A Future Scenario for Telecommunications Vendors

The recession and changing demands from carriers will result in significant changes to vendors' skill sets. By Frank Fabricius, Peter Kjeldsen, Jouni Forsman and Caroline Jones Strategic Planning Assumptions By 2004, consolidation among telecommunications vendors will have reduced the current number of global companies by 20 percent (0.7 probability). Telecommunications vendors will be forced to cut production costs by 15 percent per year in 2003 and 2004 to remain competitive (0.8 probability). Until 2004, smaller telecommunications vendors will have opportunities in many markets, as global vendors focus on relatively high-volume product lines (0.8 probability). Until 2005, successful telecommunications vendors will be those with solutions that reduce carriers' operating expenses by at least 15 percent per year (0.7 probability). 2 A Future Scenario for Telecommunications Vendors ©2002 Gartner, Inc. November 4, 2002 Executive Summary During a period of telecommunications liberalization and privatization, incumbent carriers are transforming themselves into purely market-driven businesses focused on services, profit margins, preventing customer churn, time to operation, outsourcing of nonstrategic business areas and cost reduction. The market consolidation that eventually follows any market expansion, window of opportunity or market shift, in this case created by liberalization, coincided with a severe recession that has affected the global marketplace. Prior to this consolidation, liberalization had allowed alternative players into a previously monopolistic marketplace. Too many players thought they could succeed, oversupply occurred, followed by "survival of the fittest" and consolidation. This is a global market, in which local conditions are largely synchronized with those in other regions. Its "go and stop" nature is particularly challenging for vendors. In the early stages of liberalization, vendors struggled to meet demand from incumbents preparing for competition and competitive carriers preparing to take advantage of the newly opened markets. Now, vendors must reduce supply as quickly as possible and adjust their organizations as carriers consolidate and individual carriers' capital expenditure decreases. Vendors need to be increasingly flexible and adapt to the changing nature of carrier demand. Gartner Dataquest forecasts a further period of telecommunications vendor consolidation until 2004. The key near-term issue for carriers is cost reduction, because they need to be more profitable, but are unable to grow revenue from new services at a sufficiently fast rate. Carrier consolidation will also continue, and these trends mean generally weak equipment sales prospects. The result will be an accelerated implementation of necessary business changes, and change management will be a critical success factor. For vendors, high-volume production will become increasingly important; standardization and low margins will result in a need for further consolidation, as well as specialization and a strong corporate strategy. Carriers will need increasingly complex infrastructure solutions. To cope with this need, vendors must reconsider their value proposition, market strategy and positioning. Likely changes for vendors are increased R&D (as a percentage of revenue), outsourcing to subsuppliers, increased partnering and "ecosystem" thinking, mergers, acquisitions or, alternatively, a focus on a narrower product portfolio. The most likely short-term outcome is a period of partnership agreements from 2002 to 2004, with more long-term strategic repositioning of businesses to 2006. In the future, telecommunications vendors can be split into the following three segments: ■ Systems integration and solutions vendors ■ Niche vendors ■ Component vendors Carrier Demand Will Drive Changes in Vendor Skill Sets As carriers improve their core business by focusing on service provision, and climb the value chain by addressing content provision, they will require vendors to display a new or improved skill set. Figure 1 illustrates how carriers can climb the