It’s no secret that this is a challenging time for the telecommunications industry. Many companies have announced layoffs this year, and their struggles to grow profits are apparent in their quarterly earnings statements.
In the meantime, M&A speculation escalates among various players, such as Sprint and T-Mobile. All eyes are on CenturyLink and Level 3 Communications to see how their merger proceeds once it gains approval from the Federal Communications Commission; and the next chapter for Avaya when it emerges from chapter 11 bankruptcy.
Where does all this leave partners?
In this gallery, Rich Karpinski, 451 Research’s principal analyst of mobile operator strategies; Brent Iadarola, Frost & Sullivan mobile and wireless communications vice president; and Michael Finneran, industry analyst and Channel Partners contributor, sort through the issues and look at what’s ahead.
Follow contributing editor @EdwardGately on Twitter.
U.S. carriers are going to have to invest an estimated $275 billion over the next seven years to upgrade to 5G, Finneran said.
“They’ve got to keep cutting deals with customers to attract new subscribers and they’re staring at this big bill coming down the pike, and it doesn’t look like a happy place to be anymore,” he said.
For U.S. wireless carriers, revenue growth has been pressured by fewer phone upgrades and declines in legacy services, Iadarola said.
“Interestingly, the popularity of equipment installment plans has actually delayed mobile handset upgrade cycles,” he said. “A more sophisticated device inherently drives a user's average monthly data consumption, which translates into higher tiered service packages for carriers. Thus, tempered upgrade cycles have adversely impacted carrier revenue growth.”
The problem with 5G is, "Where are the applications," Karpinski asked.
“Billions of devices are great, but the average revenue per user (ARPU) on connectivity there is small,” he said. “Enterprise services are profitable, but require a shift from telecom services to business ‘solutions.’ Low latency is interesting, with AR/VR and things like connected cars looking like real businesses. But will telcos drive those opportunities or simply tag along? The telcos we talk to are paddling furiously just below the surface to find that new direction. No sure-fire answer has emerged just yet.”
“Wireless carriers will need to introduce differentiated value-added services to enhance ARPU, attract customers from competitors, and reduce churn,” Iadarola said. “In order to avoid becoming simply a 'dumb pipe,' carriers will need to aggressively move up the value chain and pursue service innovation.”
Mobile penetration (or mobile connections/population) now comfortably exceeds 100 percent in the United States, Iadarola said.
“Thus, the competitive environment in the U.S. mobile market has intensified, leading to aggressive pricing pressures between the T1 mobile operators,” he said. “Margins have already been shrinking at a faster rate than any other time in the wireless industry.”
The number of connected devices per household continues to increase, so carriers must embrace growth opportunities beyond simply the mobile phone, and pursue emerging “connected” device categories such as wearables, tablets and the Internet of Things (IoT), Iadarola said.
“But where the real money is being made is advertising, and the vast, vast majority of that is going to Google and Facebook,” he said. “It’s kind of depressing, but it looks like the telecoms are becoming just commodity businesses and enablers for some really successful companies like Apple, Google and Facebook.”
Many times M&A doesn’t solve underlying business problems, Karpinski said.
“Sprint was hobbled by its Nextel purchase back in the day,” he said. “AT&T is going big now with Time Warner, but will face huge integration challenges if it goes through. A T-Mobile/Sprint deal makes sense from a ‘size’ perspective, but isn’t necessarily a clean combo. Short answer: it depends on the deal and the business proposition that is driving it.”
Whether CenturyLink and Level 3 Communications will benefit from their merger remains to be seen, Finneran said.
“The big reasons to do one of these things is to reduce costs, which means it’s a good thing,” he said. “Is it going to be enough, is it going to stave off the inevitable, I don’t know. Consolidations like this, they’re not from a position of strength; personally, I don’t take them as a positive sign. I take it as a good strategy because the management clearly sees if they keep going in the same direction, they know what the endgame is going to be.
While, at best, the premises-based PBX system market likely is staying even, “but probably shrinking by a couple of percentage points a year,” growth on the cloud PBX side is over 10 percent, Finneran said.
“That was one of the big reasons that Mitel (is buying) ShoreTel,” he said. “ShoreTel bought their way into the business by buying M5 four or five years ago and had a good, satisfying base. If you’ve got to go out and have salespeople and commercials, and print brochures, and do all of that other stuff, your cost for customer acquisition is about twice what Mitel ended up paying for all those seats they got from ShoreTel.”
The cloud side of the carrier business is showing financial promise, Finneran said. For instance, Windstream’s recent acquisition of Broadview Networks, a cloud-based UC provider, and last week’s launch of Broadview’s OfficeSuite with Windstream’s SD-WAN.
“But it, too, is getting highly competitive,” he said. “Free enterprise does not stand for a free ride.”
Increasingly in smaller businesses, people are questioning the need for a desk phone, Finneran said.
“Do we really need desk phones at all?’ he said. “And for an increasingly mobile workforce, maybe it can be delivered on a cell. That is kind of one of the interesting developments we’re seeing in the market, and it’s coming from the wireless carriers.”
Carriers have begun offering PBX-type capabilities for cell phones, Finneran said.
“It’s an idea that’s been kicking around for the last 15 years at least, but in desperation, these guys seem to be going for it,” he said. “If they can start coming up with services that really merge the requirements of an enterprise telephone system with the convenience and user experience that a mobile phone delivers, it could be good news for the mobile operators and make things even worse for the guys who are selling PBX systems — either cloud or on premises. This could be another nail in the coffin of the traditional enterprise phone system.”
Will other companies follow Avaya into chapter 11 bankruptcy? Finneran said it’s possible.
AT&T and Verizon seem to be financially stable, and they’re diversifying out of telecom, he said. They seem to be safe financially, he said.
“And in the PBX business, Cisco and Microsoft obviously are safe,” Finneran said. “Avaya kind of ended up in a weird spot because they wound up going private equity at exactly the wrong time and taking on tons of debt. Sprint seems to be on the comeback trail, but not entirely out of the woods yet.”