Outwardly, the signs for telecom service providers point to high demand. According to industry estimates, mobile network traffic will grow more than eightfold between 2017 and 2022, with video accounting for 75 percent of the traffic. New devices, new access technologies, and cloud adoption will all drive this growth.

Despite high traffic demand, telecom providers will continue to struggle to achieve sufficient revenue growth and sustain profitable network investments to keep pace. CapEx and OpEx requirements will continue to overtake the value derived from traffic growth. Meanwhile, competitors outside the industry, such as over-the-top (OTT) application providers, web-scale companies, cloud providers, and digital media companies are garnering a greater share of revenue from the services supported by the traffic than the telecom providers are able to achieve. Further, they are doing so largely without bearing the brunt of the infrastructure cost.

Given this dilemma, top-tier telecom providers will pursue a dual strategy in 2017 and beyond. They will continue to drive the transformation of their infrastructure to lower CapEx and OpEx costs. In addition, they will position themselves more deeply in the digital services ecosystem, seeking pockets of profitable service opportunities. This position will include taking a broker or enabler position between the competitors (OTT, cloud, web-scale, and media providers) and end-customers to gain greater participation in the revenue stream. It will also include providing platforms and connectivity for Internet of Things (IoT) and eventual 5G business cases across current customers and vertical industries.

The transformation and positioning initiatives will go hand in hand as partners and end-customers expect the same flexible, on-demand, and self-service capabilities from their telecom providers as those offered by web-scale and cloud providers. Telecom providers will need to transform their existing infrastructure to provide these capabilities.

For 2017, this means a transition without significant additional monetization of traffic growth. TBR predicts that global telecom provider CapEx will decline in 2017 as a result of this trend. However, beginning in 2018, efficiencies from early adopters of infrastructure transformation (specifically OSS/BSS transformation and NFV/SDN) will improve service offers. Cost benefits will require greater scale and the retirement of legacy infrastructure, which will not be realized until at least 2020. Similarly, the revenue and investment advantages of 5G will slowly ramp from pre-5G in 2018 to greater deployment. Ericsson predicts 550 million 5G users by the end of 2022, for example.

The digital ecosystem repositioning is also underway. This will continue through the next five years with service providers choosing positions with varying degrees of participation in the ecosystem for content, cloud, or IoT. This participation will be governed by the search for pockets of profitability.

In summary, slow revenue growth will strain capital and operational expenditures through 2017, with the benefits of transformation beginning to show in 2018 and new infrastructure and digital ecosystem positions manifesting for most service providers by 2020.

For suppliers, this transition period will be difficult as they manage profitability within a pressured top line. At the same time, they are tasked with enabling the transition through new solutions that service providers require, creating additional pressure on maintaining professional services and research and development investments. Pure play software and services players will continue to find increased traction with telecom providers as the providers require management consulting to determine business model shifts and expertise in analytics, data platforms, software-mediated networks, and data center transformation to enhance positions in the digital ecosystem.

Digital media, IoT and 5G will provide growing pockets of profitability for telecom

TBR believes telecom providers are learning from mistakes they made that led to missed revenue opportunities following the arrival of Internet model-driven OTT applications. They are identifying ways to embed their solutions within the revenue stream of media, IoT, and 5G. While they will provide connectivity through flexible and reliable networks, telecom providers will also deliver value in three other ways:

Provide the platform. This involves the telecom provider supplying the platform for media channels, IoT service aggregation or 5G services. In most of these new opportunities, there are multiple constituents involved in providing the service components to end customers. In media, there are content providers, advertisers, and ancillary application providers. In IoT, there are potentially many suppliers for services such as the smart home, connected car or smart city. In 5G, new applications that require high-density deployments will also be composed of multiple suppliers. The telecom provider will supply the software platform to aggregate the applications into composite services and deliver them to end users. They will gain a platform access/license fee as well as revenue sharing.

Own the application or content. This involves buying a content provider or developing applications that are part of the composite service. Telecom providers can gain direct revenue from these assets in their own platform plays or include them in platform plays from other providers.

Differentiate the network as a value add. This involves creating a connectivity value add by providing unique quality of service that constitutes the best path to meeting end-customer service requirements.

Telecom strategies and operations transformation will provide increasing opportunities for nontelco suppliers

TBR believes telecom providers aim to obtain the benefits of cloud and web-scale infrastructure across their network platforms. But they lack expertise in the technologies and in many cases do not understand the appropriate business model to leverage these capabilities. While existing network suppliers are ramping up their capabilities in these areas, there is ample room for IT solution providers that possess the expertise and solutions from engagements in other transaction-centric industries, such as financial services, or with the web-scale players themselves.

This opportunity is particularly strong in the strategic and operational areas. Fundamentally, transformation introduces additional layers of software and commodity hardware throughout the network. These software layers will be highly dependent on automation of orchestrated responses to customer requirements. A coherent business model will be critical to inform the automated responses telecom providers require to maximize customer value and profitability. In this regard, telecom providers are in discovery mode. While they can recreate existing connectivity-driven business models within the new architecture, operationalizing new value-added business models (generally based on media, IoT, or 5G) is a major challenge. Management consultants, IT systems integrators, and others with business model transformation and definition experience will be able to fill this gap.

TBR expects these new entrants will be best advantaged by close partnership with embedded network suppliers that understand the key processes and integration points in the existing network and can adapt them to the new required technologies. Working more closely in strategic partnerships with management consultants and IT systems integrators will maximize network suppliers' likelihood of being selected for business and technology transformation projects.

Telecom providers will continue to evolve to super 7 capabilities using open source

TBR believes telecom providers are pursuing the benefits of cloud and web-scale infrastructure across their network platforms. The benefits include reduction of service provision cycle time from months to minutes, which requires rapid infrastructure upgrades. However, web-scale providers have achieved these benefits by making significant investments in proprietary technologies and processes from the software layers all the way down to the silicon. Telecom providers for the most part do not want to or cannot afford to bear the cost of these proprietary solutions so they are engaged in an industrywide cost mitigation exercise, pressing their network suppliers and the open-source community to develop reusable approaches to web-scale for telecom infrastructure.

Network suppliers are addressing this requirement by developing new proprietary and open-source solutions ranging from management and orchestration, NFV, and SDN solutions to rackscale servers.

They are challenged, however, by the need to monetize the new solutions at a rate that replaces declines in their legacy software and equipment. This means the network suppliers also cannot afford to bear the full cost of the transformation on behalf of the telecom providers. TBR believes open-source and pure play open-source providers become the critical innovation point in telecom's journey to web-scale benefits. While many developments occurred in 2016 in both the proprietary (e.g., AT&T's Enhanced Control, Orchestration, Management & Policy [ECOMP]) and open-source realms, TBR expects the next two years will be critical in establishing viable open-source solutions that truly meet the majority of telecom provider requirements.


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