ICT & TMT: Player futures in an ecosystem of shifting and ever-changing identities

By: Ahmed Ijaz Jan 15, 2013

Foreword
Factors influencing ever-shifting Identities

And who knows which is which and who is who. (Us and Them, Pink Floyd, 1973)

Just how much digital the world has become, and is set to become all the more in the times to come, needs no preamble. Consumers of the world have given their verdict connectivity for everyone and at every place. In the words of one ICT player: Everything that can benefit from a connection will have one. This ranges from a microwave oven to a tree in the backyard. Whole liv es are floating, interacting and developing in light clouds. Consumers of any kind in such a world demand ubiquity, convergence, performance, security, affordability and even a wow-experience from their digital lives as a birthright. All the while, companies and players responsible for collaborating together (at times unknowingly) in a thus-far loosely-defined ecosystem to bring such delights to consumers find themselves constantly re-defining their identity! One can imagine different reasons for this behavior:

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Technology Evolution: For example voice-services by CSPs are dying in favor of Access an area where user-services are dominated by Over-the-Top players. CSPs are thus questioning themselves if their traditional identity would work? Similarly, legacy ITO providers are challenged by the advent of Cloud offerings and are questioning themselves how they should slowly re-poise themselves without losing their core brand image in the eyes of customers. Profitability: For example, with the commoditization of hardware, companies such as Dell and HP (and many others) have been expanding into Software & Services to have higher margin offerings in the mix. Growth: For example, growth has been the major contributor of Total Shareholder Returns for the Technology sector in general (margins are less of a contributor) and Technology companies would undertake even those growth strategies which challenge their core identity; to the extent of having identities wiped through consolidation. In the telecoms sector, CSPs faced with stalled-growth worldwide are seeking foothold in the high-growth IT and Cloud Services.

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In other words, companies are not as adamant as before in protecting their identity in fixed areas of business. They know that the boundaries are changing fast and that new players are constantly attacking home turfs. In short, the question is not whether a player would LIKE TO exploit a promising area but whether a player CAN do it. And although it is almost impossible to say with certainty which player(s) is/are most likely to succeed in grabbing the lions share of the ICT cake, it is worthwhile studying the capabilities which would separate winners from losers.

ICT & TMT Player Canvas

Players Placement

Here, we have created a canvas with TMT sectors on one-axis and ICT company categories on the other. We hope that this canvas can help us study the transformational forces, trends, companies and changing-identities in the ICT and TMT ecosystem. To appreciate why we have conceived this matrix, let us place some examples of companies in different cells.

ICT & TMT Player Canvas

Discourse

Technology: Software & IT Service Providers Within the Technology Software arena, first we have Big Cap Software Technology companies such as Google, Apple, SAP and Microsoft. And then there are medium-to-small cap software companies spread across the world. In terms of shareholder value, its typically the big-cap companies which have created most value as compared to smaller cap stocks which is one reason why we should expect consolidation in this area. IT Service Providers range from such global players as IBM, CSC and Accenture to ce rtain regional giants as Atos and Logica to off-shore players such as Wipro and Infosys of India. Media & Telecommunications: Software So far we have talked about Software companies and IT Service Providers from a vertical or industry-neutral perspective. For Media & Telecommunications verticals these players fall into different categories. First, there are big-cap generalist software companies such as Oracle, SAP and Microsoft which create Enterprise software for almost all industries and by virtue of that also have tailoredofferings for Media & Telecoms sectors. Then, there are companies such as IBM and HP which act more as Platform providers for other Independent Service Vendors and Solution Partners to pre-integrate, package and offer end-to-end solutions to customers. Then there are traditionally equipment and network oriented companies such as Ericsson, Huawei and Nokia-Siemens which have over-time built their own software Operations and Business Support Systems offerings. Second, there are mid-cap companies not as large as these generalists, which focus on providing highly vertical-specific and rich functionality to Media and Telecommunications companies. These include such concerns as Amdocs, Intec, Redknee, Convergys. Axiom and cVidya etc. Although these mid-cap companies are not as big as the aforementioned generalists, they enjoy very extensive product portfolios and usually aim at providing solutions for end to end business processes of the target verticals. Lastly, there are small-cap companies which have bestof-breed offerings for one particular area as compared to end-to-end capabilities. These include such companies as Tribold or Comptel etc.

ICT & TMT Player Canvas

Discourse

Media & Telecommunications: IT Service Providers By a similar example, IT Services for Media and Communications verticals are provided by generalists such as IBM and by dedicated SI and Services companies. Also, enterprise software companies such as Oracle and SAP have the on-demand version of their products in the marketplace which they are bundling alongside other Hosted Services or Outsourcing offerings.

Operators The next intersection is that of Media & Telecommunications operators or service providers which range from Wireless Players to Fixed Line and Broadband/Internet Players to Television, Content and Entertainment Players to Wholesale and Enterprise Players to Convergent Players. Also, there is a distinction between Telecom and Media companies in the developed world as compared to the ones in the developing world as they are experiencing different financial profiles and different stages in the industry lifecycle. We shall discuss this further in a little bit. Successful operators of the world have been operating as utilities by operating efficiently and maximizing dividend payouts. In other words, the financial profile of these players has become that of cash-generators. Multiples are on decline and growth rates are stalling.

Hardware & Infrastructure Companies Finally, we dare not open the Hardware & Infrastructure box as it contains a variety of categories of companies from consumer devices to corporate computing equipment to cloud infrastructures to everything that goes into devices such as LCDs, Memory chips and Motherboards to Communication Networks and their backhauls. We have just given a few examples of these categories and the list is definitely not exhaustive. The objective is to just let the reader imagine a nexus of forces in the ICT and TMT canvas. Once again, the objective of this section has been to try and put competing players and forces in the ICT and TMT ecosystem o n a 2D canvas so that we can provide for a framework for further discussion. By no means is the list of companies exhaustive! With this visual orchestration secured, let us proceed further and discuss different ideas with a view to assess the capabilities of each group of players.

ICT & TMT Financial Profiles

Let us first talk about financial health and see how each group of players is doing. To start with, large software companies such as Google, Microsoft and Oracle take the lead and boast of the most enviable financial performance. These and other companies in the group are not just growing at double-digit rates but have fat margins too. However, these companies are facing growing competition from off-shore companies which have impressive EBIT margins. IT Service Providers follow Software Companies more because of their healthy margins and less because of their revenue growth. IT Service companies such as IBM enjoy a unique and a sort of outlier cashgeneration profile as well. The companies to look for in this group however are the offshore companies which are growing their revenues fastest of all at considerably fat margins. Next there are Hardware and Infrastructure companies which took a beating during the recent downturn. Although these companies have picked up revenue growth between 2010-2012, the margins are thin and pressed. It is for this reason that many hardware players are trying to gain a foothold in software and services (such as Cloud Services) to improve their profitability.

Finally, Service Providers are facing commoditization and the most successful ones operate as utilities by operating efficiently so that they can maximize dividend payouts. Faced with low growth prospects, the telecommunications industry is facing declining multiples and the financial profiles of mature operators are changing to cash-generation. Operators in developing markets have returned significantly to shareholders but with every passing year they are becoming more like their developed market counterparts. In the short to medium run, developed market operators can possibly enhance their financial performance by managing portfolios across multiple geographies and markets. They should also seek new business models.

ICT & TMT Financial Profiles

We have talked considerably about Technology and Telecommunications companies and the reader can view another summary in the figure listed below. However, it is worthwhile delving a bit further into the abysmal performance of Media companies worldwide which is a result of the complacency of legacy players in the face of competition by online and digital players. Traditional media companies did not realize that their customers are no more without alternatives and that their customers have started to enjoy being understood and served according to their needs. In a world with more buyer-power and competition, traditional companies started to lose ground to OTT and Internet players. The most successful Media companies namely Tencent and Baidu also attribute their success to listening to their customers.

Consolidation and Identity Shift

Amidst Shifting Boundaries
In Alice's Adventures in Wonderland, the Duchess says rather prescriptively: If everybody minded their own business, the world would go around a great deal faster than it does. And although the world of ICT and TMT practiced this wisdom some time back and everyone seemed to have been living ever-happy, it does not apply any more. The ecosystem we are talking about seems to almost thrive on the ability of its players to be imaginative enough about poking their noses in each others territory. What sets winners apart from losers is the ability to know whether, where, when, whom and how to poke. Let us re-visit our canvas and try to visualize the directions in which these pokes have been happening and are likely to happen further.

Consolidation and Identity Shift

Amidst Shifting Boundaries

Software Companies Large software companies seem to have appetite for Hardware and Infrastructure companies, as seen in the case of Oracle acquiring Sun. The first obvious reason is being able to provide integrated solutions which delight customers in terms of lower Total Costs of Ownership and lower Integration Tax. The second more strategic reason is being able to keep IT Service Providers and System Integrators at bay i.e. not let middlemen or brokers monetize the integration-gap. Large software companies with Media and Telecommunications solutions also have an appetite to absorb niche Telecom Software players such as OSS/BSS companies. This appetite is explained by the fact that these large companies such as IBM or Microsoft would rather remain focused on platforms and horizontal-capabilities than develop indigenous vertical capabilities. Same is the case for Equipment makers like Ericsson and Huawei with their constant acquisitions of OSS and BSS companies they want to package software and services alongside their core offerings in a bid to offer end to end solutions to their customers and also in a bid to improve margins. Such M&A is also rampant in medium-cap OSS/BSS companies e.g. Amdocs or Convergys. Finally, a circle

IT Service Providers This is a very interesting bunch of players when it comes to the ability to tread into unfamiliar or foreign territory. IT Service Providers thrive on the resourcefulness of their diverse human and consulting capabilities, and on the flexibility of their development and delivery processes. They are ever in the business of integrating disparate entities into meaningful wholes. They have exposure to, and experience with, the widest range of horizontals and verticals, which hardly any other player in the ecosystem can boast of, except for certain Enterprise software companies such as SAP to a certain extent. IBM for example makes use of its platform and middleware to partner with niche ISVs of the world and provide bundled products and IT services to its customers. IBM and CSC are also treading into the Communications and Unified-Communications which unnerves both Operators and Enterprise UC Software companies. In short, unique integration capabilities, superior and proven service-delivery experience and rich cross vertical/functional expertise give IT Service Providers a competitive advantage when it comes to exploiting new identities in the ICT world.

Consolidation and Identity Shift

Amidst Shifting Boundaries

Operators Operators have a clear appetite these days for Cloud and IT Services apart from solutions for verticals. A detailed analysis of this appetite is presented in my audio-visual presentation titled CSPs across the Sands of Time. An HD version of the video (44 MBs) is available for download at: http://bit.ly/104QT2O. The video can also be watched on Youtube at http://bit.ly/Pf6dl4. This detailed audio-visual talks about areas Operators would/should eye once their traditional revenue-generators such as voice and data phase out, the capabilities that would help them seize these areas, and the challenges they would face in embracing these opportunities. Hardware Companies Hardware companies have been pressed for profitability and what other high-margin territory would be more plausible for them than Software & Services. Thats why Dells and HPs of the world have been moving their focus to cloud services. For network infrastructure and equipment makers, there is a compelling need to bundle control-plane software and OSS-products which are capable of managing heterogeneous networks from different vendors. Certain level of upstream vertical integration is also happening in makers of consumer devices. A Final Word We have seen how Convergence, Consolidation and Collaboration mark the TMT and ICT landscape. In an increasingly customercentric world, those players which provide their customers with delightful, relevant, need-specific solutions at an affordable price would be the winners. Business would need to develop the right organizational abilities to do this. For example, even though Hardware, Software and Services companies would like to mingle and merge, their development cycles are very different and so are the requirements in terms of capital and human capabilities. And harmonizing such disparate businesses would require great Management Potential. Similarly, R&D spending for innovation which fuels growth is not every companys sweet prerogative Software and Hardware companies have the cash-muscle to invest in R&D whereas IT Service Providers live on thin margins and dont have much room for research spending. Similarly, operators need to re-invest in their network capabilities and are left with little afterwards.