IT Services: Identifying the Addressable Markets for Telecom Operators (Executive Summary) Executive Summary Publication Date: 31 March 2003
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IT Services: Identifying the Addressable Markets for Telecom Operators (Executive Summary) Globally, the telecommunications services market is going through difficult times. Growth is stagnating, and carriers are faced with the challenge of protecting existing businesses and looking for new revenue streams. The situation is not much different for carriers in developed markets in Asia/Pacific such as Japan, Australia, Hong Kong, Singapore, South Korea and Taiwan. Carriers in emerging markets such as China, India, Thailand and Indonesia are still in the network-expansion phase and are focused on growing their subscriber base. Soon, they will be in a situation similar to that in the developed markets. In this environment, carriers must identify new business opportunities to grow their revenue, especially in areas where they can use their existing knowledge and inherent skill sets. Among the opportunities for growth is IT services, which is often confused with the managed-services market. This market is large. However, this is a domain already dominated by large IT vendors and outsourcing companies such as IBM, HP and EDS. The market is fragmented, but opportunities exist in this sector for carriers. The question is, How much of the market is addressable by telecom operators? For more information on this subject, see the Gartner Dataquest Focus Report "Up the Value Chain: But How High Can Carriers Go?" (ITSC-AP-FR-0118). IT services revenue and telecom services revenue for Asia/Pacific and Japan in 2002 is shown in Figure 1. Figure 1 Asia/Pacific and Japan: IT Services vs. Telecom Services Revenue in 2002 Billions of Dollars 120 107.7 100 94.4 80 60 40 20 0 IT Services Telecom Services 113730-01-01 Source: Gartner Dataquest (March 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1
2 IT Services: Identifying the Addressable Markets for Telecom Operators (Executive Summary) Gartner Dataquest examined 12 major markets in Asia/Pacific, including Japan, Australia, Hong Kong, Singapore, South Korea, Taiwan, New Zealand, Malaysia, China, India, Indonesia and Thailand. Gartner Dataquest estimates that the total telecom services market for these 12 countries in 2002 is $108 billion. In contrast, the total market for IT services is estimated to be approximately $94.4 billion. TheaddressableandunaddressableITservicesmarketinAsia/Pacificand Japan is shown in Figure 2. A closer look indicates that the total addressable IT services market for telecom operators is approximately $28 billion, or 30 percent of the total IT services market. Gartner Dataquest believes telecom operators will enjoy only limited addressability in the IT services space. In some market segments, they don't have the right skill sets, proprietary technology and industry experience, factors that favor IT vendors. Carriers are also constrained by lack of IT services delivery competencies and tools to bring network solutions to the market. Gartner Dataquest's IT services market has six key segments. Carriers will find varying degrees of success in each segment, depending on their inherent strengths and the environment in which they operate. As such, within the segments, the revenue opportunity is considerably smaller, mostly limited to the CPE, WAN and public network environment. The six segments are as follows: Hardware maintenance Software maintenance Consulting Development and integration IT management Process management These segments are further divided into subsegments. For a detailed IT Services definition guide, see the Gartner Dataquest document "Market Definitions Guide, 2002" (ITSV-WW-GU-0004). Of all the segments, telecom operators are most likely to find success in IT management and development and integration segments. They can expect better returns in terms of revenue and a higher success rate when they target these two segments. Combined, they offer a revenue potential of about $15 billion, which is more than half the addressable market for IT services. The other segments have relatively lower entry barriers, but telecom operators are faced with many more players, which makes it difficult to compete. Figure 3 shows the IT services and telephone company-addressable markets in Asia/Pacific and Japan in 2002. The IT management market offers the largest opportunity to carriers in terms of size and high success rates. Potential revenue, assessed at $8.5 billion, accounts for 31 percent of the total addressable market. Operations services and help desk management subsegments offer high success rates. Telecom operators can optimize on their proficiency in running large networks. Their customer service skills can be leveraged to provide front-end support for help desk services. As marketsmatureanditproductsandservicesbecomemoreutilityoriented, telecom operators gain significant advantage because of their experience in the communications market. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 31 March 2003
IT Services: Identifying the Addressable Markets for Telecom Operators (Executive Summary) 3 Figure 2 Asia/Pacific and Japan: Addressable vs. Unaddressable Market for Telecom Carriers Addressable (29.5%) Unaddressable (70.5%) 113730-01-02 Source: Gartner Dataquest (March 2003) Figure 3 Asia/Pacific and Japan: Addressable Market by Telecom Carriers Billions of Dollars 35 32.2 30 25 IT Services Market Telco-Addressable Market 20 15 16.1 19.2 14.9 10 5 0 Hardware Maintenance 5.5 6.1 2.7 Software Maintenance 5.9 3.5 Consulting 6.6 Development and Integration 8.5 IT Management 1.1 Process Management 113730-01-03 Source: Gartner Dataquest (March 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 31 March 2003
4 IT Services: Identifying the Addressable Markets for Telecom Operators (Executive Summary) Next on the list is the development and integration segment, which offers medium success rates. The revenue potential is significant at $6.6 billion, which is 24 percent of the total addressable market. Telecom operators must have industry-specific knowledge, software development capability and integration expertise. Deployment and integration services offer high success rates. The advantage lies with telecom operators that can establish alliances with IT services vendors and get involved in installation of upgrades or new equipment. Carriers in emerging markets tend to focus on this segment. The third most addressable market is hardware maintenance, where telecom operators hope to achieve medium success. The revenue opportunity is about $5.5 billion, which is almost 20 percent of the addressable market for IT services. Most of it comes from the telecom equipment subsegment. Carriers would do well to address this as part of a general managed-services offering. This segment has a higher takeup rate among carriers in emerging markets because it does not require too much specialized skills and can draw on existing skills of employees. Consulting opportunities for telecom operators are limited to IT consulting, but operators can achieve relatively high success rates here. Revenue prospects are about $3.5 billion, which is 12 percent of total addressable market. Carriers would do well to develop specific, targeted and focused offerings that are aligned to network-related activities, which helps to add to their credibility as communications service providers. Software maintenance offers medium success rates with a revenue potential of approximately $2.8 billion, which is 10 percent of total addressable market. Competition is tough because this is the domain of IT services vendors. Most of them, because of their historical association with their clientele, are wellentrenched, and it would be difficult to dislodge them. Carriers are unlikely to find requisite skills in-house and would either have to acquire or recruit relevant personnel. In developed markets, carriers may have the capability to get into managed services. Skills drop and aspirations to look beyond basic voice services are not very high in emerging markets. Process management is least addressable, and the success rates are the lowest. Revenue potential is marginal at $1 billion, which is only 4 percent of the total addressable market. Business opportunity is a relatively small percent and is only likely in some aspects of call center outsourcing that involves customer selection, acquisition and retention activities. While there is a significant opportunity for telecom operators to enter the IT services market, they must exercise caution in the early days. They must identify the segments that they want to go after based on addressability, success probability, existing or inherent skills and strengths, and the ease to acquire or scale such skills. Going forward, they can upgrade as businesses scale up and become sustainable. For the full report, see the Gartner Dataquest Focus Report "IT Services: Identifying the Addressable Markets for Telecom Operators" (TCPS-WW-FR-0154). 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 31 March 2003