There are a number of ways to look at the bigger picture, and this time around, I’m doing it from a financial markets point of view. Future columns will look at other aspects of the market, and over time I hope to cover several of them.

 

Not being a financial analyst, I figure the next best thing is to tap one, and I just so happen to have a close working relationship with one that many readers will be familiar with. Catharine Trebnick has been following the telecom markets for many years, and is currently a Senior Research Analyst at Boston-based America’s Growth Capital. She was kind enough to spend some time with me last week and what follows is our Q&A discussion about the overall state of the U.S. service provider market.

 

Before getting to the Q&A, I should also add that earlier this month, Catharine and I produced a very successful webinar where we shared our views on the IP infrastructure market. We are in the process of planning more of these, and I’ll update you on future webinars once they’re scheduled. Until then, I hope you enjoy our conversation, and as always, your comments and suggestions are welcome.

 

 

 

CT: North America wireless subscriber growth is at an all time high penetration rate, roughly 85%. Competition between the service providers has stepped up as providers look for growth by taking market share from their competitors. It is important to note however, that in many countries in Asia Pacific, penetration rates far exceed 100% with many customers subscribing to more than one service provider. One comment made at the Mobile World Congress (News - Alert) in February by a service provider from the Middle East is that American carriers as well as European carriers lack imagination and innovation in services offered and pricing packages.

 

Last week both Verizon Wireless and AT&T announced unlimited cell-phone calls for a flat rate of $100. Price elasticity states that for every 1% decline in price, a 2% increase in demand is required to sustain current revenue). Additionally, we could interpret the change to flat rate price as an indicator that service providers are looking now to data services such as text, video and combinational services for aggressive growth. Because current economic conditions may drive consumers to become more price-sensitive, a flat, no-surprise rate can be appealing. If this happens, subscriber growth may stagnate and/or decline. If the consumers are willing to spend less on mobile call, they maybe less inclined to spend less on text and video also.

 

If you look at 4Q07 access results, most of the service providers are concentrating on new advanced, high-speed services such as FiOS and U-verse and less so on xDSL access. For example, Verizon announced it added 264,000 high-speed access lines, almost all FiOS.

 

Cablecos and telcos have been battling it out on the broadband access side. Initially, the cablecos had the market share in terms of Internet access. However, the battle has shifted to IPTV away from xDSL and cable. Verizon has been making inroads with FiOS and AT&T with uVerse. High end bandwidth to the home looks like a good revenue stream for these carriers for some time yet.

 

 

CT: In my view, Vonage, Cbeyond, and the CLECs all have different target markets and different offerings. Vonage more or less is a VoIP service and the primary target market is the consumer with incremental revenue from small medium business (SMB) sector. While Cbeyond has packaged VoIP and data bundles, they focus only on the SMB market. The majority of the CLECs, such as Time Warner (News - Alert) Telecom, market predominately managed voice and data services to the Fortune 5000.

 

I believe the outlook for the whole sector can be tied to current macro economic conditions, and there should be more growth across the board as consumers and businesses look to low cost solutions. That said, the demand from SMBs and growth in this segment is expected to be robust because SMBs still lack the IT resources and expertise of large enterprises and are unable to deal with 3–5 different vendors so they are very receptive to solutions from Cbeyond and other CLECs. The SMB market has shown a relative healthy demand for services like VoIP and data, and is expected to remain a growth market over the next few years.

 

 

CT: There continues to be incremental spend on infrastructure for the deployment for new IP-based services. In our discussions with vendors and professional services companies, the core transport and optical networks are expected to experience the most challenges as broadband access and new IP-based services such as video are rolled out.

 

Another trend we are picking up from our discussions is fiber between the NFL cities can keep pace as new IP-based services are rolled out. However, in the Tier 2 cities where more bandwidth may be required, the demand for next generation IP-based services is lower.

 

 

CT: In North America, we see more room for consolidation from Tier 1 service providers than in the Tier 2/3 wireless market. Outside North America, we’re beginning to see consolidation with many of the Tier 1 operators. Most recently in Russia, VimpleCom acquired Golden Telecom (News - Alert) for $4.3 billion. An interesting trend has been consolidation among wireline and wireless service providers, such as AT&T, who is now an integrated service provider, having dropped the Cingular brand.

 

 

CT: Since January, and following the Q4 07 results that have been reported by both AT&T and Verizon, their stock prices have declined. 2008 guidance from the large OEMs and Cisco (News - Alert), and emerging players such as Acme Packet, has been conservative, and points to a cautious capital market environment.

 

On a brighter note, TIA recently released their forecast for 2008, showing telecom spending in the U.S. to increase 9.3 %, breaking above the $1 trillion in revenue mark.

 

 

CT: On the enterprise side, the service providers are seeing more competition from technology vendors and system integrators such as IBM, CSC, EDS and HP that are able to provide bundled and managed services as a complete solution versus a carriers providing VPNs and fat pipes. This is because the complexity and dozens of technologies used by enterprises today makes it appealing to outsource the “mess” to specialists.

 

Adding to the competitive threat, large enterprises are looking at ways to reduce overall spending. One trend that stands out is how enterprise CIOs are looking to reduce capital expenditure by leveraging their in-house IP infrastructure. We are seeing many enterprise CIOs developing plans to roll voice usage onto their internal data networks.

 

In the consumer market, Apple and Google have changed the game. 2008 will be a telling year as to how service providers will deal with the variety of threats I outlined above.

 

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