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Straight Talk Telecoms

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The traditional telecoms industry is shrinking. Telcos, or communications service providers (CSPs), will record $1.78 trillion in revenues in 2015. That’s down 5% from last year. Revenues were flat in the prior three years, from 2012 to 2014. Vendors selling into CSP capex budgets are understandably nervous.

A whole new range of customers for these vendors is emerging from the OTT movement, however. Include all these providers and industry capex is set to (gradually) rise, from $405bn in 2014 to $466bn in 2020. This is one finding from Ovum’s latest annual forecast of revenues and capex, available on the KC this week.

Capital spending by telcos remains tightly constrained: from $339bn in 2014, CSP capex will decline in 2015–17 before growing again through 2020, spurred on by early 5G spending. Meanwhile, capex from the Googles and Facebooks of the world – Internet content providers (ICPs) in Ovum lingo – is growing steadily in aggregate, reaching $110bn by 2020. That’s not much less than all fixed telcos will spend on their networks in 2020.

Vendors need to watch this shift closely. Many have already had success in the data center interconnect market, whose strong growth has been enhanced by ICP buildouts. For companies like Ericsson, Huawei, and Nokia to really grow revenues in the ICP market, though, serious investments will be needed – in both organic R&D and acquisitions. Some of this is already happening, but not enough. Vendors have made more progress in cutting than in ramping up new areas. To succeed with ICPs, the bar is high for vendors. Many ICPs have their own strong internal technology development teams and a track record of using ODMs to manufacture customized equipment.

While the ICPs represent one opportunity, enterprise and government customers are building increasingly complex networks, and they need help. Universities are deploying SDN; sports stadiums are installing small cells; airports are buying carrier-class edge routers; broadcasters are investing in mobile TV and multiscreen platforms; governments are building large optical networks. Opportunities will continue to arise in these markets, but vendors need to adapt their solutions, partner with complementary firms, and invest in sales and marketing to win. Simply reselling technology designed for telcos will not be enough to win in other verticals.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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