ICT IN EMERGING MARKETS: A USD 200 BLN OPPORTUNITY THAT CANNOT BE IGNORED
|Authors||Jacobo Garcia-Palencia - Partner|
|Juan Jose Rio - Associate Partner|
|Dimitris Lioulias - Manager|
- ICT is a global market worth more than USD 3 trillion and it becomes increasingly relevant for telecoms players, both as an offensive and as a defensive play
- The ICT offering can be broken down into six different categories of services, from more network centric (and hence more synergetic to pure Telco players) to more IT centric (and hence more synergetic to pure IT players). These services range widely not only in terms of revenue generation potential but also in terms of EBITDA margins (3-45%)
- The motivation of telecoms operators to enter the ICT battlefield has been varied depending on the type of player. The result, however, has been strategies that turn ICT into an important part of operators'; business
- In Emerging markets, the ICT opportunity is at different stages of development: In South East Asia, business process outsourcing is at the forefront of ICT services being provided. Operators are in some cases quite advanced as they started with their ICT efforts more than a decade ago
- In the Middle East, slow deregulation of the telecoms markets hinders strong development of ICT. Operators are in the process of building their skills and they use partnerships to achieve so
- In Africa, poor fixed infrastructure also affects ICT negatively. Operators try mostly to leverage their mobile assets to deliver ICT services
- The size of the opportunity in these Emerging markets is expected to reach USD 230 Bln by 2013. The window of opportunity for aspiring telecoms operators is narrow. Firstly, because competition is increasing on the access side. Secondly, because IT players are moving aggressively to lock in long-term contracts enterprise and SME customers willing to outsource a number of their networking and IT needs
1. About Information and Communications Technology (ICT)
As the boundaries between telecommunications and IT continue to blur, there is an increasing interest in ICT, the services falling in the intersection of these two industries. Beyond the usual hype surrounding new service offerings, ICT is gathering pace and according to Gartner, it is estimated that ICT-related services will generate more than USD 3.3 trillion in 2010 and growing to USD 4 trillion in 2013.
In this environment, players from both industries are moving to capture momentum. Pure network operators are expanding their portfolio beyond network products to include certain IT capabilities, while pure IT players are expanding from the opposite end of the range of ICT services.
2. Relevance for telecoms players - Defensive and offensive
The motivation for telecoms operators in developed markets, for instance, British Telecoms (BT), France Telecom (FT), as well as in developing markets, Singapore Telecommunications (Singtel), is mixed as they see ICT as a means of both defending traditional revenue streams and of attacking new revenue pools that belong to other traditionally non-competing players (e.g. IT).
On the one hand, they are faced with threats in their traditional business, as they experience increased competition in the enterprise market from direct industry competitors (enabled by regulatory intervention) and large IT players.
On the other, they realise that they have the ability to tap into a new and large pool of revenues now, as IP-based networks allow telcos to offer an extensive array of ICT products on their networks. In parallel, operators see that corporate customers tend to favour a one-stop-shop for ICT services, which telcos can leverage to build unique offerings, given that they are the owners of the customers'; connectivity. This opportunity is sizeable, growing at rates higher than pure telecoms revenues (i.e. >10% vs 3-5%).
While a full ICT portfolio encompasses all services ranging from telecommunications to IT, a further categorisation is necessary to highlight not only the differences between assets and skills required to provide such services, but also the variances in margins for telecoms operators across those different categories.
1. ICT P&S categories
The ICT offering can be broken down into six different categories of services, from more network-centric (and hence more synergetic to pure telco players) to more IT-centric (and hence more synergetic to pure IT players). These services are:
Network products: standard telco operator products around pure voice and data provision
Managed network services: set up and management of third party networks on top of, or connected to, the traditional telco operator networks - e.g., WAN, LAN, IP based networks
Managed convergent services: Software (SW) and Hardware (HW)-driven services that fundamentally rely on network and connectivity services - e.g. messaging services, workforce services, M2M
Managed IT services: SW- and HW-intensive services that fundamentally rely on connectivity but are driven by typical IT skills - e.g. data centres
IT professional services: IT consulting services and BPO - e.g. IT strategy consulting, IT network architecture, CRM customisation and integration
IT and convergent products: third-party HW and SW reselling
Referring to Exhibit 1, the three service categories (and partially the fourth) from the left side of the exhibit are mainly enabled by operators'; network capabilities and could become immediate components of an ICT offering by a telecoms operator. In order to capture the new revenue potential, only modest investments would be required by operators, estimated between USD 5-15m1, e.g., in platforms and in people';s skills, as the majority of necessary assets (especially those that are needed to protect their traditional fixed connectivity revenues) are already in place.
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1 Based on data from HP. These numbers will vary depending on the extent of service offering as well as the number of users that have to be provisioned. Investments highlighted exclude OPEX costs related to potential managed services agreement with a company like HP or other provider.
2. Growth potential of each P&S category
Value contribution is not evidently the same across the P&S categories in Exhibit 2, with the first and last category producing 65-75% of total annual ICT revenues generated in a typical market.
Given the diverse nature of these services and underlying assets required for their provision, the different categories show markedly differing margins. Average margins decrease progressively from pure network-centric (a 35%-45% in network products) to pure IT-centric products (3%-15% in IT and convergent products).
While the ICT market as a whole is expected to grow, not all service categories have the same growth potential. The growth rate will depend both on structural conditions in each market and on generic ICT trends. In markets where a large number of players exists at the access level and where the regulatory environment continuously fosters competition, the revenues from network products is likely to stagnate due to multiple factors, e.g. price competition, VoIP or wholesale offerings that will potentially destroy value for the whole industry.
On the flip side, as enterprise clients grow more comfortable with outsourcing of IT infrastructure or even the entire business processes, and as they get more accustomed to technological advancements, such as cloud computing, it is anticipated that managed services will grow faster than other ICT services. Furthermore, expansion of cloud computing onto the residential segment will give telecoms operators the opportunity to extend revenues from managed services beyond the corporate segment.
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Other factors that will drive growth in specific services relate to the size and economic situation of specific countries. For example, it is far more likely that services such as Business Process Outsourcing (BPO) will be a growth area for the Philippines ICT market (large population - relatively low GDP per capita), than it will be for a country like the United Arab Emirates (UAE).
In summary, while ICT services'; growth depends largely on market-specific conditions, managed services (network, convergence, IT) are positioned to benefit the most from growth in the market.
3. Cloud computing
Cloud computing is a decades-old concept that current technological developments allow to materialise and to fulfil the promise of significant disruption in the ICT space.
While definitions and understanding of 'What is Cloud?'; vary widely, common ground suggests that Cloud is the provision of IT-enabled capabilities 'as a service'; via the Internet. Attributes that define cloud computing are that it has to be service-based, scalable and elastic, shared, metered by usage - and all this has to happen via the use of Internet technology.
The main benefits of Cloud-based services are that they provide enterprises with flexibility, scalability and speed, as well as the transformation of CAPEX into OPEX. Cloud-based services can be categorised as follows:
Infrastructure as a service
Platform as a service
Software as a service
Business process utility as a service
While cloud computing has been overhyped and expected to bring to enterprises benefits of 'transformational magnitude';, the reality is that Cloud services are a viable means for delivering ICT in the future. As such, cloud-related revenues, while already sizeable today, are forecasted to reach USD 150 Bln by 2013.
The Cloud, similar to any outsourced arrangement, contains certain risks compared to IT handled in-house. The main risks relate to security, availability and reliability, control, compliance. However, a phased approach together with selection of appropriate partners will usually help mitigate most of these risks.
From the perspective of the telecoms operators, cloud computing presents opportunities. If addressed properly, it can open up the door to capturing value from the IT industry (albeit, not from the large players, e.g., IBM. In the case of players like IBM, it is more likely that it will enable the selling of joint standardised offers to SME driving more fixed internet and connectivity) and can be a defence against IT players'; foray into traditional telco areas.
As telecoms players design their Cloud strategy, they have to take into consideration of the following:
Cloud services are a reality and their value, according to Gartner, is expected to almost triple in the next 3 years, by 2014
The key to provisioning of Cloud services is connectivity, i.e., the telecoms operators'; traditional strength. This means that uptake of Cloud services will always bring additional value to telecoms operators, as Cloud players require increasing amounts of bandwidth, it is especially the case in less competitive telecoms countries
For telecoms operators it is difficult to become positioned at the forefront of Cloud services, as they lack the 'pedigree';
Telecoms operators, however, can pursue a phased introduction into the Cloud space by offering services in which they already have significant in-house capabilities, such as data centres, established business processes such as billing and customer care, and so on. They can then extend their offering that would include SaaS while building the relevant capabilities
For the most part, the Cloud is a zero-sum game. As customers shift an increasingly large part of their IT budgets to the Cloud, the traditional IT expenditure, such as software purchasing, hardware purchasing, IT systems integration and other services, will lessen. Consequently, heightened competition is expected in the Cloud as traditional IT players resist the erosion of their revenues. This is likely to spill over to the telecoms arena, as Cloud services will enable those players to offer VoIP solutions
TELECOMS OPERATORS IN ICT
1. Operators'; rationale for competing in ICT
In this environment, telecoms and IT players leverage their own skills and expand along the service categories. Pure network operators are expanding their portfolio beyond network products to include certain IT capabilities, while pure IT players are expanding from the opposite end of the range of ICT services. Hence these two intrinsically different types of players (given their underlying assets and capabilities) have met and are competing mainly in managed convergent and manager IT services, while still trying to defend their core business and keep it intact from each other.
In the case of telecoms players, the move into ICT aims to address two basic strategic intents:
Defensive: Protecting core telecoms revenues - Operators try to ring-fence existing customers and revenues by offering a bundle of telecoms and ICT services. This product offering makes switching costs higher for the customers and locks them in, as typical ICT contracts are longer than pure telecoms contracts and can extend to between 3-10 years.
Offensive: Growing revenues from adjacent services - Operators have identified ICT as a potentially lucrative new revenue stream and build their ICT portfolio to offer services adjacent to their traditional telecoms services, thus capturing higher share of wallet from the enterprise segment. Furthermore, operators have identified emerging clients in the SME and SOHO segments and develop standardised, off-the-shelf offers to address their needs, as those customers increasingly shift from an in-house to a managed-services model for telecoms and IT services.
While this rationale applies to all telcos, the main focus is different for each of the following types of operators:
Global players, e.g., BT: ICT is addressed as their core business
Fixed incumbents, e.g., Telefonica: ICT is addressed as a vehicle to protect fixed market share
Second, third fixed entrants, e.g., Orange in Spain: ICT is addressed as a means to gain share of fixed telco. Dumping data centres services in the process is not uncommon
Mobile players, e.g., Vodafone: ICT';s focus is to address the SME segment by leveraging on incumbent offers or promoting fixed line replacement by mobile
Furthermore, significant differences can be observed between operators in developed market and those in developing markets. Developed markets operators (e.g., Orange, Singtel, Telefonica) have embraced ICT more tightly and reap higher rewards, as ICT revenues contribute 10-15% of their total revenues. In contrast, emerging market players derive less than 1% of revenues from ICT.
2. Typical telecoms players'; positioning
Not all telecoms players are positioned in the same way in the ICT market. Some players have historically been strong in IT services as a result of strategic choice, others have developed IT capabilities opportunistically to address specific customer needs, while the rest as a result ofresponse to the local competitors.
In general, the telecoms players'; positioning in the ICT market can be distinguished along three axes that have fundamental implications regarding their revenues and margins from ICT:
Breadth of product offering: the more expanded towards the pure IT services, the higher the revenue pool, but lower the margins
Breadth of geographical coverage: the further the geographical coverage, the higher the revenue pool (per client), but generally lower the margins (due to lack of own infrastructure on additional geographies)
Target segments: the bigger the size of the targets, generally the lower the margins due to bigger negotiation power by key accounts and need for higher customisation of product offering (e.g., key multinational clients)
While this classification is useful to understand the differences better between the players, market reality shows that there are many trade-offs that operators have to make. For example, focus on specific service categories does not necessarily mean that a telecoms operator can address the needs of all customers in these categories. Conversely, an operator that serves multinationals does not necessarily mean that it can offer the full range of P&S. Both local and global operators often offer part of their services to key clients through partnership models, both at home and abroad.
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3. Approach for building ICT capabilities
In developing their ICT positioning and capabilities, telecoms operators have had to develop certain skills organically, yet very often they also resort to inorganic methods. The rationale for inorganic growth, however, goes beyond just acquiring capabilities. Acquisitions have been used by large telecoms operators as a means to:
Expand or consolidate geographies by acquiring well-positioned players in a market into which the telecoms player wants to enter
Differentiate by acquiring key assets, which strengthen the telcos'; current offering locally or globally, e.g., network, data centres
Consolidate positioning in a vertical by acquiring assets that solidify an already strong position in a specific industry, e.g., banking, oil and gas
A prime example of addressing the above objectives via acquisitions is the case of BT. BT is the telecoms operator with perhaps the largest ICT capabilities, a large part of which were developed internally. However, BT has also spent approximately USD 3 Bln in the acquisition of more than 40 companies to develop presence in new geographies or solidify positioning in specific verticals.
Joint ventures have been another common means for addressing the ICT market. This has been driven largely by the need of global ICT players to deliver services to their multinational clients, while they lack the local access assets in one of the client';s countries of operation. On the flip side, incumbents in developing markets that lack ICT knowledge and capabilities see joint ventures with large ICT players as a way to leverage their telecoms assets and quickly build a certain level of ICT skills, e.g., AT&T and Qtel with their joint venture NavLink.
Obviously, these different approaches imply fundamental trade-offs of immediate versus mid-term financial returns, time to market and operational control. While acquisitions have an immediate impact on capabilities and business size, they generally show more questionable financial returns and organisational difficulties.
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Conversely, building capabilities internally takes significantly longer time, but at the same time the financial downside is limited, there is more organizational control and generally robust, long-term competitiveness is achieved.
4. Telecoms operators'; considerations and key success factors
For those operators who are keen to move beyond their traditional capabilities and capture the ICT opportunity, certain key considerations and success factors are important to keep in mind.
I. Valuation considerations
First and foremost, the decision to move into ICT comes with a size versus margin-dilution trade-off, which often impacts company valuation. Telcos with high ICT focus have lower valuations compared to other telcos as, while still having high CAPEX requirements, they attract additional revenues from ICT that have significantly lower margins. For the ICT foray to result in value accretion, the incremental revenues derived from IT services have to offer sufficient margin to make up at least for the difference in valuation between the traditional telco and the ICT telco business model.
II. Existing skills and assets as ICT enablers
Before telecoms operators decide on the breadth of their ICT portfolio and on targeted customers, they need to carefully analyse their existing skills, assets and current scale. While certain skills, e.g., network, data centres, even the operator';s own IT department, can be easily leveraged to offer ICT services, others require significant investments both in money, e.g., specific platforms, but most importantly, in time, e.g., people';s skills, culture.
For operators who choose to expand the service portfolio around network-centric skills, traditional telco margins are more likely to be maintained, while stretching the service portfolio to IT-centric skills and services will reduce average margin.
Finally, the operator';s geographical footprint is very important in deploying an ICT offensive, as margins are generally linked to infrastructure ownership. Venturing into service provisioning for multinationals outside an operator';s own infrastructure footprint will generally dilute margins.
III. Go-to-market approach
Successful ICT operators have generally followed a phased go-to-market approach leveraging existing capabilities, complemented by partnerships and acquisitions. A typical entry-level service portfolio is built around network-centric services, which tend to be similar across industries. More IT-centric product offering, which requires vertical approach-to-market to address industry specific IT requirements, is addressed at later stages. Especially after one or two anchor clients have been acquired in a given industry vertical. Otherwise, the operator';sfocus is primarily on SME and Corporates within its own market, and the ICT offering is initially seen as a way to provide 'discounts'; to defend contracts (sometimes the IT services are offered for free as part of a total contract value negotiation).
All this is usually built on the basis of an independent business unit inside the operator to ensure focus, provide visibility of margins (especially if the operator is quoted) and to portray ICT as a serious business of the operator to the corporate clients.
IV. Second/ third entrants considerations
The ICT game is not equally attractive for all telecoms players in a market. While incumbents are usually well positioned to leverage their network assets and at the very least capture the connectivity revenues of ICT services, second and third entrants in the fixed or mobile markets have a more difficult ICT business case ahead of them. They are likely to end up directly competing with the IT players without having high margins from the telco business to support them. These players have to consider the minimum fixed line investments they have to incur to be competitive in ICT and consider if and how they can leverage their backbones for the provision of such services. Furthermore, they have to consider what their options are for international Internet connectivity, as this is a key ingredient for the provision of ICT services. In most cases, if these players do not have an international gateway, offering ICT services becomes a challenging proposition.
V. Implementation considerations
Telecoms operators have some of the network assets required to offer ICT services. However, successfully competing in this arena requires a different operating model and a different mindset than those common in telecoms players.
In particular, the operating model surrounding the commercial, service delivery and customer care functions are fundamentally different. Offering ICT services requires a much deeper relationship with clients that go beyond the typical box-pushing approach of telcos sales. An ICT key account manager must understand the specific needs of the client and offer solutions to address them.
These solutions often require customisation, and the product factory needs to have the capacity and sufficient independence from the telco factory to deliver it. Finally, offering customer care for the client often entails servicing customers at their own premises.
All the above require a differentiated service mentality, culture and skills from those traditionally found in typical telcos. The transition from a telco to an ICT mentality has been accomplished with varying degrees of success by many telecoms players. However, one should not underestimate the need for a lengthy transformation program to make it happen.
VI. Ending note: No silver bullet
The high level analysis above provides a primer on how ICT can be approached by telecoms operators in emerging markets. However, each operator faces different competitive situations, market dynamics, potential customers and opportunities. Moreover, each operator has access to different skills, financial resources and knowledge. This means that devising an ICT strategy should entail specific tailoring to the operator';s own circumstances and should address key strategic trade-offs, such as the high impact on the company';s profitability and valuation.
5. ICT window of opportunity
Telecoms operators venture into ICT with the knowledge that connectivity is the baseline requirement for each ICT offering and that their network assets put them in the pole position to offer many ICT services. From this starting point, many operators from developed markets have moved towards an extensive ICT portfolio.
In emerging markets, however, operators are behind the development curve where iCT is pursued only on the surface, offering limited services primarily driven by their network assets.
In some cases, these players are comfortable with their limited offerings because they operate in less competitive, closed markets, and they are not eager to develop additional revenue streams that partly lie outside of their traditional area of expertise. In other cases, these players just do not have the knowledge to develop their ICT practice properly.
Whatever the reason be, there is a window of opportunity for ICT services that operators cannot miss. Firstly, the window is narrow (especially in emerging markets in which the size of the fixed telecoms market is significant), as regulators push for increased competition on the access side, and the arrival of new submarine cables and alternative technologies (e.g., WiMax or LTE) further heats up the markets.
Secondly, the window is closing. As enterprise and SME customers become more willing to outsource a number of their networking and IT needs, IT players move aggressively to address those needs. While telecoms operators will, in most cases, still capture the connectivity revenues, they risk losing all upside potential from managed services in the long-term as ICT contracts are typically signed for a long period of time.
TELECOMS OPERATORS IN ICT
The nature and stage of maturity of the ICT market varies across developing regions. While global telecoms and IT players are present in these regions and they offer a high degree of customised services to their Multinational Corporation clients, the ICT efforts of local players range from just offering plain connectivity to offering a substantial portfolio of services.
These differences are driven by environmental conditions that are unique to the regions. For example, South-East Asia is home to large populations with relatively low labour costs, which makes the region a likely provider of outsourcing and specifically business process outsourcing services. At the same time, the Middle East has still some way to go by way of deregulation of the telecommunications markets, while Africa has poor fixed telecoms infrastructure, two factors that affect ICT developments negatively. These are but a few reasons that contribute to the differences in ICT development and in the size of the opportunity across the regions.
2. Size of the ICT opportunity
The size of the ICT opportunity is significant in all three regions and it is expected to grow rapidly in the next three years, as markets mature, economic growth increases enterprises'; and SME';s investments in IT, telecommunications regulators foster more competition, and operators continue to embrace ICT and its potential.
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3. Telecoms operators ICT activity
Even if the three regions are at different stages of development when it comes to ICT, telecoms operators in all regions have been positioning themselves to capture the ICT opportunity.
Operators in South-East Asia are more advanced as in some cases, they have started with their ICT efforts more than a decade ago. Regional operators are appearing with diverse product offering and they leverage their socioeconomic conditions to offer competitive BPO services. Acquisitions are being used to complement existing skills and footprints.
Operators in the Middle East are in the process of building their skills and forming partnerships to achieve it. Specific to ICT, their product offering is less advanced, Given that the fixed-line markets are not fully liberalised, operators leverage their (near) monopoly to offer connectivity and enhanced last mile access (e.g., FTTx). At the same time, their geographic area of focus is mainly their home market, as the regulatory environment does not facilitate cross-border deployments. Major acquisitions of ICT companies have not yet hit the markets.
Operators in Africa are, in most cases, hindered by lack of fixed infrastructure and the mobile assets are leveraged to deliver ICT services. Vodafone is well positioned to play this game as they have been competing in this way in much of their footprints. Other contenders in the region seem to be following the acquisition and partnership route to gain access to the necessary ICT skills. For all of the above, the ICT offering is still relatively basic and players are still deliberating on the best approach forward.
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4. Summary - The ICT opportujnity per region
The ICT opportunity in South-East Asia, Middle East and Africa is sizeable with potential for further growth. This growth will be driven by different factors across the regions:
In South-East Asia, where large regional operators are already positioned, the opportunity lies in leveraging socioeconomic conditions to take advantage of BPO opportunities and in taking the current offerings to the next level of complexity and sophistication. Consolidation is likely to the extent it offers clear footprint benefits.
In the Middle East, beyond the global players'; servicing multinational clients, there is good potential for development of strong country-specific ICT offerings before regional plays can be contemplated. The opportunity will be driven mainly by those who put emphasis on dedicated ICT skills and organisations that will cover the relative vacuum in the local corporate and SME markets.
In Africa, the opportunity lies mainly within the top two ICT countries, i.e., South Africa and Egypt, with less immediate potential in the other North African countries. As ICT skills and fixed infrastructure improve, the operators'; offering will increasingly address the growing needs of local and regional corporates as well as those of SMEs.
The ICT opportunity is sizeable, with potential for further growth and it represents operators with an avenue for additional revenues.
However, the opportunity and urgency to act is not the same for all markets. As depicted on Exhibit 7, the opportunity is expected to be higher in markets with greater fixed market and higher competition.
Operators in South-East Asia, the Middle East and Africa are positioning themselves for ICT, as they see it both as a defensive response to threats to their traditional telecoms business from a multitude of competitors, and as an offensive strategy to capture value from adjacent revenue pools. Operators, however, do not yet fully capture the opportunity, especially in the Middle East and Africa, as they are in the process of developing their capabilities.
Building these capabilities is a process that requires operators to transform away from the telco mindset, assets and operating model to those of an ICT player. This is the case even if operators prudently decide to follow a phased approach and mainly leverage their telecoms assets to offer a partial portfolio of ICT services. However, the investments required are relatively small and they may only increase if the ICT venture proves successful for the operators.
In any case, operators have to consider their relative size, assets, capabilities, resources and market environment before they venture into ICT, as they have to devise their own clear strategy on how to approach the opportunities and risks entailed by the ICT market.
These risks relate mainly to the reality that, due to lower margins of ICT services, ICT players are faced with lower valuations than those of pure telcos. Furthermore, the actual transformation onto an ICT player is a long-term process that requires strong top-management support and disciplined execution to make it happen.
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Finally, operators have to consider that the window of opportunity for ICT is narrow, especially in the more lucrative oil-rich Middle Eastern markets and the key South African and Egyptian markets. On one hand, liberalisation and technological evolution could render operators uncompetitive if they have not developed the necessary ICT capabilities. On the other, the high-value clients are going to be locked away in longterm contracts with their telcos and IT competitors.