By Adam Janota
Innovation and forward thinking will be rewarded, but smaller or less agile firms could be taken out
A lot of Carrier businesses may agree that 2008 – 2011 was a very difficult period for the industry.
The industry struggled to cope with exponential growth in data volumes vs. falling wholesale prices for their principal services – and this was set against a backdrop of an unprecedented financial crisis that has heightened the pressure on price, while simultaneously reducing scope for investment and diversification by Network Operators.
However, bad times do not last forever and there are glimmers of light on the horizon, both in the wider world economy and for the Networks industry.
Invariably many of these potential opportunities for Carriers are also potential threats – it depends on whether an individual business can be classed as predator or prey. Many industry commentators believe 2012 will see a period of consolidation in the networking industry, with more agile innovative companies that have maintained healthy growth acquiring assets of their more distressed industry peers. In essence those companies who were able to turn threats into opportunities will thrive at the expense of those who could not. Let’s examine some of these key issues:
A Nice Problem to Have
One of the “problems” we often hear about in this industry is that of exponential data growth. Perhaps challenge is a better word. After all, there are worse problems to have than exponential growth in demand for the core service your business provides. Indeed this is a problem that some other industries may envy. The challenge is how to meet this growing demand without eradicating margins in the commonly referenced “race to the bottom.”
Data growth can be pinned to a handful of influential factors: the exponential growth of the Internet and of the content available via it, increased globalisation and the interconnectedness of businesses, the rise of cloud computing and more recently significant growth in rich content and applications, all of which now need to be delivered seamlessly over a plethora of mobile devices.
While these trends have driven growth they have undoubtedly played a part in pushing down bandwidth prices. However, many Network Operators are expanding their capabilities to deliver value added services in order to reclaim margins. Network Operators are in a unique position to provide the physical assets that are required to deliver the scale and performance high growth areas such as cloud, rich content and mobile data need to thrive.
Content is King
To illustrate the impact consumer demand for content is having on Network Operators you only need look at the online movie and video streaming company, Netflix. Netflix is estimated to be responsible for an eye-watering 32.7% of all US downstream internet traffic.
Unfortunately for Network Operators, it is the content owners who are reaping the financial rewards of this marked surge in consumption. However, the market is beginning to mature in some areas, more competition is beginning to emerge, and the content players may soon face some of the challenges their network counterparts have had to deal with; better targeting, differentiation, and a more heated battle for existing customers.
The diversification of content players will in turn create opportunities for networks to diversify their services – with those moving the fastest and most effectively likely to reap the rewards. Some content providers will play the price game and race to the bottom, but others will almost certainly be looking to provide value added premium services such as high definition or 3D video to take more revenue from the end user. The Carriers that move early to build differentiated offerings or who partner to deliver value added services will likely win a larger share of the revenues.
This model can be repeated in gaming, where we are seeing online games moving from a purely client-server model, to fully enabled cloud gaming – with services like OnLive beginning to appear. User experience is key to competitiveness in the gaming marketplace, and ultimately providers will look to Carriers that can ensure high performance, low latency and demanding SLAs, like with content, those that can deliver will win.
Ahead in the Clouds
It’s not just the general public consuming video and games and social networks that is driving the exponential growth in network traffic. Cloud computing is something that no one in IT can fail to have heard about in the last years, and presents an incredible opportunity for Carriers.
In basic terms cloud computing is information technology delivered as a service, rather than a product, which is ultimately delivered over a network.
An obvious opportunity for Network Operators?
Some might argue this phenomenon is only adding to the commoditization of bandwidth services. Luckily for network operators not all cloud offerings are equal.
Some cloud-based applications and services will be extremely latency sensitive and require real-time relational database syncing.
Others, such as social media updates or email, are less demanding. We believe networks will cash in on the opportunity to differentiate their services to cater, at an appropriate price point, to their various different customer requirements.
The networks that move quickly to claim the most valuable areas of differentiation will likely demand the largest slice of revenue for their services.
Another vast stream of revenues that successful Carriers will be tapping into is mobile backhaul. Mobile data has burst onto the scene faster than most expected, and it has caught many mobile Network Operators by surprise.
Contrary to what many might expect, it’s not the over-the-air component of mobile networks that is causing so many problems. In fact modern 3G and 4G wireless connections are being bottlenecked by the poor backhaul networks, based on legacy TDM copper networks that are really best-suited to voice calls and are creaking under the strain brought about by the smartphone phenomenon.
There’s an opportunity for traditional Carriers to be relieving this strain, and delivering solutions that allow mobile customers to connect to the content and services they want on the internet – which these days is just about anything you can find on the internet from videos to games to advanced applications.
Many analysts are estimating that mobile growth is only just beginning to take off, and that in fact mobile devices will be the preferred method of web access for most end users. Perhaps there is not huge scope for differentiation here, but there is certainly a large revenue stream that is set to grow.
The Heart of the Opportunity
In the earlier days of the Internet the neutral data centre existed as a place for networks to connect to other networks. In time these neutral hubs became ecosystems of networks that subsequently attracted other network-reliant businesses, like cloud and content providers. The very networks that helped to foster the thriving ecosystems of cloud and content providers, must now grasp the opportunities that lie in the neutral sites they are already connected to.
Many networks have everything in place to make 2012 a huge success, it’s a matter of how to leverage strengths to capture new revenue opportunities in other industries which are now beginning to mature and develop differentiation of their own. Perhaps 2012 will see a paradigm shift, a race to the top, rather than the bottom.