Charting future wholesale trends

An unintended consequence of network innovation is that it opens the floodgates to as many threats as it does opportunities – just ask mobile operators struggling to make the economics of 4G investment stack up in a world where OTT players proliferate. Richard Irving assesses the prospects for wholesale operators.

 Which of the following telling developments is most likely to set the agenda in wholesale telecoms?

News that WhatsApp, the almost-free over-the-top (OTT) messaging service is now handling more than 10 billion texts a day – a 10-fold increase in a year?

Confirmation that Google is trialing a new technology called WebRTC (short for web-based real time communications) – an application that could turn telephony on its head by embedding voice services in internet browsers?

Or the revelation that Eddy Cue should be able to wangle cut-price tyres next time he takes his sports car in for a service?

If you are unfamiliar with the name, then let me explain.

Cue is the rising star of Apple – head of the company’s internet software and services division, driving force (no pun intended) behind the launch of the hugely successful iPad mini and chief executive Tim Cook’s all-round Mr Fix-It.

Late last year, Cue, who has been with the iconic device manufacturer for 24 years, broke with a long-standing Apple convention barring senior executives from holding top-level positions with other companies, when he joined the board of Ferrari.Cue, a long-time customer of the supercar maker, has yet to elaborate on his reasons for the move, although company watchers believe it marks a new push at Apple to connect up the car with internet friendly “machine-to-machine” (M2M) gadgets. Apple is already working with General Motors, Honda and Toyota to develop a hands-free version of Siri, the voice-activated personal assistant, for the car market. But a joint venture with Ferrari on a host of in-car devices that might talk to other internet-based applications either in the car, back home, or even at Ferrari HQ, could eventually pave the way for something a little more substantial with Ferrari’s ultimate owner, Fiat.

Apple’s potential interest in Ferrari should send shivers down the spines of many wholesale operators – or a least, those lucky enough to bear responsibility for M2M within their remit. For the wholesale telecoms market faces a Doomsday scenario in which revenues from each of its three main pillars – voice, messaging and data access – are slipping into terminal decline(or expected to within two to three years).

One of the few bright spots on the horizon is the M2M market, which the London-based consultancy Machina Research says could be worth a combined $50 billion a year to service providers by the end of the decade. So any collaborative efforts between Apple and Ferrari/Fiat that might ultimately poach some of those revenues will be most unwelcome.

To unravel the prospects for international wholesale operators you must pick a path through a complex web of rapidly changing dynamics between fixed and mobile telephony; voice, text and data; and the love-hate relationship between telcos and OTT players. You must then recognise that there is not necessarily a correlation between rising volumes and rising revenues. And finally, you must set those often very disparate interactions against an uncertain global economic backdrop that appears to favour a raft of developing economies over the troubled Eurozone and the ex-growth markets of Spain, Italy, Germany, France and the UK.

In a nutshell, most analysts expect core telco wholesale revenues to flat-line over the coming years but the overall trend is littered with inconsistencies. According to Catherine Haslam of the telecoms consultancy Ovum, Africa is expected to top the league, with international wholesale revenues growing 9.4% between 2010 and 2016. Asia also puts in a strong performance, up 4.1%, while the Middle East (+3.8%) and South and Central America (+3.25) deliver on their potential. But the overall performance will be dragged down by Canada and the US, where revenues will fall 12.2%, and Europe (-3.4%).Within this sweeping geographical context, Ovum expects fixed international volumes to fall by 5.2% as the march of OTT players such as Skype decimate the business, but international mobile volumes to surge 11.1% as the roll-out of 4G fuels sales of bandwidth-hungry smart devices.The bad news is that wholesalers will struggle to turn those surging mobile volumes into cold hard cash – Ovum reckons international mobile revenue will grow 3.0% at best, while fixed revenues will crash 11.2% over the same period.

The European context is important, not just because it reflects continuing concerns about the viability of the Eurozone as a robust economic entity and all the implications that might have on long-term competition within the telecoms sector. But because many of the crucial market segments within the region have peaked, or appear close to peaking.Drill down further, and the outlook for European operators looks even more cloudy: Mobile data, which includes voice over the internet (VoIP), the de facto network of choice for mobile international voice, is set to drive revenues forward but it is not clear to what extent it can offset the slump in fixed international voice revenues and traditional SMS revenues – both of which are falling faster than anyone feared in their worst nightmares. And if all that wasn’t enough, many companies are trying to pay the interest on huge swathes of public debt while at the same time maintaining cash handouts to shareholders and saving up for that all-important investment in 4G. Amidst all the confusing signals, some clear trends are emerging – and not all of them bad.

For one thing, the OTT community represents a huge business opportunity in the data arena, as wholesale providers seek to cope with the fast expanding backbone demands of key players such as Skype and Viber. More comforting still, is the fact that even a small upwards tweak to the pricing models for mobile data revenues in, say, 2015 would be more than enough to hoist the entire market back to profitability. But perhaps the best news of all, must surely be the assumption that Vodafone clearly sees value in the wholesale model, hence its £1 billion acquisition of Cable&Wireless Worldwide last year. Trusting to luck in the hope that mobile data will save the day with forecast-beating profits is hardly an option for today’s wholesale chiefs, most of whom are determined to preserve what little value there still remains in international voice for as long as possible. For them, the challenge is to find an elixir to make voice stronger for longer. Most are pursuing strategies that fall into three main categories: delivering new products and services that command a healthy premium over mainstream voice; building scale in order to underpin eroding margins with much higher traffic volumes; and forging closer links with retail operators to better understand the threat from OTT.

Yijing Brentano, vice president of international wholesale for Sprint, must feel the pressure more than most. Chief executive Dan Hesse reportedly parachuted her in to a specially created role in order to help rejuvenate the business and much is expected of her. The 15-year Sprint veteran’s business unit currently contributes around $1.6 billion to group revenues, a large chunk of which comes from traditional services such as voice, where margins are getting squeezed ever thinner. Last year Brentano oversaw a root-and-branch strategic review and came out the other side with a five-year plan to focus on higher margin growth opportunities such as the M2M market.

“Our traditional business will always be there because pretty much everything that drives demand – either wirelessly or over fixed lines – ultimately has to travel through a pipe,” she says. At the end of the day, it doesn’t really matter what type of traffic is coursing through the network, so long as it’s going through your network, she adds. Nevertheless, she says, more profitable opportunities must also prevail.