Telco 1.0: Death Slide Starts in Europe

Telefonica results confirm that global telecoms revenue decline is on the way

Very weak Q1 2014 results from Telefonica and other European players 

Telefonica’s efforts to transition to a new Telco 2.0 business model are well-regarded at STL Partners.  The company, together with SingTel, topped our recent Telco 2.0 Transformation Index which explored six major Communication Service Providers (AT&T, Verizon, Telefonica, SingTel, Vodafone and Ooredoo) in depth to determine their relative strengths and weaknesses and provide specific recommendations for them, their partners and the industry overall.

But Telefonica’s Q1 2014 results were even worse than recent ones from two other European players, Deutsche Telekom and Orange, which both posted revenue declines of 4%.  Telefonica’s Group revenue came in at €12.2 billion which was down 12% on Q1 2013.  Part of this was a result of the disposal of the Czech subsidiary and weaker currencies in Latin America, in which around 50% of revenue is generated.  Nevertheless, the negative trend for Telefonica and other European players is clear.

As the first chart in Figure 1 shows, Telefonica’s revenues have followed a gentle parabola over the last eight years.  They rose from 2006 to 2010, reaching a peak in Q4 of that year, before declining steadily to leave the company in Q1 2014 back where it started in Q1 2006.

The second chart, however, adds more insight.  It shows the year-on-year percentage growth or decline in revenue for each quarter.  It is clear that between 2006 and 2008 revenue growth was already slowing down and, following the 2008 economic crisis in which Spain (which generates around quarter of Telefonica’s revenue) was hit particularly hard, the company’s revenue declined in 2009.  The economic recovery that followed enabled Telefonica to report growth again in 2010 and 2011 before the underlying structural challenges of the telecoms industry – the decline of voice and messaging – kicked in, resulting in revenue decline since 2012.

Figure 1: Telefonica’s growth and decline over the last 8 years

Telco 2.0 Telefonica Group Revenue

Source: Telefonica, STL Partners analysis

One thing is clear: the only way is down for most CSPs and for the industry overall

The biggest concern for Telefonica and something that STL Partners believes will be replicated in other CSPs over the next few years is the accelerating nature of the decline since the peak.  It seems clear that Telco 1.0 revenues are not going to decline in a steady fashion but, once they reach a tipping point, to tumble away quickly as:

  • Substitute voice and messaging products and alternate forms of communication scale;
  • CSPs fight hard to maintain customers, revenue and share in voice, messaging and data products, via attractive bundles

The results of the European CSPs confirms STL Partners belief that the outlook for the global industry in the next few years is negative overall.  It is clear that telecoms industry maturity is at different stages globally:

  • Europe: in decline
  • US: still growing but very close to the peak
  • Africa, Middle East, Latin America: slowing growth but still 2(?) years before peak
  • Asia: mixed, some markets growing, others in decline

Given these different mixes, STL Partners reaffirms its forecast of 2012 that overall the industry will contract by up to 10% between 2013 and 2017 as core Telco 1.0 service revenue decline accelerates once more and more countries get beyond the peak.  This is illustrated for the mobile industry in Figure 2, below.

Figure 2: Near-term global telecoms decline is assured; longer-term growth is dependent on management actions now

Global mobile telcoms revenue

Source: STL Partners

Upturn in telecoms industry fortunes after 2016 dependent on current activities

If the downturn to 2016 is a virtual certainty, the shape of the recovery beyond this, which STL Partners (tentatively) forecasts, is not. The industry’s fortunes could be much better or worse than the forecast owing to the importance of transformation activities which all players (CSPs, Network Equipment Providers, IT players, etc.) need to make now.

The growth of what we have termed Human Data (personal data for consumers and business customers, including some aspects of Enterprise Mobility), Non-Human Data (connection of devices and applications – Internet of Things, Machine2Machine, Infrastructure as a Service, and some Enterprise Mobility) and Digital Services (end-user and B2B2X enabling applications and services) requires CSPs and their partners to develop new skills, assets, partnerships, customer relationships and operating and financial models – a new business model.

As IBM found in moving from being hardware manufacturer to a services player during the 1990’s, transforming the business model is hard.  IBM was very close to bankruptcy in the early 90’s before disrupting itself and re-emerging as a dominant force again in recent years.  CSPs and NEPs, in particular, are now seeking to do the same and must act decisively from 2013-2016 if they are to enjoy a rebirth rather than continued and sustained decline.

Cloud 2.0: Network Functions Virtualisation (NFV) vs. Software Defined Networking (SDN)

Network Functions Virtualisation

What is Network Functions Virtualisation?

Network Functions Virtualisation (NFV)  is an ominous sounding term, but on examination relatively easy to understand what it is and why it is needed.

If you run a network whether as an enterprise customer or as a service provider you will end up a stack of dedicated hardware appliances performing a variety of functions needed to make the network work or to optimise its performance. Boxes like Routers, Application Load Balancers, Session Border Controllers (SBC), Network Address Translation (NAT), Deep Packet Inspection (DPI) and Firewalls to pick just a few. Each one of these hardware appliances needs space, power, cooling, configuration, backup, capital investment, replacement as they become obsolete and people who can deploy and manage them leading to on-going capex and opex. And with a few exceptions, each performs a single purpose, so a firewall is always a firewall or an SBC is always an SBC and neither can perform the function of the other.

Contrast this model with the virtualised server or cloud computing world where Virtual Machines run on standard PC/Server hardware, where you can add more compute power/storage on an elastic basis should you need it and where network cards are only required when you connect one physical device to another.

What problems does NFV solve?

NFV seeks to solve the problems of dedicated hardware by deploying the network functions on a virtualised PC/server environment. NFV started as a special interest group running under the auspices of the European Telecommunications Standards Institute (ETSI) by 7 of the world’s largest telecoms operators and has now been joined by additional telecoms companies, equipment vendors and a variety of technology providers.

While NFV can replace many dedicated hardware devices with a virtualised software platform, it is yet to be seen if this approach can deliver the sustained performance and low latency that is currently delivered by some specialised hardware appliances such as load balancing, real time encryption or deep packet inspection.

Figure 8 shows ETSI’s vision of NFV.

Figure 8 – ETSI’s vision for Network Functions Virtualisation
Network Virtualisation Approach June 2013

 Source ETSI

Report Contents

  • Network Functions Virtualisation
  • What is Network Functions Virtualisation?
  • What problems does NFV solve?
  • How does NFV relate to Software Defined Networking (SDN)?
  • Relative benefits of NFV and SDN
  • STL Partners and the Telco 2.0™ Initiative

Report Figures

  • Figure 8 – ETSI’s vision for Network Functions Virtualisation
  • Figure 9 – Network Functions Virtualised and managed by SDN
  • Figure 10 – Network Functions Virtualisation relationship with SDN