Study of prevalent business models in telecom industry

Abstract

The telecom industry encompassing telecom service providers (Telcos), telecom equipment vendors (TEVs) and the whole ecosystem surrounding them is changing rapidly in many aspects like its structure, players, rule of the game, profitability and market power. The industry is characterized as capital expenditure (CAPEX) intensive and operational expense (OPEX) sensitive industry. Resultantly, telcos have to live with long payback period while TEVs have to get accustomed to longer sales/reorder cycles and longer technology upgrade cycles. With the emergence of mobile telecommunication and ensuing service innovations, the industry also has to deal with new orthogonal challenges posed by characteristics of services such as rapid innovations, shorter development and deployment cycles and shorter life span. The industry has observed new entrants (e.g. Huawei and ZTE in telecom equipment vendor space while Aircel, DoCoMo, MTS, Uninor and Shyam telecom in telco space) and along came price wars and cost pressures. This took toll on some players e.g. Nortel in telecom equipment vendor space. The industry is also observing consolidations at every point in value network as evident from the events enlisted below: Merger of Verizon and Alltel in US telco space and merger of Vodafone and Hutch in Europe s telco arena. Closer in India, merger of Idea cellular and Spice telecom Joint venture of Nokia and Siemens as Nokia Siemens Network and Merger of Alcatel and Lucent as Alcatel-Lucent in telecom equipment vendor space Acquisition of Marconi by Ericsson, and the acquisition of Nortel Network s wireless assets by Nokia Siemens Networks and parts of Nortel divisions have gone to Ericsson Besides, there are some signs of vertical integration e.g. telecom equipment vendors vying for lucrative managed services contract (e.g. Sprint awarded 800 million USD contract for managed services contract to Ericsson) while telcos partnering with content providers and enterprises (e.g. Airtel partnering with Google). There is tendency for convergence among traditional telecom, media and content industries and relatively younger Internet and IT/ITeS industries. Such evolution has posed many challenges to industry including increasing needs for newer and better business models that ensure sustained profitability. The industry has indeed observed many innovative business models that are devised around either new approach to increase revenue stream or containment of cost. Such models have also played around with the risk profile and risk allocation to the players. Until the industry reaches certain maturity level, it is suspected that the field of business model development will continue to abound with innovation. The worldwide telco market is 1.3 trillion USD while worldwide TEV market is 300 billion USD. The worldwide mobile network infrastructure equipment market grew at 6% to US$50.8 billion in 2008 over 2007, and is expected to grow in 2009 and 2010 particularly fuelled by emerging markets such as India and China. However, declines are expected in the overall market starting in 2011 due to near coverage saturation and price pressure from operators. The 3G GSM network equipment market jumped 32% in 4Q08 over 3Q08 and presents itself as an area for high potential growth in the mobile infrastructure market driven by massive 3G build outs in China and India.