Profitability “pathetic” – only three vendors left standing in five years
George Bailey, is general manager of IBM’s electronics industry, and as such is responsible for almost US$4 billion of hardware, software, and services business. He leads nearly 5,000 IBM employees worldwide who develop business and technology solutions for clients in the electronics industry. He led the integration of PricewaterhouseCoopers’s PwC Consulting with IBM’s services group to create the largest consultancy in the world with more than 180,000 professionals. He also works in partnership with many of the leading network equipment providers and carriers in the world.
So when he speaks about business change, it’s probably wise to take notice.
Over the past year, Bailey has had a team of researchers, led by Christian Seider, Senior Managing Consultant, looking at the future for the Network Equipment Providers (NEPs).
And it’s not good news – on the surface.
Bailey thinks that pressures on service provider business models, as well as competition from low cost players, will lead to further consolidation amongst NEPs. Although he didn’t comment on where he sees the winners coming from, IBM’s research shows Cisco, Ericsson and Huawei to be occupying top spots in terms of scale, operating margins and revenue growth.
“Consolidation will be beyond what we have seen, and it will be continued and dramatic,” he said. “In five years we could be down to perhaps three to five companies. Whichever, that’s a very small number,” he said.
“The current industry is not sustainable,” he said. “The levels of profitability are pathetic. Cisco is exempt from that, operating as it does at 4-5 times the industry average, and Ericsson has separated itself form the pack somewhat, but even these two are facing problems.”
So what’s the answer? Bailey said it lies in a company’s willingness to genuinely partner and collaborate with other players, to create more value all round.
“You may expect us to say that, as a systems integrator and consultancy, but we see the difference between companies who really understand partnership and those who are less fully committed. Make collaboration real, understand how to collaborate to get competitive advantage. It’s easy to say but hard to do,” he added.
If NEPs don’t partner, the only other route to success will be to become a complete end to end player, from the network access layer up to the services and applications layer, Bailey said.
The danger for NEPs in the new telco world is that even if companies enable a whole new business model, in which operators open up to a host of third party applications and services, it is as yet unclear who will extract the value from that.
“Where’s the value? You can do a whole lot of work, and investment, and get absolutely nothing back. Telcos hype value added services – take IPTV as a service, where they hype is way beyond reality. Now, I believe it will happen, but where’s the value and when will it arrive?” Bailey queried.
“The consumer electronics groups have a very different model of who captures the value. They think the subscription model is not sustainable and they want to disintermediate the telco.
So what can operators, and by implication their NEPs, do about this?
The answer perhaps lies in becoming trusted partners again, engaging in consultative sales that enable the operator to take advantage of their assets to make sure they extract value from the coming, new, services environment.
Seider added that although, in his opinion, NEPs frittered away a lot of trust operators placed in them at the time of the 3G spectrum auctions and developments, they can make a comeback in this area.
“Operators were disappointed at the level of advice they got from the NEPs around that time,” he said. “There is still room for improvement to sell in a consultative way, to become the trusted advisor in this space.”