Communications service providers (CSPs) continue to struggle with telecoms’ emerging new order.
For the past two reported quarters, global CSP revenues have declined YoY.
Europe continues to be a drag on global averages, in part due to currency swings and macroeconomic instability, but even CSPs in China have seen revenues decline YoY for three straight quarters.
In addition, profitability results are mixed at best: among the largest 45 CSP groups in 1Q15, average net income and EBIT margins fell considerably from the 1Q14 level.
Higher capex is one contributing factor; CSP capex now averages 19 percent of revenues, the highest since 2009.
In comparison, Internet content providers (ICPs) such as Google, Apple, and Alibaba continue recording strong revenue growth, often at the expense of CSPs, and they’re investing in their networks: ICP capex now accounts for over 6 percent of revenues, up from 4 percent a few years ago.
Even the “smaller” ICPs such as Snapchat - now valued at about US$15 billion on private markets, roughly the same as large US telco CenturyLink - are helping to develop new service categories, such as ephemeral messaging, largely unaddressed by CSPs.
This growing CSP-ICP competition and the related growth of data center spending is good news for some vendors. Much ICP spending is directed at data centres and related cloud infrastructure.
That’s helping to lift revenue prospects in many sectors facing a weak outlook in the CSP vertical. Within the optical components market, for instance, datacom is the fastest-growing segment, with a projected 14 percent CAGR from 2014 to 2020.
By contrast, the mobile radio access network (RAN) is weak: total vendor announcements of LTE contract awards numbered just 23 in 1H15, down from 88 in 1H14, and Ovum expects RAN spending to start falling next year.
Looking forward, CSPs will have to prioritize service agility and cost-effectiveness in order to expand their operations. Some growth will come from acquisition, either of other CSPs or across industry lines into the data centre/cloud space.
While ICPs are tiptoeing their way into communications, telcos drive this industry with their deep pockets and last-mile connections to billions of end users. Now they need to prove that the last-mile “pipe” they deliver is not a commodity.
By Matt Walker - Research Analyst, Ovum