Yankee Group survey: The latest lessons in smart wholesale

Capacity’s second Smart Wholesale Survey analyses the state of the market and its future direction. Yankee Group’s Sandra Palumbo reviews the findings.

Global connectivity, mobile, cloud, content and growth – these are the five key takeaways from the 2011 Smart Wholesale Survey by Capacity and Yankee Group. Similar to the 2010 survey (chart 1), this year’s respondents view the global wholesale market as robust and growing thanks to traditional, foundational services like international bandwidth, coupled with the hot mobility market and fueled by the continued emergence of cloud computing and content-heavy services.

All aspects of the communications market seem to be undergoing massive transformations as consumer and business end users demand more of everything – more bandwidth, more content, more devices and more services. These user demands in turn put ever increasing pressure and demand on the service providers, operators, vendors and developers that serve them. Delivering real-time, high-speed content all over the world, to a variety of devices and users, and allowing for increased communication and collaboration tools is putting tremendous pressure on today’s network resources. These forces could spell danger for the wholesale industry that is the foundation for all of these things to become realities. Instead wholesale operators around the world are finding these trends and demands as the sign of a bright and successful future for many in the wholesale industry.

About the survey

For the second year in a row, Capacity partnered with global telecoms research and consulting firm Yankee Group to design and field the survey. The 10-question online survey was answered by 216 wholesale telecoms companies. Nearly 40% of respondents were C-level executives with the remainder senior level executives from sales, marketing, operations and product development organisations.

The respondents to this year’s survey represent a global cross-section (chart 2) with just over half of the companies from North America, western Europe and central and eastern Europe. The balance of the respondents provides insight into the wholesale markets of Asia-Pac, Latin America, Russia and CIS, Middle East, Africa and the Caribbean.

As with the previous Smart Wholesale survey, the survey sample is biased towards international wholesale firms (48.6%), although this class of respondent is smaller than in the 2010 survey where international wholesale firms represented 56% of respondents. The remaining respondents represent an assortment of providers including national fixed operators, mobile operators, data centre operators, managed services providers, system integrators, etc.

Overall this respondent base provides an insightful and illustrative view of the current state of the global wholesale market specifically with regard to: where they see growth coming from; where investments are expected to be made; and their overall outlook on key trends within the market.

Where is the growth?

More than 80% of respondents are expecting some level of growth in their wholesale business, compared to only 11% of respondents that are expecting some level of decline in that business. This closely maps to the results from our 2010 study where we asked the same question. So with such a continued bullish outlook we have to ask – where is the growth coming from?

Keeping in mind that nearly half of our respondents are international wholesale operators, international capacity sales continues to be viewed as the biggest area of revenue growth. Even when geography is factored in, it remains a top ranked service hot spot (chart 3). The one region that, while still very highly viewed, was most highly ranked as the third top growth area was for those firms based in western Europe.

Where the results get more interesting is when we look at some of the other top areas of expected growth. Following international bandwidth, mobile data is the next service viewed to have the most bullish outlook. This is true both in terms of the number one ranked service for growth and the overall service for growth (sum of those respondents that ranked the service one, two or three). With mobility services and devices exploding in the consumer and enterprise markets around the world, including many emerging markets, that mobile data is an area deemed to have great growth promise is to be expected and will likely continue.

The third overall top ranked growth service by the 2011 survey respondents belongs to cloud computing. Some in the communications industry deem cloud as being more hype than reality, at least for the short term, but cloud computing introduces to the wholesale market an even broader base of potential customers as over-the-top content and service providers look for the cloud-based connectivity they require to get their wares to market.

Cloud computing is another service area that will translate to continued growth for the wholesale market, especially those large wholesale operators and data centre operators that have the infrastructure and capabilities to provide cloud computing resources at the carrier and service provider grade level.

The global wholesale market is becoming reinvigorated thanks to what we now refer to as ‘smart wholesale’ services, but that doesn’t mean all of the traditional, stalwart services the wholesale market has long relied on for its foundation are going away. Respondents to the 2011 survey continue to anticipate growth from more mature services like voice signalling and managed or outsourced services. In the area of IP interconnect, this year’s respondents are much more positive on the potential opportunity in this area than the 2010 respondents, who ranked it much lower. This demonstrates some faith that the issues surrounding migration issues, for example, will hopefully be able to be addressed in a positive manner for the market.

An item that was rather surprising to see once again on the lower end of the overall ranking of growth services is mobile backhaul. Mobile backhaul continues to be an extremely popular topic amongst operators and mobile infrastructure companies, however the survey respondents continue to view it as a lower growth area. One possible explanation for this is that, like other traditional pure connectivity wholesale services, the pricing in this area is under increasing pressure. Additionally service providers are seemingly more focussed on some higher-end mobile services like those around mobile data, mobile cloud components to cloud computing and the broad content delivery market.

Mobile makes them merry

When taking the pulse of the wholesale market, it is most interesting to measure operators attitudes on key topics and trends in the market. For this group of respondents, the attitudes around mobility and mobile-related services were loudly positive. When asked to agree or disagree with the statement, “Mobile-related services will be the largest driver of wholesale growth for at least the next three years,” an astounding 89% of respondents (chart 4) agreed or strongly agreed with that statement. This further supports the finding earlier in this article on the areas where operators are expecting the most revenue growth.

Further building on the wholesale love for all things mobile, 77% of respondents (chart 5) agreed with the statement around 4G offering wholesale providers game-changing opportunities for their businesses. With the plethora of mobile devices seemingly flooding the market every day – from the latest tablets and smartphones, to an endless array of connected devices and the explosion of M2M – the mobile marketplace is expected to be the darling of the communications market for the foreseeable future, and so is understandably a darling to wholesale operators around the globe as well.

An interesting attitudinal question that had a slight disparity with the earlier question on expected growth services was that around the perceived value and potential for high-volume content delivery services. Despite having an 81% agreement rate among respondents to the content potential question, it ranked fifth in terms of overall growth services (chart 6). This is likely explained by the fact that high-bandwidth content services are continuing to develop and expand as the needs of consumers and businesses evolve. Business models are also changing in the content delivery and development ecosystem leading to great potential for the underlying wholesale market.

Future opportunity and investment

The positive expectations for the future growth and success of smart wholesale are directly driving the main areas of investment and development focus for wholesale providers. With mobile operators, international operators and content providers once again the top three customer segments deemed to have the greatest growth potential (chart 7), coupled with the already discussed key growth services, we can now look at where wholesale providers are investing.

Mobile-related infrastructure and services are very important areas of investment, with little variation from region to region. In terms of traditional services, our wholesale respondents expect to continue to make investments in international bandwidth first and foremost (chart 8) as well as voice signalling. Cloud computing too is an area of planned investment by providers, which can provide wholesale operators with a multitude of additional services that can then be delivered to wholesale customers who in turn may white label these offerings directly to end users or layer them into their own value-added services.

This positive outlook and high expectations for growth doesn’t come cheap however. Wholesale operators not only need to continue to invest in their product and service portfolios but also need to prioritise their capex investments as well (chart 9). Operators are looking to further build out their infrastructure to support cloud-based and content-rich services. This is seen in the number of operator respondents that are planning to invest in their data centres and cloud computing platforms.

Service delivery platforms continue to be named a key area for capex dollars to be spent, supporting the movement towards smart wholesale and the continued evolution of the typical wholesale provider from simply a reseller of bandwidth and minutes to that of value-added service provider, supporting the growth and evolution of the entire global communications market.

The future of the global wholesale market is bright, and while we won’t be surprised to have further consolidation in some areas like we have recently seen with Level 3 and Global Crossing, nor be surprised by the ‘death’ of some old-school products, the wholesale industry as a whole has demonstrated its ability to evolve and adapt to the needs of the overall market, showing it is smarter than some have given it credit for.

Sandra Palumbo is a research fellow at Yankee Group. She provides strategic council to telecoms service providers and vendors with a focus on managed services, cloud computing and mobile applications and content. Previously she worked at a global carrier based in North America and a large system integrator headquartered in France.