Telecoms in 2020: core scenario

24 December 2009

Charlie Davies Jan Dawson Tony Cripps Jeremy Green

www.ovum.com

Table of Contents................................................................................................................1 Telecoms in 2020: core scenario........................................................................................2 Executive summary ..........................................................................................................2 Shaping the world of 2020................................................................................................3 The world beyond telecoms providers..............................................................................6 The evolution of customer requirements ........................................................................10 The world adjacent to telecoms providers......................................................................12 Redefining the telco: recognisably different....................................................................16

Ovum2009.Unauthorisedreproductionprohibited.

1 of 23

TELECOMS IN 2020: CORE SCENARIO

Telecoms in 2020: core scenario

Executive summary
In a nutshell
This is the first of two reports that present the combined thinking of the Ovum telecoms research group on the subject of what the telecoms industry will look like in the year 2020.

Ovum view
The telecoms industry will change radically over the next ten years. Ubiquitous broadband IP networks will enable a software-based application, content and service marketplace in which telcos must work hard to define their role. Some will succeed as SMART players, becoming the next-generation provider of communications, content and services to consumers, while others will find their niche as LEAN operators, running maximally efficient networks that enable SMART players to offer a high quality of service and experience to consumers. These changes will happen slowly, but telcos must decide now which of these paths to pursue. (For a definition of SMART and LEAN, refer to the section Redefining the telco: recognisably different in this report.)

Scope
This is the first of two reports that present the combined thinking of the Ovum telecoms research group on the subject of what the telecoms industry will look like in the year 2020. This first report outlines: the major events that we think are mostly likely to occur over the next decade both within and outside the telecoms industry the key drivers that will shape the industry and adjacent markets from today until 2020 the resulting implications and impact on the telecoms industry.

The second report will summarise the findings of Ovums various telecoms research practices, each of which will publish a more detailed report on their core area in late 2009 and early 2010 as shown in Figure 1. (Please note our Mobile 2020 report was published in April 2009, see The future of the mobile industry: a vision for 2020).

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

2 of 23

TELECOMS IN 2020: CORE SCENARIO

Figure 1 Overview of Ovum reports on Telecoms 2020

Consumer

Content and advertising

Devices and platforms

Enterprise

Wholesale

TELECOMS IN 2020

Telco operations

Emerging markets

Network infrastructure

Components

Regulation

Mobile

Source: Ovum

The individual reports will provide more detail on the implications of the core scenario for various players and sectors of the telecoms industry, and recommendations for our clients. This report focuses on providing an overview of the scenario we believe will play out over the next ten years. This report provides our core scenario for relatively developed telecoms markets with high fixed and mobile penetration, including North America, Europe and much of Asia and Australasia. However, we believe many of our projections are not necessarily appropriate for emerging markets, and as such have produced a separate report, with separate findings, on the prospects for telecoms in the emerging markets in 2020 and this report makes no attempt to summarise those findings. This report is split into four main chapters. These are as follows: The world beyond telecoms providers The evolution of customer requirements The world adjacent to telecoms providers Redefining the telco: recognisably different.

Shaping the world of 2020

A decade of change: the wheels are in motion
We begin with a discussion of the major factor which has driven significant recent change in telecoms and which, in combination with other technical, social,

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

3 of 23

TELECOMS IN 2020: CORE SCENARIO

economic and political developments, underpins what we identify as the five major drivers of change over the next decade. The most powerful engine: Internet protocol The decade from 2010 to 2020 will be one of significant change for the telecoms industry and the adjacent industries whose impact on telcos will increase significantly over the coming years. This change will come in different forms, which we explore in more detail in this report. There is one overwhelming force that underpins the significant disruptions that will occur in the next ten years, just as it has driven substantial change in recent years. This is IP, the protocol that underpins the development of the Web, that has created the Internet as a major platform for delivery and which increasingly underpins the transport and delivery of anything digital. During the past decade it has given rise to: The Web as the medium a plethora of content, innovation, information and commerce that has become central to modern society. The subsequent rapid rise of the GAMEYs and others multi-billion pound companies whose impact on traditional retail, telecoms, broadcast and advertising continues to grow. The emergence of the Internet as a platform with a fundamental and irreversible shift of data to the cloud and its subsequent impact on infrastructure and supply. The replacement of a variety of disparate dedicated networks for particular applications and services with a single converged IP network carrying all applications and services. The ongoing transformation of networks from circuit-switched to packet from PSTN/GSM to FTTx/HSPA and LTE and the accompanying consequences for industry and services.

Five key drivers of change The transformational impact of IP directly underpins what we have identified as the five major drivers of change over the coming decade, outlined in Figure 1.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

4 of 23

TELECOMS IN 2020: CORE SCENARIO

Figure 2 Drivers of change from 2010 to 2020

Driver
Growth Growth of of IP IP Video Video

Detail
Significant Significant increase increase in in IP IP video video Driven Driven by by UGC UGC and and big big brand brand content content Debate Debate of of video video distribution distribution ecosystem ecosystem Boom Boom in in wireless wireless web web browsing browsing FMS FMS fuelling fuelling decline decline of of PSTN PSTN Growth Growth in in mobile mobile only only households households

Variables
Enterprise Enterprise video video driven driven by by communications communications Developed Developed markets markets initially, initially, going going global global Balance Balance of of mobile/fixed mobile/fixed traffic traffic will will vary vary Mobile Mobile voice voice dominates dominates in in emerging emerging markets markets Integrated Integrated and and mobile mobile only only models models still still work, work, but but fixed fixed only only is is no no longer longer sustainable sustainable Mobile Mobile devices devices dominate dominate emerging emerging markets markets Netbooks highly popular in Netbooks highly popular in certain certain countries countries Use Use of of different different standards standards still still common common Equipment Equipment vendors vendors become become software software vendors, vendors, compete compete with with ISVs ISVs Telcos Telcos adopt adopt more more software-centric software-centric infrastructure infrastructure and and practices practices Some Some departure departure from from this this model model in in markets markets where where infrastructure-based infrastructure-based competition competition is is prevalent prevalent (e.g. (e.g. the the US) US)

Going Going mobile mobile

Explosion Explosion of of connected connected devices devices

Growth Growth in in web-enabled web-enabled devices devices The rise of The rise of connected connected TVs TVs // HDTVs HDTVs Pressure Pressure for for content content portability portability Communications Communications increasingly increasingly delivered delivered by by software software on on standard standard hardware hardware Growing Growing influence/power influence/power of of software software players: players: Google/Apple/IBM Google/Apple/IBM etc etc Growing Growing influence influence of of SMART SMART players players Operators Operators relegated relegated to to wholesale wholesale roles roles in in support support of of SMART SMART players players

The The rise rise of of software software

Power Power shifts shifts to to SMART SMART players players

Source: Ovum

Growth in IP video The ongoing migration to online viewing, combined with an increase in mobile video consumption, means that in terms of bandwidth consumption video will account for the majority of traffic by 2020. It will also drive a massive increase in overall broadband traffic, necessitating costly upgrades to both access and backbone networks. Going mobile End users have always spent much of their time away from home, but they will be increasingly able to take their content, applications and services with them, thanks to the availability of more ubiquitous, higher bandwidth mobile networks and more capable mobile devices. Explosion of connected devices By 2020, most electronic devices such as PCs, mobile phones, portable media players, TVs, set-top boxes (STBs) and games consoles will have direct access to web-based cloud content and applications through wireless connectivity in the home and wide area settings, and through the widespread adoption of core web technologies and a small number of de facto standard rich Internet application (RIA) technologies on those devices.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

5 of 23

TELECOMS IN 2020: CORE SCENARIO

The rise and rise of software The emergence of HTML5 as the foundation for future device-side web applications during the late 2000s points the way towards the emergence of a consistent, truly ubiquitous multi-screen application environment for connected devices of all kinds by 2020. SMART equals power players The telecoms market of 2020 will be dominated by the SMART players, which offer consumers a bundle of services, management, applications and technology and a retail relationship focused on quality of experience and simplicity for the end user. These players will depend on connectivity provided by LEAN operators, but easily the largest revenue opportunity will be taken by the SMART players.

The world beyond telecoms providers

Sources
Our story of the future is informed by several publicly available future scenarios, including the Worldwatch Institutes State of the World report, the UK Government Office for Sciences Sigma Scan, and the US governments Mapping the Global Future: Report of the National Intelligence Councils 2020 Project.

Economy
By 2020 the world economy has emerged from the depths of the severe recession of 200910/11 but the recovery has been fitful and uneven. Energy and resources, and security-based industries, are the most profitable vertical sectors. In developed countries there has been no return to the boom years of the first decade of the 21st century. Unemployment remains higher than pre-recession levels in these economies and consumer confidence, and therefore spending, remains relatively low. Food and energy prices are high, further constraining spending. Increased taxes to pay for the bailouts at the start of the recession remain an added burden. Successful developing countries have weathered the storm better than their developed market counterparts, although manufacturing industries have reoriented their strategies to produce more goods for the growing middle classes of their home markets rather than consumers in the developed world. Less developed countries with resource-based economies have benefited from the rise in commodity prices. The most successful of these are attracting inward investment from the developed economies and at an ever-increasing rate from India and China, both of which are seeking to secure access to key resources including food. Less developed countries without strong resource sectors, and some countries with valuable resources but with poorly developed states, remain poor and

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

6 of 23

TELECOMS IN 2020: CORE SCENARIO

fragile, and susceptible to famine and epidemics. These countries are most at risk from the effects of climate change and are sources of continuing migration, most of it illegal, to more successful countries.

Politics and geopolitics

There have been no major political upheavals. The democratic countries remain democratic, but with decreasing levels of political participation in and affiliation toward mainstream political parties. Efforts to export democracy to other regions have been abandoned as a costly failure. The European Union has moved towards increasingly closer integration despite widespread hostility in the populations of some member states. India and China are increasingly influential in world politics. The influence of the US and the developed countries of the West has diminished with their weakened economies and discredited economic models. Indian and Chinese development programmes are active, and less developed countries increasingly orient themselves towards Indian and Chinese political models, brands and cultural influences. Russia has recovered from the impact of recession and is again flexing its muscles over neighbouring states, particularly those bordering the expanded European Union.

Businesses
While the world economy has largely recovered from the recession of 200913, the scars remain. Businesses are spending again on technology following an extended period of severe cutbacks, but there is no spending boom. Budget cuts during the recession affected discretionary spend on mobile and forced a new attitude to mobile services, borne out of a need to manage costs and exert more control over employee activities. Many IT projects were put on hold in businesses, particularly those requiring high capex or where the business case was hard to prove. This slowed or even halted investment in some areas. A new generation of employees that have grown up with social networking have entered the workforce. This has prompted companies in some sectors to introduce more flexible ways of working, including collaboration, presence and mobility. Unified communications has therefore become mainstream. In some verticals, particularly finance, corporate governance is now a major factor in all IT investment decisions. Security of company data is a major concern in all verticals, driving divisions between business and consumer use of mobile devices and applications.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

7 of 23

TELECOMS IN 2020: CORE SCENARIO

New start-ups in the SME sector embrace innovative communications approaches where they see that the cost and productivity benefits can drive competitive advantage. Businesses in developing countries were slow to see the benefits of enterprise mobility during the recession years. Instead companies have allowed mobile usage to grow in an uncontrolled fashion based on a mix of consumer contracts and expensed mobile. In some markets this has changed and to some extent enterprises here have caught up with their developed market counterparts.

Social trends
Developed countries The trend towards de-urbanisation is largely reversed; city centres revive as the most affluent consumers move back into them. Economic inequality diminishes somewhat as a result of the collapse in house prices and the impoverishment of the middle class in the long recession; the participation of active and articulate users leads to improved public sector provision despite the budget cuts of 201217. The demographic balance of the population continues to shift towards the elderly. Migration from the failing states of Africa and the Middle East continues, with many of the migrants employed in social care. There is a wider variation of household types, with inter-generational families more common as a consequence of the ageing population and unemployment, and new patterns of communal living emerging. Crime and disorder decline in inner-city areas, but social tension remains acute in the migrant ghettos of the outer suburbs.

Successful developing countries The trend towards urbanisation continues, with affluent consumers increasingly seeking the benefits of city life. Economic inequality increases as some benefit more from growth than others. Population growth begins to slow, but the demographic balance is still tilted towards younger people. The urban elite are increasingly mobile. There are many returnees from the US and other developed countries, but others continue to spend a few years abroad to further their careers or to take part in development programmes. There is increasing migration between successful developing countries, as well as migration from the failing states. In the cities family structure is increasingly trending towards the nuclear family; in the countryside more traditional (extended family) patterns persist. Crime is high and increasing.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

8 of 23

TELECOMS IN 2020: CORE SCENARIO

Less successful developing countries Large-scale migration to the cities continues as part of a pattern of national, regional and international mass migration driven by rural poverty and land degradation. Economic inequality remains very high, with a small elite wealthy group (even by international standards) and most others either very poor or actually starving. Population growth remains very high, and the demographic balance is heavily tilted towards youth.

Technology developments
There will be no major technological disruptions beyond those described in this series of reports. Device capability will continue to improve, with advances in computing power driven by multi-core processors and parallel architectures (see Ovums report The end of Moores Law and its impact on devices), together with improved memory and local storage capacity. This will allow the use of more sophisticated software and user-friendly interfaces. Devices will contain more radios, and will be more autonomous and promiscuous in the way that they choose between available networks. Battery life will remain a significant bottleneck for device performance, with only incremental improvements in battery technology expected in this period. The industry will be making plans to deploy 5G, which will offer higher bandwidth and enable lower-cost operations. There will be no new sources of electrical energy generation, and low power operation will be a major consideration. Innovation continues to move faster than standardisation, and making things work together remains a major challenge for consumers of all kinds. Users look increasingly to big brands to overcome compatibility issues and provide a satisfactory customer experience. Ovum has coined the term managed device platform (MDP) to describe this emerging phenomenon (see Of iPhones and Androids: redefining the smartphone and other devices). Online crime and fraud, identity theft, and the porosity of government databases makes users increasingly wary of online transactions, and more ready to look to big brands as guarantors of trust.

Resources and environment

The pressure on natural resources continues to increase. Energy prices began to rise again even before the end of the recession in 2013 as a consequence of reduced oil & gas exploration and production in the 2009 12 period. Energy performance is increasingly featured as part of the specification for a wide range of products.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

9 of 23

TELECOMS IN 2020: CORE SCENARIO

Food and water are in much shorter supply. In the successful economies this translates into higher prices, product innovation and reduced spending on nonfood items. In the failing economies it translates into famine, further pressures towards state and societal collapse, resource wars, civil war and mass migration. Many countries fail to meet emission reduction targets set in 2010. By 2020, increasingly frequent severe weather events, and the increased political instability caused by climate change in many poor countries, leads to increased activity aimed at reducing emissions more drastically. This leads to renewed calls for a greenhouse gas treaty, but expectations of meaningful progress are low.

The evolution of customer requirements

The shift to wholesale
By 2020 wholesale relationships will be more important, and more common, across the entire telecoms industry, supporting a wide range of retail services offered to consumers and enterprises. These retailers will include fixed, mobile and convergent service providers, cloud-based content and application providers and brand extenders that have decided to add telecoms services as a part of a much wider one-stop shop service portfolio. The variety of wholesale players will also increase. At one extreme will be the niche players that offer a very limited specialist set of services to intermediaries. There will also be managed network outsourcers that take total responsibility for the deployment, performance and management of communications infrastructure on behalf of retailers that wish to concentrate their efforts on customer-facing activities.

Retail customers
Consumer behaviour Users would like to find what they want, when they want it, with minimal complexity and to a satisfactory quality. This is, in essence, the consumers ideal scenario and one which companies are attempting to fulfil today. By 2020, these requirements will be better fulfilled, with the delivery and packaging of content and services changing as a result. These requirements and characteristics are listed in detail in Table 1.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

10 of 23

TELECOMS IN 2020: CORE SCENARIO

10

Table 1 Consumer digital experience, service and content in 2020

User requirements Accessible: easy to find, easy to set up, easy to use Content and service characteristics Portable and transferable across devices and domains Interactive and immersive

Timely: relevant and convenient according to the context at the time of use Personalised: appropriate to the user, their device(s) and their connection Available: providing an appropriate quality of service, and secure

Seamless

Graphically rich

Source: Ovum

Customer segmentation By 2020, we believe consumers will fall into three main categories, as outlined below. It is important to note that the balance of customer types will vary from market to market and the balance of consumers will differ substantially in emerging markets (see our report Telecoms in 2020: emerging markets for more detail). Digital citizens seek safety, ease of use, and predictable spend. Customers buy a bundle of managed services, which could include content, communications and connectivity from a single SMART player. They rely on this supplier for single sign-on and billing. However, in some cases, they may purchase basic connectivity from a LEAN operator. Products aimed at this segment will be 'mass customised' and targeted at different segments. Digital metrics live on the margins of the Information Society. Their priorities are price and simplified access to minimal transaction-oriented content and applications (such as ticketing and banking). In emerging markets, they will account for a much larger percentage of consumers. Digital adventurers are consumers that continue to value fully open platforms, self-configuration and management and rely heavily on free applications. More likely to purchase basic connectivity from best-of-breed suppliers.

These different customer segments are outlined in more detail in our report Telecoms in 2020: consumer.

Enterprise customers
Customer segmentation As with the consumer market, there will be multiple market segments in the various company size brackets in the enterprise market, as shown in Figure 3.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

11 of 23

TELECOMS IN 2020: CORE SCENARIO

11

Figure 3 Enterprise categories 2020

SoHo
30% Ambivalent Users: Some SoHos maintain separate fixed and mobile contracts. Communication and IT are managed largely as they are today in a piecemeal and haphazard fashion. 40% Mobile: SoHos that have migrated to a mobile-only service with no need for a fixed service in order to manage their communication needs. 30% Internet Savvy: SoHos that have migrated to Internet and over-thetop Internet-based managed service providers. The segment is served by a new provider type; the Internet-based managed services provider.

SME
40% Consolidated: SMEs that have consolidated their IT and communication services. This segment represents the greatest opportunity for telcos as they adopt a broader set of IT and telecoms services which are increasingly delivered from the cloud. 30% Price Focused: SMEs continue to manage communications in a disintegrated fashion, searching for the lowest cost product. This value segment is under pressure from technology-advantaged organisations in the next decade. 20% Mobile Minority: SMEs that have migrated entirely to mobile. 10% Internet Innovators: SMEs that have migrated to over-the-top and Internet providers.

Corporate
40% Service-driven Corporate: Larger enterprises that adopt a more service-driven relationship with the industry. This segment fuels the outsourcing market as the business seeks service scale and reliability. 55% Commodity Buyer: Large enterprises that continue to seek lower-cost technologies. While this segment is open to outsourcing, the primary driver remains one of cost efficiency over service. These users will look to take advantage of cloud-based opportunities. 5% Maverick: Enterprises that exploit unmanaged services with limited service performance guarantees through the Internet community.

MNC
66% ICT as an Enabler: With technology becoming a central ingredient in service delivery, technology is an enabler of this segments business, if not a differentiator. The global nature and complexity of their communication and IT services means that the outsourcing momentum has continued through the decade. 10% of this segment single-source IT and communications from an SI. 20% of this segment source fixed and mobile in a single contract. 33% ICT as a Function: Technology is perceived as a cost to the business. The segment is heavily outsourced in order to reduce the cost of delivery. 20% of MNCs in this segment source their fixed and mobile services in a single contract.

Source: Ovum

Enterprise end users are consumers In addition, of course, end users within the enterprise are also consumers. By 2020, the boundaries between work and personal life will have eroded even more significantly than they have today, and most employees will engage with devices and services that meet needs in both domains. Most enterprise CIOs will have come to terms with this and implemented the necessary security, billing and other processes in order to make this an enabler rather than an inhibitor of getting business done.

The world adjacent to telecoms providers

Networks are no longer just about telcos
Telecoms networks continue to grow in importance. By 2020, all-IP networks will be fundamental to our digital worlds. But telcos are in danger of losing their dominant positions as technological, commercial and political forces make it more

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

12 of 23

TELECOMS IN 2020: CORE SCENARIO

12

feasible and more appealing for other companies to gain access to network assets. These forces are outlined below: By their very nature, IP platforms engender a separation between network and service layers, thereby enabling more service-based competition and loosening the link between network and channel ownership. The sheer costs of next-generation access (NGA) combined with a decline in communication-based revenues are driving increased network-sharing and targeted subsidies, and thereby introducing new stakeholders into the domain of networks and infrastructure. As telcos, vendors and other companies evolve their businesses, so too does their expertise evolve. In some cases, it no longer makes sense for telcos to be involved in, for example, passive infrastructure or in basic network management.

These network-related forces will accelerate the evolution of telco business models and the dissolution of vertical integration as the modus operandi for telcos. By 2020, we believe that in many markets telcos will still own and operate networks, but in most cases, their approach to networks will have significantly changed for example, increased network-sharing (co-opetition) across mobile and fixed networks, and the outsourcing of network management to vendors. More significantly, many telcos will have chosen or been forced to definitively open up their networks to third parties, increasing their reliance on wholesale revenues.

201020: convergence a reality

The wheels of industry upheaval were set in motion some time ago with the opening up of telecoms networks and services to competition. We have outlined how the rise of IP has significantly accelerated and expanded this process. Today, it is not only telcos, but all manner of telecommunications providers and now broadcasters, including cable and satellite operators, that face growing competition in their core markets of voice, broadband access, TV and advertising. The rise of managed device platforms and the ultimate breakdown of vertical integration have significant ramifications for players across the value chain.

From vertical to horizontal integration

By 2020 most connected devices such as PCs, mobile phones, portable media players, TVs, STBs and games consoles will have direct access to web-based cloud content and applications through the widespread adoption of HTML5 (or future evolutions of core web technologies) and a small number of de facto standard RIA technologies on those devices. This democratisation of client-side technologies and the practicality of direct-toconsumer (D2C) services to all devices that results from this technology adoption will have profound effects both across the applications and services value chains. Meanwhile, end users will gain the ability to consume the same content over any

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

13 of 23

TELECOMS IN 2020: CORE SCENARIO

13

network across a range of different devices that will all leverage a common cloud as the source and common store for a wide range of content, applications and services. Phase one: the rise of open, but managed platforms Today, tight vertical integration between devices, software, applications and content is the favoured and necessary means to link non-PC devices and their users to content and application developers. This has spawned diverse, but architecturally similar, products in multiple sectors and from multiple types of provider, ranging from mobile phones and portable media players (e.g. Apples iPhone and Vodafone 360) and pay-TV services (e.g. Sky HD/Active) to games consoles (e.g. Microsoft Xbox and Xbox Live) and e-book readers (e.g. Amazon Kindle). So beneficial is this model to developers and consumers alike that many more such products will be created and honed over the next few years. Ovum describes this transitional architecture as a MDP, a concept that is described more fully in Of iPhones and Androids: redefining the smartphone and other devices. MDP providers offer a vital, cloud-based integration, development and deployment hub for third-party application and content providers (including telecoms operators) to build and deploy their own server-side applications and roll out their own services, helping maintain the MDPs stickiness. The network hub becomes, in effect, an operating system for cloud-based applications and services. Phase two: horizontal in full force However, the vertically-integrated MDP play will not remain viable for many players in the longer term, although specific circumstances of geography, local brand and use case may affect that viability. In our timeframe, all emerging MDP providers whether software, hardware, webcos, telecoms operators or others will ultimately be threatened by the transformation of their main role. Currently, this is management of the channel and the end-to-end connection between the content or application originator. In our timeframe, the emphasis will shift to the provision of cloud-based development and deployment platforms. The ability to adapt successfully to this change will go a long way towards determining whether, or how, a company makes the final evolution (in the 2020 timeframe) to SMART player. This horizontal service integration in the cloud was beginning to happen in the late 2000s, driven by major web and applications software vendors such as Google and Microsoft, and will have been largely complete for several years by 2020 (although new capabilities will always be forthcoming). This evolution is in essence the same as the IT notion of platform-as-a-service (PaaS) and will come to dominate telecoms service deployment as it will services

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

14 of 23

TELECOMS IN 2020: CORE SCENARIO

14

and applications that today tend to be viewed as IT-oriented. By 2020, that divide will have well and truly closed. This will have profound effects on the positioning and relative strengths of many different participants in the application and content ecosystem, including todays telecoms operators, as well as in the preferred channels to market for content and services.

A more level playing field

These significant changes in the delivery framework and value chain for digital services and content will ultimately result in a more level playing field by 2020. The dissolution of stove pipes means companies with heritages in different sectors content, software, telecoms, devices can, via the purchase of wholesale services, M&A and partnerships, manoeuvre much more easily into different domains. This possibility is already clearly in evidence today; by 2020, it will be the norm. Success in 2020 therefore becomes less about asset ownership and more about competencies, execution, scale and brand.

Legal and regulatory issues

Regulators will struggle to adapt to the changing telecoms world, and current regulatory frameworks are likely to require an overhaul. As more players without networks become more dominant, the focus of regulation will need to shift away from telecoms sector-specific regulation and towards competition law and abuses of dominance. However, certain basic regulatory principles and mechanisms are likely to remain in place. Bottlenecks such as mobile termination and local loop unbundling are likely to remain heavily regulated, with LLU prices likely to be set at such a level as to create a level playing field for alternative operators. Network sharing will throw up new regulatory questions, but most regulators (some under pressure from governments) will overlook the potential diminution of access network competition in return for a robust open access framework. Net neutrality is likely to continue to be a hotly debated topic in the early years of the decade, with most regulators enforcing transparency about network management practices as a minimum requirement, and some going further. Over time, the need to invest in NGA and tiering of broadband products will increase pressure to lift some of the more draconian regulations in this area. Some telcos will manage to claim their share of this increased customer value, but this will be because they have managed to grow their role into the domains of these other players, not because the telco role itself becomes more valuable.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

15 of 23

TELECOMS IN 2020: CORE SCENARIO

15

Redefining the telco: recognisably different

LEAN and SMART: the two faces of telecoms
The horizontalisation of processes and layers will be reflected in the two basic roles that the telcos of 2010 will be able to adopt in 2020: that of LEAN operator and that of SMART player. In Ovums Telecoms 2020 terminology, LEAN stands for low-cost enablers of agnostic networks, and is heavily reflective of the heritage of telecoms providers. As such, LEAN operators almost invariably have their origins in the telecoms providers of 2010. Meanwhile SMART refers to services, management, applications, relationships and technology. A SMART provider is one that leverages considerable expertise in technology (primarily in applications infrastructure and platforms) to aggregate services and applications (including content) and to manage their distribution on behalf of both those third parties and the end user. They therefore provide a hub through which many customers are provided with access to software-based assets, such as content and applications, and through which the providers of those assets are themselves connected to customers, creating a mutually beneficial situation for all. Figure 4 outlines the different functions carried out by SMART/LEAN players. Figure 4 SMART and LEAN player functions

SMART player Applications/content platform Content management API aggregation Developer tools and support Deployment and integration Device and distribution services
Source: Ovum

LEAN operator Broadband access Access services services QoX and QoS Network QoS and QoX Billing Network APIs OSS/BSS APIs and services Developer SDKs

While LEAN operators are likely to have arisen from a background in telecoms, SMART players can have a multiplicity of origins: software vendor, broadcaster, content provider, consumer electronics vendor and webco, as well as telco. Unlike SMART players from other backgrounds, SMART telcos will almost invariably be LEAN too. For telcos, SMARTness occurs in addition to LEANness, rather than instead of it. Indeed, it is a necessary prerequisite. In practice due to the high barriers to entry it is unlikely that a SMART player from a non-telco background will also be a LEAN operator. This relationship underpins the interdependence of different entities in the telecoms environment in 2020.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

16 of 23

TELECOMS IN 2020: CORE SCENARIO

16

The evolution of the SMART role

Early SMART players in evidence today On the mobile side, the SMART model will grow out of two business models we see emerging in the market already today: namely, the iPhone and the Amazon Kindle. In the case of the iPhone, a single player Apple has created the device, the operating system that runs on it, and a system for deploying applications to the device, as well as technical support, with the carrier solely responsible for connectivity and the commercial relationship associated with it. The Kindle is a simpler model, but one that goes further in one respect than the iPhone model: the carrier no longer has a direct relationship with the customer, but rather acts as a wholesaler to the device vendor (Amazon). These two models are likely to evolve and to some extent converge to create a set of players that provide: Services in some cases bundling in connectivity from one or more carriers. Management of devices and the end-user experience on an end-to-end basis. Applications those that run on the device, for example through application stores. Relationship the primary commercial and support relationship with the end user. Technology the technology underlying all these other pieces.

We refer to these players as SMART players after the acronym created from the elements of the bundle they provide. SMART models will take longer to develop in the wireline market Although the early signs of the SMART model are apparent in the mobile market, the model will take longer to develop in the wireline market. Therefore, the first few years of the decade will see the rapid growth of over-the-top providers of online content and services taking advantage of broadband pipes, and an accompanying explosion of video traffic over those pipes. This will necessitate two things: an expansion of capacity to meet this demand, and the introduction of tiered broadband packages to fund that expansion in a way that aligns revenues with costs. At the same time, voice revenues will fall rapidly as the continuing impact of substitution from mobile strips away usage and subscribers, and the growth of voice carried as data over IP networks continues. All of this means that broadband will account for the majority of telcos revenues just a few years from now, and that telcos will be staring at life as almost exclusively providers of connectivity unless something fundamentally changes.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

17 of 23

TELECOMS IN 2020: CORE SCENARIO

17

Two other trends will be developing at the same time. First, traffic on broadband networks will grow rapidly, driven by the explosive growth of online, over-the-top video consumption by consumers. Second, the complexity presented by getting the range of connected devices in the home to talk to each other and move content around the home network will drive consumers to seek simplicity by outsourcing the management of the whole setup to another party. These two trends will to some extent occur in isolation in the early years, with online video providers and home network management providers being separate entities. But over time, a set of providers will emerge which has interests in both domains. Once again, Apple is perhaps the company closest to this model today, with its online content delivery vehicle (iTunes) and the range of networked devices in the home (including Mac computers, iPods, iPhones, Apple TVs and AirPort wireless base routers). Today, Apple merely provides a level of technical support around the various devices it sells, but it would be a relatively small step to provide more comprehensive SMART services around the home. Despite separate evolutions, both SMART models will combine This trend will take some time to percolate and it may be several years before we see the first true SMART players in the home. At the same time, the genesis of the SMART model in the home is different from the genesis of the mobile SMART players. But ultimately, the home and mobile SMART models look very similar, and many of the same players will be present in both. We have already mentioned Apple as a candidate in both markets, but players such as Sony, Google, Microsoft and others might easily be candidates too, along with brands that do not yet share their high profile in these markets. In fact, it is most likely that by 2020, there will be a single set of SMART players, offering services which encompass both the home and the mobile environment in a single offering. Connectivity would extend seamlessly from the home environment, likely delivered through a wired broadband pipe and a wireless LAN, to the mobile environment, making use of mobile, WiMAX and Wi-Fi connectivity.

LEAN operator: the main role for telcos in 2020

The main role that todays telecoms network operators will fill in 2020 and the one they would be wisest to pursue is that of LEAN operator, even though a handful of telcos could become SMART players. This is because the LEAN operator position leverages assets and skills that telcos have spent years developing and is closest to the starting point most operators are at today. The LEAN operators primary role is enabling the SMART players to run services over multiple networks in a network-agnostic fashion, hence the LEAN acronym. The term LEAN, as used by Ovum, should not be taken to mean that the business of being a LEAN operator is in any sense simple. Achieving efficiency within network management and as an organisation is a real challenge and will require substantial investment and effort at least initially. Nor is it meant to imply that

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

18 of 23

TELECOMS IN 2020: CORE SCENARIO

18

that the business is run on a low-capex, low-profit and low-staffing basis (although those may be the case in some instances). The focus of LEAN operators will be on providing the best possible quality of service for the lowest possible cost and operational expenditure. LEAN operators will be those that have successfully honed their focus on their core competencies and in building and running networks that meet the requirements for 2020, transforming their businesses accordingly. This will require telcos not just to refine their existing offer, maximising the potential and leverage of their networks, but also to provide services on top of that network that better support the third-party application and content developers, PaaS providers and others that are totally reliant on those networks. Telcos especially those that own significant local access infrastructure are especially well positioned to fulfil this role. Indeed, with the exception of some network equipment providers and some utilities, they are really the only companies with the resources or ambition to become LEAN operators. LEAN requires scale and investment The transition from todays telco to LEAN operator will require some significant adjustments from their current roles, which are covered in more detail in the other reports in this series. LEANness is fundamentally a scale game, where low margins can be offset against huge volumes of business. Inevitably, this means further consolidation and telco failures. Many of todays telcos will fail to successfully make this transition and either be acquired or rendered irrelevant. In evolutionary terms, those that survive the LEAN operators will be fit operators. The transition to LEANness is a vital one for the survival of todays telcos.

SMARTness is a bonus for telcos, not a birthright

As we have discussed, SMART players in 2020 will have arisen from a variety of origins. However, in common with most LEAN operators, they will typically, if not invariably, be very large. Making a successful business out of being SMART does require scale, but companies will also pursue higher-margin revenues in content and advertising, for example. However, this game plays to the strengths of companies whose core competence is in software, computing and content acquisition and distribution rather than in building and running networks. SMART players will leverage the ability of most connected devices to access and use the same content and applications in the cloud to provision content and services to consumers across multiple devices and multiple network technologies, both fixed and mobile, using the underlying common IP fabric. The skills and capabilities required to become a successful SMART player include:

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

19 of 23

TELECOMS IN 2020: CORE SCENARIO

19

a robust development and deployment platform, primarily in the cloud, exposing a wide range of APIs and other functions for third-party developers to create value technical skills and investment capability to develop those platforms ownership of valuable content and/or relationships with content owners skills in creation and marketing of integrated services a substantial existing base of customers / eyeballs capabilities in targeting, serving up and tracking advertising experience and expertise in managing content and applications on end-user devices.

Although SMART players will bundle a great deal of capability into their end-to-end offerings, what they most need are suppliers of agnostic network access; namely the LEAN operators. LEAN operators will continue to provide the underlying network infrastructure. In some cases, particularly that of incumbents, the same company will own both LEAN and SMART entities.

Smart enabler underpins LEAN and SMART operators

The imperative for telcos to evolve in order to survive is evident in two major trends today: the efforts by (mainly mobile) operators to position themselves as smart enablers for third-party application developers, and parallel efforts by (mainly converged) operators to provide multi-screen services to consumers. Recently, there has been a significant push from a number of telcos, particularly large mobile operators, to carve out a new position for themselves in a world in which the stove pipe is rapidly disappearing. They are doing this by attempting to build and market a suite of tools and interfaces for third-party application developers which, combined, provide an intelligent platform. Their hope is that this will allow them to act as a smart enabler of future consumer services. A difficult road to tread Many telcos will pursue this route in light of the undoubted pressure to add value to their role. Telcos have strong capabilities and assets in functions such as billing, network management, messaging and location. Exposing this functionality more effectively to third parties is a key imperative for them to prosper as LEAN operators. However, this is very much a first-generation approach to the problem, because it is based on legacy telco functionality rather than the sort of web services functionality that will form the foundation of tomorrows applications. As such, their capabilities are likely to be eclipsed in the near future by Internet content and service providers, which are able to provide a much richer, more open set of APIs. Building a true platform will mean adding considerably to the legacy telco infrastructure with new components and services, both built in house and secured from third parties and vendors.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

20 of 23

TELECOMS IN 2020: CORE SCENARIO

20

The provision of complete software platforms is not a core telco competency As described in the companion report, Telecoms in 2020: platforms and devices, the smart enabler role is similar in concept to a MDP (see The role of smart enabler: positioning for growth in the open mobile market). However, both are a long way from offering a complete software platform for developing and deploying applications in the web-centric world Ovum believes will predominate in 2020. Here, tying developers into a proprietary client-server service architecture will not meet with their approval, so most attempts to do so will lead to failure (although a tiny number of major consumer goods brands may be able to impose this situation in specific instances). This does not render the smart enabler role null and void. In fact, providers of network-centric PaaS-style application platforms will live or die on their ability to aggregate, integrate and expose enabling technologies from a wide range of sources. These might include application developers, content providers, device manufacturers, web companies, billing providers, banks, advertising networks, messaging providers and many others, as well as telecoms operators. The important point here is that smart enablers eventually either develop fullyfledged platforms that allow them to occupy the SMART player role, or develop to a more limited extent and fall back on providing a limited set of APIs that allow them to function as effective LEAN players, hence the emphasis on the E in LEAN. This is outlined in Figure 5.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

21 of 23

TELECOMS IN 2020: CORE SCENARIO

21

Figure 5 From smart enabler to SMART or LEAN player

Additional platform resources leading to SMART player functionality Smart enabler becomes SMART player Legacy network functionality APIs etc. Telco network Range of 3rd parties Smart enabler functionality APIs etc. Telco network

SMART player with platform resources Smart enabler becomes LEAN operator Enabling LEAN operator functionality APIs etc. Telco network

Source: Ovum

Few operators can become SMART themselves

Of course, there is no fundamental reason why todays telcos cannot evolve their developer programs into a platform and evolve as SMART players (as well as LEAN). However, in many instances, the circumstances are against them. Only a select few telcos will be able to extend the smart enabler role into that of the SMART player itself. While there is no single answer as to which types of entity will successfully make the transition to SMART player, Ovum expects that, in mature markets at least, they are likely to have evolved from companies with a strong pedigree in applications software and in building real developer communities, as opposed to running developer programs that do little more than expose basic telco functionality. Aside from 2010s established and emerging platform players, this list may also include consumer electronics vendors, media broadcasters/conglomerates and large webcos. Each of these groups of players will have to stretch to achieve this role, but telcos have in some ways the steepest hill to climb. The ability to build a robust and

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

22 of 23

TELECOMS IN 2020: CORE SCENARIO

22

extensible platform is the biggest single criterion for becoming a SMART player, and this is arguably the area where telcos are weakest.

LEANness brings its own benefits

The biggest risk for telcos in trying to become SMART players is that they overextend themselves into disciplines that are not traditionally where their core expertise lies. Of course, they may acquire this expertise as some notable companies are in the process of doing. A handful of telcos may succeed as SMART players, and others will no doubt try and fail to achieve that goal. Nor is this exclusively a concern we have for telcos; we would advise similar caution to other aspirants towards true SMARTness. Knowing where to draw the line, and where to direct investment to greatest effect, will be crucial to the development of telcos in the next ten years, as described in the companion report Telecoms in 2020: telco operations. Telcos that are clear in forging a future as a LEAN operator still have to invest substantially in their networks and in the core functions we have outlined in this section. However, they also need to focus on dramatically increasing the depth of their engagement with the main cloud platforms through which most of the content and services they pass on to their subscribers will be acquired and provisioned.
Ovum does not endorse companies or their products. Ovum operates under an Independence Charter. For full details please see www.ovum.com/about/charter.asp. For full details of Ovum's citation policy, see www.ovum.com/media/citation.asp. Whilst every care is taken to ensure the accuracy of the information contained in this material, the facts, estimates and opinions stated are based on information and sources which, while we believe them to be reliable, are not guaranteed. In particular, it should not be relied upon as the sole source of reference in relation to the subject matter. No liability can be accepted by Ovum Europe Limited, its directors or employees for any loss occasioned to any person or entity acting or failing to act as a result of anything contained in or omitted from the content of this material, or our conclusions as stated. The findings are Ovum's current opinions; they are subject to change without notice. Ovum has no obligation to update or amend the research or to let anyone know if our opinions change materially.

Ovum 2009. Unauthorised reproduction prohibited. Ovum200 9.Unauthorisedreproductionprohibited.

23 of 23