Telcos tackle value chain challenge


10 Jul 2003

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We are likely to see more deals like last week’s launch by Esat BT of a new data storage service in conjunction with storage hardware firm EMC. Esat BT Data Storage will, it is claimed, allow organisations to manage growing volumes of data efficiently. Esat BT provides the infrastructure — the high-speed optical network plus data centres — while EMC supplies the systems that store and manage customers’ data.

In one way, the Esat/EMC partnership is par for the course: yet another case of technology firms getting together to target a growing market. But it is nevertheless a significant departure for a telco that was once content to offer straightforward voice and data services to its customer base.

According to Padraig Coakley, managing consultant at Mason Communications, an independent telecoms consultancy, the challenge facing all traditional fixed-line operators is to move away from their traditional reliance on voice services.

“These days data makes up the bulk of traffic; that’s where the growth is,” he says. “Telcos have got a value chain issue: to keep profitable, they’ve got to move up the value chain and grab more and more of the services that you’d put on top of your basic data connection.”

Telcos all over the world are facing this challenge and shifting their strategies accordingly. Martin Wickham, chief information officer at Esat BT, first noticed it during a visit to Canada in 1999, where he was impressed by the approach taken by Alliant, a strategic partnership of the incumbent carriers of four Canadian provinces. “They had a thing called the Living Lab where they would try out new technology and even at that stage they were playing around with TV over DSL, remote medical imaging and those kinds of applications,” Wickham recalls. “We were talking generally about where the industry might be going and they said they were convinced that they were going to be suppliers of IT services. They were looking to be suppliers of remote managed services, not just for the network but also for the systems infrastructure.”

At around the same time BT, which was to acquire Esat Telecom in March 2001, itself had recognised the potential of IT services and had set up a services business initially targeting call centres. In the last 18 months, Wickham, has noticed “a more deliberate strategy [around IT services] starting to develop” within the BT group worldwide.

Cathal Magee, managing director of Eircom retail (pictured), also sees a greater emphasis on services, but characterises the change as an evolution rather than a dramatic strategic shift by telcos. “The whole convergence between communications companies and IT companies has been happening for some time … and we think it will continue to evolve,” he says.

Magee identifies a number of drivers behind the trend. One is the physical convergence of voice and data networks through IP networks that extend through right to the desktop. Another is, almost inevitably, the internet. In order to provide internet access services to customers, telcos have invested millions in building and managing the infrastructure that supports the internet, from high-speed networks to new data centres. This has enabled them to offer new services such as disaster recovery, web hosting and applications management.

As the technology has evolved, so too have customer requirements. “Customers, particularly in the enterprise space, want to concentrate on their core business and increasingly they’re looking to outsource infrastructure and network services,” Magee notes.

While there is wide range of IT services that telcos can offer, the most obvious one, feels Wickham, is to provide the infrastructure or technical platforms on which an organisation’s applications would run. Telcos could also run actual applications themselves for clients but Wickham feels the market is not quite ready for this. Instead, clients would probably first outsource their IT infrastructure before they would consider contracting out the management of applications.

Another opportunity being evaluated by Wickham is offering a controlled test environment to large firms that are implementing a company-wide enterprise resource planning (ERP) system such as SAP or Oracle. “We could sell people a test environment for the duration of the project with a lot more flexibility than they could build themselves and with a lower capital burden,” he says.

But managed services are not just for the big boys. Wickham sees them as a way to level the playing field between large and small businesses. At present, large businesses have a competitive advantage over small ones, he feels, because they can afford to build and run a complex technical infrastructure. In the managed services model, the infrastructure is owned and operated by the telco and the client’s systems and networks can be simply piggybacked on top. “It would give them the kind of things that they couldn’t aspire to themselves: a robust infrastructure with built-in disaster recovery capability. It would also give them scalability – they wouldn’t have to redesign their infrastructure as their needs change.”

Magee agrees that managed services have a role to play within the SME sector. But he also sees great potential within the public sector where he sees “a debate taking place around the whole issue of centralisation of IT infrastructure and how you actually improve your IT and network infrastructure and at the same time reduce costs”.

As telcos expand their range of services and they start to come up against large IT services companies like IBM Global Services and EDS, will they not simply be swapping one set of competitors with another? “I don’t think you’ll see telcos replacing the IT services companies,” says Magee. “I think that both will play into each other’s value chain. Yes, they will be competitors but they will also partner with each other around the fulfilment of customer requirements.”

Although Eircom and Esat BT may put a lot of sales spin on the new services they are rolling out, Mason’s Padraig Coakley believes they simply have no option but to explore new revenue opportunities.

“Traditional voice-related revenues are shrinking so they need to migrate to a new model,” he bluntly concludes.

By Brian Skelly