Competing in a converging world

Convergence offers telecom providers a world of opportunities. But before they can profit, they must make tough strategic and technical choices. Success will depend not only on making the right decisions about where to play in a converged environment, but on transforming business models and capabilities to make the most of these new opportunities. The days of being "all things to all people" are in the past.

On the verge of opportunity

• Intense competition is driving voice prices down putting revenues and margins under pressure
• Broadband penetration and customer demand for music and gaming content is exploding
• Rapid growth in global Wi-Fi hotspot coverage is enabling true mobility
• Device and IP network proliferation is fuelling massive scale of change in the industry

Together, these factors are driving the convergence of telecommunications with other industries, and creating unprecedented change and growth potential for service providers. Convergence, enabled by IP technology, is blurring traditional industry boundaries giving rise to a new "converged ecosystem" where telecom providers must partner to create value.

In a recent survey of top industry executives conducted by the IBM Institute for Business Value and the Economist Intelligence Unit (EIU), eighty percent of respondents agree that it is essential to embrace convergence within the next three years as a source of long-term revenue growth.

Those surveyed view voice-data convergence as the most impactful type of convergence, as evidenced by the strong growth in VoIP in all geographic markets. Most incumbent fixed network operators have overcome their initial fears of revenue cannibalization. With core voice revenues in decline, service providers are increasingly offering their own VoIP and other services bundled with DSL broadband subscriptions as value-added services.

Fixed-wireless access (FWA) convergence is next in line in terms of expected business impact, according to telecom executives. As customers have grown accustomed to the fixed broadband experience and the ever-presence of their mobile (cellular) networks, combining the two is becoming increasingly attractive.

While these factors are internal to the industry, the greatest convergence challenges are external, emanating from the impact of convergence with other industries, including IT services, media and entertainment, and consumer electronics.

Some players in these industries with well-established brands, customer bases, distribution channels and competencies see telecommunications as the next logical extension of their businesses. For telecom providers, this poses unique challenges in terms of customer relationships, service development, network infrastructures and the systems and processes required to deliver working solutions to customers.

Challenge: Customer focus

Forty-six percent of the executives surveyed state that their medium-term growth strategies center on core markets and customers. But in a converging environment, customer segments and needs continue to evolve. The challenge for service providers is to understand not only how different customer segments value, access and use content and applications, but also how to build targeted propositions to different segments.

Small and medium-sized enterprises (SMEs) represent a key opportunity area for telecom providers. However, their disparity of size, revenue potential and technical expertise require telecom providers to respond with flexibility of service and responsiveness to the specific needs of this segment. Value for money is more important than simply low costs.

IT/telecom convergence offers a very significant opportunity to develop business applications to help enterprises increase efficiency and generate savings. Indeed, value from converged services must be created from the business impact of the service itself, not just the simple act of transferring voice or data from one device to another.

Finally, service providers are likely to use converged services themselves in interactions with their customers. Significant increases in self-service and speech-enabled technologies are forecast in contact center environments, combining voice and data to give customers greater choice in how they request and receive care, billing and other information from service providers.

Challenge: New service creation

Telecom executives overwhelmingly see new products and services and expansion in wireless access technology as key sources of medium-term revenue growth. But bringing complex converged services to market quickly depends on dramatically enhancing new product development processes. New services need to be innovative, customer-centric and priced to drive adoption. Telecom providers must look for ways to utilize core capabilities to enter new markets and service areas. Using existing customer footholds, they can expand product and service propositions to better target particular customer segments.

Challenge: Devices

Contrary to what might be expected, the telecom executives surveyed do not currently view device convergence as critical to creating value against other convergence types. Yet the success of new devices such as the Apple iPod is undeniable evidence that smart devices can actually be the primary driver of new service adoption. That said, in today’s tough environment, stimulating new service uptake is not enough; service providers need to build sustainable service revenues.

With a plethora of new and more sophisticated devices arriving on the market, there is a real risk that complexity may in fact deter rather than encourage advanced service usage. Longer term value creation will be achieved through simplicity and an enhanced user experience, fostering customer loyalty.

The winners amongst service providers will be those capable of bringing together the multiple components of the advanced communications experience, including content, devices, software and technologies. As the only player that can occupy this position, the opportunity for telco providers is to position themselves as the ‘glue’ of the emerging ecosystem; the enablers of the smart infrastructure that can bring the pieces together and transform today’s into a more simple user experience.

Challenge: Next-generation networks, operating support systems and business support systems

As access and network technologies multiply and user demands for mobility gain force, telecom providers need to invest in networks that allow multiple access, irrespective of user circumstances. In a converged environment, success comes from providing customers with "anytime, anywhere, anyhow" access to content, while allowing service providers to view and manage all customer information. With next generation network environments based on horizontal architectures, telecom providers must transform their current vertical product operations into horizontal structures that can support the delivery of convergent services and an integrated customer experience. Siloed operations and redundant capabilities slow time to market and revenues for new services, and result in inefficient cost structures and processes.

With telecom providers pinning their hopes on bundled services as key future revenues streams, quick service provisioning, streamlined billing services and excellent customer service are what's going to differentiate the winners -- not simply offering the services themselves. To become truly converged and reduce costs, telecom providers need to invest in next generation operating and business support, including billing, systems (OSS/BSS) that can support all processes regardless of product or service. In the next generation network environment, the value proposition of OSS and BSS will be elevated from support to business enablement

Making a play: Building converged business models

With the various forms of convergence taking hold of the industry, established industry players face increasing competition from each other as well as from new market entrants, including MVNOs, VoIP service providers and access utility players like FWA providers. Providers in each category must deal with their own challenges in building viable business models for the converged environment. What is clear, however, is that traditional telecom single-value chain business models are a thing of the past. Convergence forces network operators and partners to re-think their roles in the emerging value system, how they add value and with which core competences.

Converged capabilities: Partnering to create value

Forty-six percent of executives surveyed stated that new products and services will primarily be developed in-house. However, in a converged marketplace, telecom companies will increasingly need to look outside to create differentiating products and services. Once telecom providers decide which business model and capabilities will help them make the most of convergence, they need to choose strategic partners that can best help them deliver cutting-edge products and services. Though building partnerships has not traditionally been a key focus for telecom companies, in a converged future, many will find that partnering is necessary to create value.

Executives responding to the IBM/EIU study agree that for them, profiting from convergence will first require the resolution of key demand, operational and supply challenges. Those surveyed see competition (87 percent), regulation (79 percent), understanding customer demand and improving segmentation (62 percent) and operational challenges (61 percent) as significant barriers to growth.

Understanding how convergence will impact customers, technology requirements, new service creation and current business models is essential for telecom companies to position themselves to differentiate from the competition. For those companies that are able to streamline their organization internally and tailor services externally to quickly evolving and increasingly distinct customer segments, the era of convergence can be one of profitable growth.

To obtain a full report on the IBM/Economist Intelligence Unit, Global Telecom Executive Online Survey, called Profiting from Convergence, visit www.ibm.com/bcs, select the “ What We Think” option.

Jeanette Carlsson is Global Communications Sector Lead, IBM Institute for Business Value.