IBM offers telcos a prescription for the new year: stop fiddling

After growing accustomed to double-digit growth before hitting the economic wall last year, two percent growth over the next few years may not seem worth risking one’s business for. However, according to a prescriptive report issued this week by IBM Business Consulting Services, service providers that fail to take those risks starting now will fail to realize even that modicum of growth and may in fact be risking everything.

“If you are a traditional telco and continue to do what you are doing and hunker down through this environment, we see you potentially fiddling while your business burns,” said IBM’s Salvador Arias, co-author of the report, “Burning Up the Phone Wires.”

The report examines the threat to fixed-line revenue through 2006 and suggests dramatic shifts in the business models of mobile operators and consumer and enterprise telcos, saying, “Current business models will not restore solvency.”

According to IBM, the most immediate threat to telcos is the erosion of fixed-line consumer revenues. “We worry about the encroachment on the traditional areas of profit for narrowband telephony from both wireless and broadband,” Arias said.

Wireless, which could use its own overhaul and will be detailed further, is expected to take away 20% of the fixed-line long-distance market by 2006, according to the report. IBM warns telcos they must “anchor the wireline” through collaborative product development with wireless operators to increase cross-platform operability, making it an extension of the network “before consumers completely abandon fixed-line services.”

To protect the consumer side of its business from its other major threat, cable broadband and voice services, IBM also says telcos must “own the broadband.” Calling broadband the critical consumer growth market over the next four years as it increases penetration to 50% of U.S. households, IBM urges telcos to overcome the cable providers’ two-to-one market share lead by filling the void in its broadband product arsenal with voice, Internet and entertainment.

Telcos also must overcome the obvious pricing advantages of cable providers due in part to regulatory inequities. Easier said than done, but IBM suggests, “One way to straddle both freedom and regulation is for telcos to employ pricing freedom to assist their retail operations, but maintain protections on wholesale uses of the fixed-line infrastructure, thereby separating retail and wholesale completely.”

“It’s amazing that in most of the regulatory environments around the world, the telco is still seen as a monopoly provider even though, and especially in the United States, you have wireless providers providing telecom services to consumers and you have cable companies providing broadband and narrowband services,” Arias said.

He added that cable companies on the entertainment side have been able to free themselves of pricing and service constraints, even though they are dominant in terms of market share, and have been taking advantage of that with significant price increases.

Telcos are similarly threatened on the enterprise side of the business, says IBM, and they have two options: provide either sharply differentiated, high-value solutions or standardized, low-cost services.

The report said the market for managed services, including those for connectivity, computing and operations will grow to $250 billion worldwide by 2006. These are the kinds of services the telcos need to go after. IBM doesn’t rule out offering managed services to other providers either and puts the market for outsourced network operations at $50 billion by 2006.

“With WorldCom and Global Crossing coming back without much debt, pricing can get really skinny. So doing nothing in the enterprise space is also a risk,” Arias said.

For both consumer-focused and enterprise-focused wireless operators, IBM says it’s all about balance. They must balance their investments between a slowing demand for voice services with a still unpredictable, but potentially high-growth data market. And they must balance their focus on both consumers and the enterprise. Serving the wireless enterprise space may require operators to choose who they want to be: a capacity wholesaler, a reseller of services using third party content and applications providers, or a “MobileLife” operator that provides full system integration across the enterprise, including content development, marketing and digital rights management.

Most important, wireless operators need to engage in collaborative product development with wireline carriers. “They all need to be doing service creation in a collaborative model so that when they come out the other end with a new service there is no doubt it is the right one,” Arias said.