Fixed Public Network Services: Key Issues for 2003

Transcription

1 Market Analysis Fixed Public Network Services: Key Issues for 2003 Abstract: Several key business issues and drivers will underpin the 2003 research agenda of the Worldwide Fixed Public Network Services Cluster. By Alex Winogradoff Strategic Market Statement The pivotal issue for fixed public network services growth in 2003 and likely in 2004 is business and investor confidence in telecommunications; expansion of communications services or investment in new services is expected to remain subdued until the major carriers can demonstrate two quarters of sustained financial growth. Publication Date:15 January 2003

2 2 Fixed Public Network Services: Key Issues for 2003 Background Fiduciary mismanagement and bankruptcy filings by leading telecommunications service providers have brought in question the longterm viability of all service providers and the short-term ability of bankrupt companies to deliver quality service. It has decimated investor, governmental and business confidence in the telecom industry and the market in general. Enterprises have been caught in a veritable "buzz saw" by the economy and now by concern for reliability of their communications providers. Enterprises have taken these revelations seriously because their own success is heavily dependent on quality and uninterrupted communications with their customers and for their business operations (extranet and intranet). Businesses will likely wait until the telecom market stabilizes before making any serious long-term commitments to upgrading their networks or next-generation networking. Consumer confidence and demand for telecom services, on the other hand, have not been significantly affected by these revelations or by the economy. Gartner Dataquest believes that the many challenges faced by the telecom sector will not be completely resolved in 2003 and that business confidence will be key to any telecom rebound. While telecom market growth overall will be weak during the next couple of years, there will be some strong growth areas (for example, managed data services). For 2003, the defining issues for the fixed public network services market will primarily be financial the state of the global economy, investor confidence in the telecom sector, and the specific actions by governments and regulators to regulate and monitor the financial performance of service providers. Regulators will also be "directed" to give greater weight to national economic policy objectives and thus will likely be dissuaded from supporting or promoting regulatory policies that may weaken the telecom industry and incumbents in the near term. In Asia/Pacific and South America, especially, while basic telephone penetration will increase dramatically, political factors in addition to the economy will nonetheless leave their vast growth potential essentially untapped. In North America, and to a lesser extent in Europe, corporate governance and financial regulations and measurements will have been fully implemented by year-end In addition, expect further service provider consolidations or bankruptcies that will weed out the remaining financially challenged service providers. The telecom industry will then be poised for a recovery toward the middle of Besides financial problems, the telecom market also faces other problems that are structural and related to past sins of overexpansion, overinvestment and overcapacity. Important questions surround the use of bankruptcy laws by insolvent companies and the unintended impact on solvent competitors that must be addressed. While these laws are intended primarily to protect solvent companies from unscrupulous creditors

3 (raiders) and to keep companies functioning during debt restructuring and reorganization, these laws are now being used as a tool by financially mismanaged companies to wipe clean legitimate obligations. The result: Investors (stockholders, bondholders and creditors) as well as employees are victimized, and solvent competitors now face potential disruptive price behavior by companies that have re-emerged from bankruptcy with "clean" balance sheets. How governments and regulators handle this issue during 2003 will be critical to the whole telecom food chain. While consumers may indeed benefit in the short run, the long-term impact could be devastating for the industry, continuing to stifle new network investment and innovation potentially beyond The next two years will be especially critical to all service providers. What must service providers do to mitigate these issues and to position themselves for profitable growth? Gartner Dataquest's research will help service providers build creative business solutions and market positioning strategies to respond to ever-changing market dynamics. In addition, Gartner Dataquest advice will assist service providers, telecom investors, enterprises and vendors to better understand the pivotal telecom services issues and trends to help guide their strategic investment decisions. 3 Overarching Business Issues for 2003 Research Coverage The Worldwide Fixed Public Network Services Cluster has identified nine key business issues that Gartner Dataquest believes will be the dominant strategic issues for clients of this cluster near term and long term. These issues are intentionally high level to cover anticipated "hot" topic areas and unanticipated issues that may arise during The key 2003 coverage issues are: How will the fixed public network services market develop, and which forces and trends will drive market growth and future opportunities? How will the data services market evolve, and what will be its impact on the service provider landscape? How will service provider roles, economics and business models change duringthenextfiveyears? How will fixed public services competition develop and diversify? How will voice services evolve, and what impact will that evolution have on carrier economics? How will regulation and government policy affect fixed public network services and service provider strategies? What impact will network security and privacy have on fixed public network services? How will Internet applications and Internet Protocol (IP) service convergence affect the telecom services market? How will the wholesale/carrier services market evolve?

4 4 Fixed Public Network Services: Key Issues for 2003 Key Business Issues: Detailed Descriptions The key business issues addressed by the Worldwide Fixed Public Network Services Cluster cover in significant detail the most important and most topical issues facing public services. Following is a sampling of some of the critical elements that will be covered. Market Size, Growth and Competitive Intensity Two of the most often cited client questions are: How large and how fast are markets growing, and how intense is the competition? These issues, including market structural changes and the forces that affect the direction of the industry, the specific market segments, and services will be addressed by the following key business issues: How will the fixed public network services market develop, and which forces and trends will drive market growth and future opportunities? Gartner Dataquest will publish forecasts for each of the major countries across six major regions (Asia/Pacific and Japan, Central and Eastern Europe, Latin America, Middle East and Africa, North America, and Western Europe). These forecasts cover fixed public network services revenue and demand statistics by detailed product and service segments and in most regions by other segments as well, such as retail, wholesale, residential, business, local, national and international. On a quarterly basis, Gartner Dataquest reviews these forecasts and market projections, assesses market trends, and provides high-level market forecast updates if appropriate. A global definitions document identifies the specific services segmentation scheme by region and provides a description of the specific line items in the forecast. In especially volatile times, alternative scenario analyses will also be developed to bind each forecast scenario with a distinct probability of attainment. The Worldwide Fixed Public Network Services Cluster also provides a detailed description of the dominant overarching global, regional, and country assumptions and trends that are the underpinning drivers and inhibitors for these forecasts. How will fixed public services competition develop and diversify? The incumbent fixed public service providers are at a crossroads in many regions worldwide. These providers must address many market-based investment and regulatory issues to remain viable concerns. Gone are the days when investors were looking for steady income from monopoly providers that had a protected environment from which they received a reliable stream of income from a cost-plus-based operation. Investors are looking less for income and more for value appreciation. This will likely be true even more so in the future. (Note: In the United States, recently proposed government tax incentives are intended to rekindle investor interest in income-based investments, which would be a boon to traditional service providers). Thus, incumbents are faced with a difficult chore of continuing to show profitability while trying to demonstrate a

5 growth in valuation of their business to entice investors a difficult balancing act at best because they are saddled with a high cost structure (past-prime assets, union labor, top-heavy management structure) and a consensus-management business culture that is great at project management and in disaster recovery but poor in innovation and risktaking. How to effectively evolve their business model and what strategies to adopt will be critical for the incumbents. For the new entrants it is a matter of identifying the incumbents' weaknesses and strengths and developing the most-effective competitive positioning strategies for nearterm profitability and long-term success. Some added questions include: What is the impact of service providers emerging from bankruptcy protection? Who are the key players in the public network service marketplace, and how do they differentiate themselves in terms of market position, image, business strategy, product, pricing and focus? What will be the impact of telecom restructuring and consolidation on the competitive landscape? How will regulation and government policy affect fixed public network services and service provider strategies? What impact will network security and privacy have on the evolution of fixed public network services? The incumbents must deal with regulatory regimes that subsidize their unregulated competitors while continuing to regulate nearly all phases of their own operation. The new entrants, on the other hand, must understand the potential benefits and pitfalls of an advantaged regulatory position. The future success of both groups of players is dependent on understanding and having a clear independent assessment of where regulation is going and how it can benefit or hurt in the near term and long term. Issues such as unbundling (for example, unbundled network element platform [UNE-P]), Internet regulation, government mandates on security and privacy, broadband investment policies, and so on are covered in detail in Gartner Dataquest research. Some additional questions: How are country and global governmental policies expected to affect teledensity and local competition? What changes are expected to result from the triennial review of UNEs and interconnection? Business Models and Financial/Economic Underpinnings of Fixed Services Fundamental structural changes are in the offing for the service provider industry as providers shift from a circuit-switched voiced-based business model to an IP-based converged-services model. While the evolution in telecom services has always been made possible by a steady stream of hardware-based technologies, the next generation of services will be driven by software and application breakthrough technology. How will Internet applications and IP service convergence affect the telecom services market? 5

6 6 Fixed Public Network Services: Key Issues for 2003 How will service provider roles, economics and business models change duringthenextfiveyears? During the next five years, service providers will finally be able to take advantage of the lower cost and customizable capability of the promised IP revolution, which will dramatically change the financial and economic balance between voice and data applications in favor of converged services. Clients must keep abreast of service developments, potential consumer and enterprise adoption rates and factors for these nextgeneration services, and their economic and financial consequences. Gartner Dataquest will be examining the demand-side and supply-side dynamics of these market shifts and changes, analyzing the regulatory policies that will inevitably accompany these changes, assessing the market-based cost structures of incumbents and new entrants as a result of these changes, and identifying the most effective business models for different classes of competitors to pursue. Some additional questions include: Where are the revenue and profit opportunities for service providers? How will the roles of public network operators, service providers and content producers change the current and future value chains? What are the optimum business models for telecom service providers? What role will business solutions play in the dynamics of fixed services, the structure of service providers and the industry? How will automation of front- and back-office operations and plug and play applications cause service providers to evolve? How will the wholesale/carrier services market evolve? Another structural element of the services provider market that has been hit by overexpansion is the wholesale or service provider-to-service provider market. This market's price structure is still heavily influenced by overcapacity, but it will continue to be a vital and important market segment in the future. Some of the subtending questions are How are clearinghouses, bandwidth exchanges and other intermediaries evolving, and what affect will they have on the market? How will demand and supply vary for long-haul telecom cable capacity, dark fiber and wavelength services during the next five years? Fixed Public Services Evolution: IP at the Core Voice and data services have been discretely separate offerings and primarily delivered over distinct networks for more than 30 years. This will change perceptibly during the next five years. How will voice services evolve, and what impact will that evolution have on carrier economics? Voice services are seeing the most dramatic changes in the near term as voice over IP (VoIP) is becoming mainstream despite the failure or weak financial conditions of the early proponents of this technology. The adoption of Internet services, the maturation and decline of the longdistance (national and international) market because of substitution by

7 wireless, and other alternative communication modalities, and the "quality" improvement in VoIP have been the main causes for this revolution. In addition, softswitch developments and interface standards for hosted voice and converged services (for example, IP Centrex, unified messaging, call centers and so on) are being finalized, which has the potential to customize or personalize voice communication services and features. Additional questions include: What shape will long-distance and local markets take as voice and data markets move toward geographic unification? How fast will public VoIP services develop and overtake circuit-switched services? What voice services enhancements, product stratification or marketing strategies will be able to stem the decline in voice margins and revenue on corporate financials? What will be the impact of mobile substitution, product bundling, and voice and data convergence on fixed network services? How will the data services market evolve, and what will be its impact on the service provider landscape? A profound change is also taking place in the data market. As a result of the commoditization of transport and the continual introduction of lowerpriced, higher-bandwidth services, traditional service providers are forced into making investments in higher-margin managed services to compete against low-cost-structure competitors. In the United States, regional Bell operating companies (RBOCs) will become competitors for long-haul managed services, putting pressure on existing service providers to enhance and differentiate their offerings. As incumbent local exchange carriers' (ILECs') managed services offerings move into the LAN, the demarcation between IT and telecom is further blurred. This sets up the inevitable battle between telecom service providers and IT services providers, traditional outsourcers and systems integrators, which see their markets threatened and are in turn venturing into deploying and leveraging their own networks rather than depending totally on network service providers. Some added questions: What are the opportunities in high-speed metro services, and how will they impact legacy services? How will ultra-highspeed metro and long-haul Ethernet services develop and for what applications? How will broadband access services evolve, and what are the success factors for future growth? How will high-speed optical transport services develop during the next five years? What are the opportunities for public wireless LAN services and what is their role in wireline services? How will managed and professional services and IP virtual private network (VPN; Multiprotocol Label Switching [MPLS] or IP security [IPsec]) change the nature of WAN, LAN and IT services, and what impact will that have on the competitive landscape? How will traditional outsourcers and vendors (such as IBM) with large embedded services networks compete against traditional network service providers? 7

8 8 Fixed Public Network Services: Key Issues for 2003 Key Issues How will the worldwide public network services market develop, and which forces will drive market growth and future opportunities? How will opportunities in the public network services market be affected by competition, technology and evolving user requirements? This document has been published to the following Marketplace codes: TELC-WW-DP-0285 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice