How telcos can win with SMBs: Strategies for success

SMB markets: An elusive opportunity for telcos

SMBs (small-to-medium-sized businesses) have been a challenging market for telcos historically. Despite this, it remains an attractive opportunity thanks to its sheer size and (potential) margins. Our interview programme, across 10 telcos globally and 100 SMBs in Europe and North America, revealed a feeling that telcos could see real rewards by focusing on this previously underserved market.

“SMB is now a high priority as a large part of our B2B strategy. We see it as a very big and growing opportunity,” noted a Western European Operator. A North American operator commented, “medium enterprises are now an area of great focus for us, there’s lots of potential there. We didn’t use to but are now investing lots of resources.” There are several key factors why telcos are looking to pursue this opportunity now:

  • As consumer average revenue per user (ARPUs) continue to decline, there remains a promise of stability and  growth with business customers.
  • SMBs are becoming more technologically mature and are increasingly embracing trends such as remote working and bring your own device, which can reduce their costs of operation. They have increased need and desire for digital and cloud services, which enable employees to access documents from any device, anywhere – they are often looking to their broadband providers to provide this.
  • Security and compliance are a high priority for SMBs. Previously they may have relied upon the belief that small businesses will not be targeted by cyberattacks, but increasingly SMBs will struggle to do business without being able to prove they are compliant. As this report will go on to highlight, security is an area of key potential telcos should be looking to pursue.
  • Technology such as artificial intelligence (AI) and SD-WAN can enable telcos to provide new services to SMBs while keeping cost of acquisition low.

SMB markets are attractive due to sheer size and (potential) margins

For SMBs, the potential untapped revenues, though relatively small per business, are sizeable when aggregated across SMBs. For example, companies with fewer than 250 employees made up 99% of all enterprises in the EU. But why do telcos often struggle in this space, and what should they do to succeed in this market?

First, it’s important to define what we mean by SMBs and how we should segment them. There is no one clear definition, and segmentation often differs across markets. For example, one operator we spoke to in Mexico pointed out that what they classify as relatively large enterprises would be considered SMBs by telcos in the United States. The definition varies, often dependent on the difference in average company size for each region.

For the purposes of this report, we define SMBs as enterprises with fewer than 100 employees. We also include the category of firms with 2-7 employees – often called SOHO (single office / home office) or VSE (very small enterprise) – in our definition. However, given their size and needs, telcos sometimes group SOHOs with consumers in their “mass-market” lines of business.

The number of potential SMB customers provides the telco with scale of service and large revenue opportunities. These opportunities come from both the acquisition of new customers, for whom operators provide connectivity and communications services (voice, conferencing, UC), and from upselling additional adjacent services to existing customers. These new services might include:

  • Enterprise mobility: management and security of mobile devices, including scenarios like bringyour-own-device (BYOD) and virtual desktops
  • Software-as-a-service: cloud-hosted enterprise software such as productivity software (e.g. Office 365), CRM software (e.g. Salesforce) or accounting packages (e.g. local accounting software)
  • Infrastructure-as-a-service: compute / storage resources and networking capabilities
  • Cybersecurity and disaster recovery: email backup and security services including firewalls, anti-phishing and DDOS attack prevention
  • IoT connectivity: bespoke connectivity solutions for IoT devices (though not the focus of this report, it is a major new area for telco enterprise services).

For most telcos, moving into new services is a crucial move to combat the commoditisation of connectivity. This move is critical in the SMB market, where cost of acquisition of new customers is relatively high, so telcos must offer value-add services to make it profitable.

Telcos’ key challenges in SMB markets: Fragmentation, heterogeneity, “high-touch” engagement

Disparity characterises the SMB market. The divergence of expectations, needs, and technological maturity of SMBs creates fragmentation. Additionally, SMB needs vary by vertical and region, both of which create additional elements of disparity. This market fragmentation has created two crucial challenges for telcos.

  1. It’s hard to understand the customers’ needs because they vary so greatly from one SMB to another.
  2. It’s expensive to serve them because of the time it takes to understand these needs and develop bespoke solutions to address them.

Both of the above challenges are complicated by SMBs’ relatively limited buying power and often limited understanding of their own IT requirements. Despite their smaller budgets, SMBs traditionally require a relatively large investment to win a sale. In comparison to the highly automated, self-service environment of many telcos’ consumer divisions, SMBs want and expect personalised, often dedicated (even face to face) sales and support. Along with knowledge of their product suite, sellers may need to help solve wider IT problems or offer technical guidance. Successful SMB sales teams require broad knowledge and time, making it a comparatively big investment for telcos.

It is not just the sales process that needs to be personalised and consultative; SMBs may also require bespoke product configuration and integration. This kind of service would be expected within a large enterprise but becomes prohibitively expensive within smaller businesses unless it is provided by channels with wider monetisation models (e.g. IT support or equipment sales). In short, SMBs have the engagement expectations of enterprises, with budgets closer to that of consumers. No wonder that few telcos made the effort with SMBs while their consumer businesses were still growing.

To seize this opportunity, telcos must find a way to bridge the gap between the entirely productised world of consumer, and the bespoke sales and services for larger corporates and enterprises.

Table of contents

  • Executive Summary
  • SMB markets: An elusive opportunity for telcos
    • SMB markets are attractive due to sheer size and (potential) margins
    • Telcos’ key challenges in SMB markets: Fragmentation, heterogeneity, “high-touch” engagement
    • There is a disconnect between what telcos think SMBs need and what they actually want
  • Untapped opportunities: Strategies for SMB market success
  • Channel strategies: Engaging SMBs to provide a “high-touch” experience
    • Short term channel strategies
    • Long term channel strategies
  • Product strategies: Where to win quick in a fragmented market
    • Short term product strategies
    • Long-term product strategies
  • Supporting capabilities: Where telcos should invest for success in the SMB market
    • Short-term supporting capabilities needed
    • Long-term supporting capabilities needed
  • Conclusion

Consumer communications: Can telcos mount a comeback?

Introduction

Although they make extensive use of WhatsApp, Facebook Messenger, Snapchat and other Internet-based communications services, consumers still expect mobile operators to enable them to make voice calls and text messages. Indeed, communication services are widely regarded as a fundamental part of a telco’s proposition, but telcos’ telephony and messaging services are losing ground to the Internet-based competitors and are generating less and less revenue.

Should telcos allow this business to gradually melt away of should they attempt to rebuild a competitive communications proposition for consumers? How much strategic value is there in providing voice calls and messaging services?

This report explores telcos’ strategic options in the consumer communications market, building on previous STL Partners’ research reports, notably:

Google/Telcos’ RCS: Dark Horse or Dead Horse?

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

This report evaluates telcos’ current position in the consumer market for voice calls and messaging, before considering what they can learn from three leading Internet-based players: Tencent, Facebook and Snap. The report then lays out four strategic options for telcos and recommends which of these options particular types of telcos should pursue.

Content:

  • Introduction
  • Executive Summary
  • What do telcos have to lose?
  • Key takeaways
  • Learning from the competition
  • Tencent pushes into payments to monetise messaging
  • Facebook – nurturing network effects with fast footwork
  • Snapchat – highly-focused innovation
  • Telcos’ strategic options
  • Maximise data traffic
  • Embed communications into other services
  • Differentiate on reliability, security, privacy and reach
  • Compete head-on with Internet players
  • Recommendations

Figures:

  • Figure 1: Vodafone still makes large sums from incoming calls & messages
  • Figure 2: Usage of Vodafone’s voice services is rising in emerging markets
  • Figure 3: Vodafone Europe sees some growth in voice usage
  • Figure 4: Internet-based services are overtaking telco services in China
  • Figure 5: Usage of China Mobile’s voice services is sliding downwards
  • Figure 6: China Mobile’s SMS traffic shows signs of stabilising
  • Figure 7: Vodafone’s SMS volumes fall in Europe, but rise in AMAP
  • Figure 8: Voice & messaging account for 38% of China Mobile’s service revenues
  • Figure 9: Line is also seeing rapid growth in advertising revenue in Japan
  • Figure 10: More WeChat users are making purchases through the service
  • Figure 11: About 20% of WeChat official accounts act as online shops
  • Figure 12: Line’s new customer service platform harnesses AI
  • Figure 13: Snapchat’s user growth seems to be slowing down
  • Figure 14: Vodafone Spain is offering zero-rated access to rival services
  • Figure 15: Google is integrating communications services into Maps
  • Figure 16: Xbox Live users can interact with friends and other gamers
  • Figure 17: RCS is being touted as a business-friendly option
  • Figure 18: Turkcell’s broad and growing range of digital services

Autonomous cars: Where’s the money for telcos?

Introduction

Connected cars have been around for about two decades. GM first launched its OnStar in-vehicle communications service in 1996. Although the vast majority of the 1.4 billion cars on the world’s roads still lack embedded cellular connectivity, there is growing demand from drivers for wireless safety and security features, and streamed entertainment and information services. Today, many people simply use their smartphones inside their cars to help them navigate, find local amenities and listen to music.

The falling cost of cellular connectivity and equipment is now making it increasingly cost-effective to equip vehicles with their own cellular modules and antenna to support emergency calls, navigation, vehicle diagnostics and pay-as-you-drive insurance. OnStar, which offers emergency, security, navigation, connections and vehicle manager services across GM’s various vehicle brands, says it now has more than 11 million customers in North America, Europe, China and South America. Moreover, as semi-autonomous cars begin to emerge from the labs, there is growing demand from vehicle manufacturers and technology companies for data on how people drive and the roads they are using. The recent STL Partners report, AI: How telcos can profit from deep learning, describes how companies can use real-world data to teach computers to perform everyday tasks, such as driving a car down a highway.

This report will explore the connected and autonomous vehicle market from telcos’ perspective, focusing on the role they can play in this sector and the business models they should adopt to make the most of the opportunity.

As STL Partners described in the report, The IoT ecosystem and four leading operators’ strategies, telcos are looking to provide more than just connectivity as they strive to monetise the Internet of Things. They are increasingly bundling connectivity with value-added services, such as security, authentication, billing, systems integration and data analytics. However, in the connected vehicle market, specialist technology companies, systems integrators and Internet players are also looking to provide many of the services being targeted by telcos.

Moreover, it is not yet clear to what extent the vehicles of the future will rely on cellular connectivity, rather than short-range wireless systems. Therefore, this report spends some time discussing different connectivity technologies that will enable connected and autonomous vehicles, before estimating the incremental revenues telcos may be able to earn and making some high-level recommendations on how to maximise this opportunity.

 

  • Executive Summary
  • The role of cellular connectivity
  • High level recommendations
  • Contents
  • Introduction
  • The evolution of connected cars
  • How to connect cars to cellular networks
  • What are the opportunities for telcos?
  • How much cellular connectivity do vehicles need?
  • Takeaways
  • The size of the opportunity
  • How much can telcos charge for in-vehicle connectivity?
  • How will vehicles use cellular connectivity?
  • Telco connected car case studies
  • Vodafone – far-sighted strategy
  • AT&T – building an enabling ecosystem
  • Orange – exploring new possibilities with network slicing
  • SoftBank – developing self-driving buses
  • Conclusions and Recommendations
  • High level recommendations
  • STL Partners and Telco 2.0: Change the Game 

 

  • Figure 1: Incremental annual revenue estimates by service
  • Figure 2: Autonomous vehicles will change how we use cars
  • Figure 3: Vehicles can harness connectivity in many different ways
  • Figure 4: V2X may require large numbers of simultaneous connections
  • Figure 5: Annual sales of connected vehicles are rising rapidly
  • Figure 6: Mobile connectivity in cars will grow quickly
  • Figure 7: Estimates of what telcos can charge for connected car services
  • Figure 8: Potential use cases for in-vehicle cellular connectivity
  • Figure 9: Connectivity complexity profile criteria
  • Figure 10: Infotainment connectivity complexity profile
  • Figure 11: In-vehicle infotainment services estimates
  • Figure 12: Real-time information connectivity complexity profile
  • Figure 13: Real-time information services estimates
  • Figure 14: The connectivity complexity profile for deep learning data
  • Figure 15: Collecting deep learning data services estimates
  • Figure 16: Insurance and rental services’ connectivity complexity profile
  • Figure 17: Pay-as-you-drive insurance and rental services estimates
  • Figure 18: Automated emergency calls’ connectivity complexity profile
  • Figure 19: Automated emergency calls estimates
  • Figure 20: Remote monitoring and control connectivity complexity profile
  • Figure 21: Remote monitoring and control of vehicle services estimates
  • Figure 22: Fleet management connectivity complexity profile
  • Figure 23: Fleet management services estimates
  • Figure 24: Vehicle diagnostics connectivity complexity profile
  • Figure 25: Vehicle diagnostics and maintenance services estimates
  • Figure 26: Inter-vehicle coordination connectivity complexity profile
  • Figure 27: Inter-vehicle coordination revenue estimates
  • Figure 28: Traffic management connectivity complexity profile
  • Figure 29: Traffic management revenue estimates
  • Figure 30: Vodafone Automotive is aiming to be global
  • Figure 31: Forecasts for incremental annual revenue increase by service

AI: How telcos can profit from deep learning

The enduring value of connected assets

In the digital economy, the old adage knowledge is power applies as much as ever. The ongoing advances in computing science mean that knowledge (in the form of insights gleaned from large volumes of detailed data) can increasingly be used to perform predictive analytics, enabling new services and cutting costs. At the same time, the widespread deployment of connected devices, appliances, machines and vehicles (the Internet of Things) now means enterprises can get their hands on granular real-time data, giving them a comprehensive and detailed picture of what is happening now and what is likely to happen next.

A handful of companies already have a very detailed picture of their markets thanks to far-sighted decisions to add connectivity to the products they sell. Komatsu, for example, uses its Komtrax system to track the activities of almost 430,000 bulldozers, dump-trucks and forklifts belonging to its customers. The Japan-based company has integrated monitoring technologies and connectivity into its construction and mining equipment since the late 1990s. Komatsu says the Komtrax system is standard equipment on “most Komatsu Tier-3 Construction machines” and on most small utility machines and backhoes.

Komatsu’s machines ship with GPS chips that can pinpoint their position, together with a unit that gathers engine data. They can then transmit the resulting data to a communication satellite, which relays that information to the Komtrax data centre.

The data captured by Komtrax (and other Internet of Things solutions) has value on multiple different levels:

  • It provides Komatsu with market intelligence
  • It enables Komatsu to offer value added services for customers
  • It gives detailed data on the global economy that can be used for computer modelling and to support the development of artificial intelligence

Market intelligence for Komatsu

For Komatsu, Komtrax provides valuable information about how its customers use its equipment, which can then be used to refine its R&D activities. Usage data can also help sales teams figure out which customers may need to upgrade or replace their equipment and when.

Komatsu’s sales and finance departments use the findings, for example, to offer trade-ins and sales of lighter machines where heavy ones are underused. Its leasing firm can also use the information to help find customers for its rental fleet.

Furthermore, Komatsu is linking market information directly with its production plants through Komtrax (see Figure 1). It says its factories “aggressively monitor and analyse the conditions of machine operation and abrasion of components” to enable Komatsu and its distributors to improve operations by better predicting the lifetime of parts and the best time for overhauls.

Figure 1: How Komatsu uses data captured by its customers’ equipment

Source: Komatsu slide adapted by STL Partners

Value added services for customers

The Komtrax system can also flag up useful information for Komatsu’s customers. Komatsu enables its customers to access the information captured by their machines’ onboard units, via an Internet connection to the Komtrax data centre.

Customers can use this data to monitor how their machines are being used by their employees. For example, it can show how long individual machines are sitting idle and how much fuel they are using. Komatsu Australia, for example, says Komtrax enables its customers to track a wide range of performance indicators, including:

  • Location
  • Operation map (times of day the engine was on/off)
  • Actual fuel consumptionAverage hourly fuel consumption
  • Residual fuel level
  • High water temperature during the day’s operation
  • Dashboard cautions
  • Maintenance reminders/notifications
  • “Night Time” lock
  • Calendar lock
  • Out of Area alerts
  • Movement generated position reports
  • Actual working hours (engine on time less idle time)
  • Operation hours in each work mode (economy, power, breaker, lifting)
  • Digging hours
  • Hoisting hours
  • Travel hours
  • Hydraulic relief hours
  • Eco-mode usage hours
  • Load frequency (hours spent in four different load levels determined by pump pressures or engine torque)

 

Content:

  • Introduction
  • Executive Summary
  • The enduring value of connected assets
  • Tapping telecoms networks
  • Enabling Deep Neural Networks
  • Real world data: the raw material
  • Learning from Tesla
  • The role of telcos
  • Conclusions and Recommendations

Figures:

  • Figure 1: How Komatsu uses data captured by its customers’ equipment
  • Figure 2: Interest in deep learning has risen rapidly in the past two years
  • Figure 3: Deep learning buzz has helped drive up Nvidia’s share price
  • Figure 4: The key players in the development of deep learning technology
  • Figure 5: Mainstream enterprises are exploring deep learning
  • Figure 6: The automotive sector is embracing Nvidia’s artificial intelligence
  • Figure 7: Google Photos learns when users correct mistakes
  • Figure 8: Tesla’s Autopilot system uses models to make decisions
  • Figure 9: Tesla is collecting very detailed data on how to drive the world’s roads

Amazon: Telcos’ Chameleon-King Ally?

Introduction

Amazon is using an array of innovative propositions to sidestep the Android-Apple duopoly in the smartphone market and Facebook’s rapidly expanding digital commerce ecosystem. Amazon’s vast selection, unparalleled logistics, innovative bundling, laser-like focus on the customer, rapidly improving entertainment proposition and leadership in voice-controlled in-home systems mean the Seattle-based e-commerce giant is fast becoming a omnipresent convenience store that always has what you want, when you want it.

Continually reinventing itself, Amazon’s restlessness could seriously disrupt the balance of power between the major global Internet ecosystems. Although the Amazon, Apple, Facebook and Google ecosystems all originate from the PC-era, they have each managed to successfully extend their digital platforms into the smartphone and tablet markets. But not without a dramatic change in the pecking order. In fact, the advent of touch-controlled smartphones enabled Apple to become a major force in the digital consumer market, while weakening the position of its long-standing foe Microsoft.

Now these ecosystems need to navigate the tricky transition to voice-controlled digital platforms, which depend heavily on advanced speech recognition, artificial intelligence and machine learning technologies. Amazon is leading the way, having created this new market with the rollout of its Echo speaker, underpinned by the cloud-based Alexa personal assistant system.

This report analyses Amazon’s financial firepower, the Amazon Prime bundle and strategy of bundling entertainment with retail, before considering Amazon’s areas of relative weakness – the smartphone and communications markets. In this section, the report also considers whether Amazon can sustain its lead in the nascent market for voice-controlled speakers for the home.

It concludes by exploring whether Amazon has sufficient economies of scope to build the expertise in artificial intelligence that will be required to ensure the Apple-Android duopoly that exists in the smartphone market won’t also dominate the emerging smart home sector. Finally, it considers the ramifications for telcos and makes several high level recommendations.

The global e-commerce market

Online commerce continues to grow rapidly. In 2016, global retail e-commerce sales (products and services ordered via the internet) will rise almost 24% to reach $1.915 trillion in 2016, according to research firm eMarketer. As that represents just 8.7% of total retail spending worldwide, there is plenty more growth to come. eMarketer expects retail ecommerce sales will increase to $4.058 trillion in 2020, making up 14.6% of total retail spending that year (see Figure 1).

Figure 1: Retail online commerce continues to grow rapidly

The major global Internet ecosystems – Amazon, Apple, Facebook and Google – all take a slice of this market. Within their ecosystems, they act as brokers bringing buyers and sellers together, earning a commission for facilitating interactions and transactions. Google and Facebook are the leading players in online advertising, while Apple is a leading distributor of digital content: Although Apple still generates most of its revenue from devices, its App Store and iTunes service are now major contributors to its top line. Still, in online commerce, Amazon rules the roost: Its online marketplace, which offers a vast selection of products and services from millions of merchants, continues to grow rapidly.

 

  • Introduction
  • Executive Summary
  • The global e-commerce market
  • Amazon’s financial firepower
  • Key takeaways
  • Amazon Prime: The Convenience Engine
  • Eroding Google Search
  • Key takeaways
  • Why Amazon wants to entertain us
  • A push into user-generated content
  • Key takeaways
  • Amazon’s Devices: Ups and Downs
  • Navigating Google’s mobile maze
  • Amazon’s Attempts to Develop Device Platforms
  • Key takeaways
  • Communications: Amazon’s Blind Spot?
  • Conclusions and Recommendations

Cloud 2.0: Report and analysis of the event

Cloud 2.0: Event Summary Analysis. A summary of the findings of the Cloud 2.0 Executive Brainstorm, 10th November 2011, held in the Gouman Tower Hotel, London. The Brainstorm explored telcos’ strategic options to grow in the fast changing digital economy. It also considered how telcos can defend their core voice and messaging business, while also examining the steps they can take to improve the customer experience. (November 2012, Executive Briefing Service, Cloud & Enterprise ICT Stream)

Cloud 2.0: Event Summary Analysis Presentation

Part of the New Digital Economics Executive Brainstorm series, the Cloud 2.0 event took place at the Guoman Hotel, London on the 10th November and looked at telcos’ strategic options, the future of the core communications products telcos rely on for much of their revenue and how they can improve the customer experience both to reduce churn and attract new customers.

Using a widely acclaimed interactive format called ‘Mindshare’ the event enabled 80 specially-invited senior executives from across the communications, media, banking and technology sectors to.

This note summarises some of the high-level findings and includes the verbatim output of the brainstorm.

More information: email contact@stlpartners.com, or phone: +44 (0) 207 247 5003.

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Extracted example slide:

Cloud 2.0: Event Summary Analysis Presentation

Cloud 2.0: don’t blow it, telcos

Summary: enterprise cloud computing services need great connectivity to work, but there are opportunities for telcos to participate beyond the connectivity. What are the opportunities, how are telcos approaching them, and what are the key strategies? Includes forecasts for telcos’ shares of VPC, IaaS, PaaS and SaaS. (September 2011, Executive Briefing Service, Cloud & Enterprise ICT Stream)

Apps & Telco APIs Figure 1 Drivers of the App Market Telco 2.0 Sept 2011

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Below is an extract from this 28 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Cloud and Enterprise ICT Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £795 (+VAT), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

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Introduction

In our previous analyses Cloud 2.0: What are the Telco Opportunities? and Cloud 2.0: Telcos to grow Revenues 900% by 2014 we’ve looked broadly at the growing cloud market opportunity for telcos. This new report takes this analysis forward, looking in detail at the service definitions, market forecasts and the industry’s confidence in them, and actual and potential strategies for telcos.

We’ll also be looking in depth at the opportunities in cloud services in the Cloud 2.0: Transforming technology, media and telecoms at the EMEA Executive Brainstorm in London on Thursday 10th November 2011.

The Cloud Market

Cloud computing represents the next wave of IT. Almost all organisations are saying that they will adopt cloud computing to a greater or lesser extent, across all segments and sizes. Consequently, we believe that there exists a large opportunity for telcos if they move quickly enough to take advantage of it.

Total market cloud forecasts – variation and uncertainty

In order to understand where the best opportunities are and how telcos can best take use their particular strengths to advantage of them, we need to examine the size of that opportunity and to understand which areas of cloud computing are most likely to offer the best returns. 

Predictions for the size and growth of the cloud computing market are very diverse:

  • Merrill Lynch has previously offered the most optimistic estimate: $160 billion by the end of 2011 (The Cloud Wars: $100+ billion at stake, May 2008)
  • Gartner predicted expenditure of $150.1 billion by 2013 (Gartner forecast, March 2009)
  • IDC predicts annual cloud services revenues of $55.5 billion in by 2014 (IDC report, June 2010)
  • Cisco has estimated the cloud market at $43 billion by 2013 (STL Partners video, October 2010)
  • Bain expects spending to grow �?vefold from $30 billion in 2011 to $150 billion by 2020 (The Five Faces of the Cloud, 2011)
  • IBM’s Market Insights Cloud Phase 2 assessment of September 2011 sizes the cloud market at $88.5bn by 2015
  • Of that total, research by AMI Partners suggests that SMBs’ share of that spend will approach $100 billion by 2014 – over 60 % of the total (World Wide Cloud Services Study, December 2010)

Figure 1 – Cloud services market forecast comparisons

Cloud 2.0 Industry Forecast Comparisons Bain, Gartner, IDC, Cisco Sept 2011 Telco 2.0

Source: Bain, Cap Gemini, Cisco, Gartner, IBM, IDC, Merrill Lynch

Whichever way you look at it, the volume of spending on cloud computing is high and growing. But why are there such large variations in the estimates of that growth?

There is a clear correlation between the report dates and the market forecast sizes. Two of the forecasts – from Merrill Lynch and Gartner – are well over two years old, and are likely to have drawn conclusions from data gathered before the 2008 recession started to bite. Both are almost certainly over-optimistic as a result, and are included as an indication of the historic uncertainty in Cloud forecasts rather than criticism of the forecasters.

More generally, while each forecaster will be using different assumptions and extrapolation techniques, the variation is also likely to reflect a lack of maturity of the cloud services market: there exists little historical data from which to extrapolate the future, and little experience of what kinds of growth rates the market will experience. For example, well-known inhibitors to the adoption of cloud, such security and control, have yet to be resolved by cloud service providers to the point where enterprise customers are willing to commit a substantial volume of their IT spending.

Additionally, the larger the organisation, the slower the adoption of cloud computing is likely to be; it takes a long time for large enterprises to move to a new computing model that involves changing fundamental IT architectures and will be a process undertaken over time. It is hard to be precise about the degree to which they will inhibit the growth of cloud acceptance.

As a result, in a world where economic uncertainty seems unlikely to disappear in the short to medium term, it would be unwise to assume a high level of accuracy for market sizing predictions, although the general upward trend is very clear.

Cloud service types

Cloud computing services fall into three broad categories: infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS).

Figure 2 – Cloud service layer definitions

Cloud 2.0 Service Types vs. layers Telco 2.0 Sept 2011

Source: STL Partners/Telco 2.0

Of the forecasts available, we prefer Bain’s near term forecast because: 1) it is based on their independent Cloud ‘Center of Excellence’ work; 2) it is relatively recent, and 3) it has clear and meaningful categories and definitions.
The following figure summarises Bain’s current market forecast, split by cloud service type.

Figure 3 – Cloud services: market forecast and current players

Cloud 2.0 Forecast growth by service type Sep 2011 Telco 2.0

Currently, telcos have around a 5% share of the c.$20 billion annual cloud services revenue, with 25 % CAGR forecast to 2013.

At the May 2011 EMEA Telco 2.0 Executive Brainstorm, we used these forecasts as a base to explore market views on the various cloud markets. There were c.200 senior executives at the brainstorm from industries across Telecoms, Media and Technology (TMT) and, following detailed presentations on Cloud Services, they were asked highly structured questions to ascertain their views on the likelihood of telco success in addressing each service.

Infrastructure as a Service (IaaS)

IaaS consists of cloud-based, usually virtualised servers, networking, and storage, which the customer is free to manage as they need. Billing is typically on a utility computing model: the more of each that you use, the more you pay. The largest of the three main segments, Bain forecasts IaaS to be worth around $3.5 billion in 2011, with 45 % CAGR forecast. The market leader is Amazon with about 18 % share. Other players include IBM and Rackspace. Telcos currently have about 20 % of this market – Qwest/Savvis/Equinix, and Verizon/Terremark.

Respondents at the EMEA Telco 2.0 Brainstorm estimated that telcos could take an average share of 25% of this market. The distribution was reasonably broad, with the vast majority in the 11-40% range.

Figure 4 – IaaS – Telco market share forecasts

Cloud 2.0 IaaS Telco Forecasts Sept 2011 Telco 2.0

Source: EMEA Telco 2.0 Executive Brainstorm delegate vote, May 2011

To read the note in full, including the following additional analysis…

  • Virtual Private Cloud (VPC)
  • Software as a Service (SaaS)
  • Platform as a Service (PaaS)
  • Hybrid Cloud
  • Cloud Service Brokerage
  • Overall telco cloud market projections by type, including forecast uncertainties
  • Challenges for telcos
  • Which areas should telcos target?
  • Telcos’ advantages
  • IaaS, PaaS, or SaaS?
  • Developing other segments
  • What needs to change?
  • How can telcos deliver?
  • Telcos’ key strengths
  • Key strategy variables
  • Next Steps

…and the following charts…

  • Figure 1 – Cloud services market forecast comparisons
  • Figure 2 – Cloud service layer definitions
  • Figure 3 – Cloud services: market forecast and current players
  • Figure 4 – IaaS – Telco market share forecasts
  • Figure 5 – VPC – Telco market share forecasts
  • Figure 6 – SaaS – Telco market share forecasts
  • Figure 7 – PaaS – Telco market share forecasts
  • Figure 8 – Total telco cloud market size and share estimates – 2014
  • Figure 9 – Uncertainty in forecast by service
  • Figure 10 – Telco cloud strengths
  • Figure 11 – Cloud services timeline vs. profitability schematic
  • Figure 12 – Telcos’ financial stability

Members of the Telco 2.0 Executive Briefing Subscription Service and the Cloud and Enterprice ICT Stream can download the full 28 page report in PDF format here. Non-Members, please subscribe here, buy a Single User license for this report online here for £795 (+VAT), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, people and products referenced: Aepona, Amazon, AMI Partners, Bain, BT, CenturyLink, CENX, Cisco, CloudStack, Deutsche Telekom, EC2, Elastic Compute Cloud (EC2), EMC, Equinix, Flexible 4 Business, Force.com, Forrester, France Telecom, Gartner, Google App Engine, Google Docs, IBM, IDC, Intuit, Java, Merrill Lynch, Microsoft, Microsoft Office 365, MySQL, Neustar, NTT, OneVoice, OpenStack, Oracle, Orange, Peartree, Qwest, Rackspace, Red Hat, Renub Research, Sage, Salesforce.com, Savvis, Telstra, Terremark, T-Systems, Verizon, VMware, Vodafone, Webex.

Technologies and industry terms referenced: Azure, Carrier Ethernet, Cloud computing, cloud service providers, Cloud Services, Communications as a Service, compliance, Connectivity, control, forecast, Global reach, Hybrid Cloud, Infrastructure as a Service (IaaS), IT, Mobile Cloud, network, online, Platform as a Service (PaaS), Reliability, resellers, security, SMB, Software as a Service (SaaS), storage, telcos, telecoms, strategy, innovation, transformation, unified communications, video, virtualisation, Virtual Private Cloud (VPC), VPN.