With vendors posting good results, achieving decent valuations when acquired and the first fruits of OSS/BSS transformation feeding through to carriers' bottom lines, 2008 has been a strong year for the sector yet, as the financial storm clouds gather and burst, could progress stall in 2009, asks George Malim?
Many hundreds of millions of Euros have been invested in the OSS/BSS sector in 2008 whether by carriers executing on their next generation transformation projects or by vendors keen to acquire a piece of the action. Much work remains to be done and significant investment remains to be made by carriers as they move through the phases of their back office upgrade programmes. The imperatives to improve customer experience, deliver new services, bill and bundle in creative ways and slash capex and opex remain and the hope is that carrier customers will continue to devote resource to deploying ever more agile systems.
Sadly, there isn't time to bask in the glow of having had a good year, as Keith Willetts, chairman of the TM Forum, attests; "In the last year, we have seen lots of service providers put major money into their transformation programmes. There seems to have been real energy and the major vendors have all had a good year. Whether that will continue is hard to say, but my argument is that they will continue to invest and hold their nerve."
Vendors certainly hope that's the case and that the rewards carriers are now reaping from their OSS/BSS investments will be enough to sustain projects through the lean times ahead. 2008 saw no major shifts in OSS/BSS ideology but many of the theories the industry has expounded since the last telecoms recession have are now coming to fruition. Steady progress involving actual deployment and real results has been the industry's path in 2008. "Over the last three to five years there has been a continuation of a set of developmental trends," says Andrew Taylor, chief executive of Intec. "The trend of transforming from legacy to next generation networks has seen ongoing investment over last four to five years and we're now seeing some realisation of that strategy and the growth of products and services around VoIP, IPTV and video."
For Alice Bartram, assistant vice president of marketing at Comverse, which has just completed a replacement of multiple systems at Russian carrier MTS that involved migration of 33 million customers in eight days, projects are beginning to pass significant their milestones on their route to completion. "Real results are now being seen within carriers and reductions in opex of 30% are being seen at some of our customers."
That type of headline figure has stimulated interest in OSS/BSS providers as mergers and acquisition targets and, in addition to players that made major purchases over the last few years beginning to integrate their acquisitions, 2008 has seen activity of its own. Among the acquisitions, Axiom Systems has been acquired by Comptel, Ceon by Convergys, Jacobs Rimell by Amdocs and Oracle has completed on its mammoth acquisition of BEA Systems.
"There is rapid consolidation of the sector," says Willetts. "IBM, Oracle, Telcordia and Amdocs now dominate compared to years ago when there were dozens and dozens of small ISVs. I suspect those not acquire already will it find it very difficult as venture capital dries up. That will accelerate consolidation and result in OSS/BSS resembling more of a normal market."
These software vendor to software vendor sales reflect a consolidating market but an interesting dynamic is emerging as signalled by hardware giant NEC's purchase of Netcracker for a reported US$300m and Alcatel-Lucent's acquisition of Service management software vendor Motive. Alcatel-Lucent has also teamed up with Convergys in a non-exclusive agreement to integrate its Infinisys billing system. Large hardware vendor action such as this is reminiscent of late 1990s when hardware players such as Lucent Technologies invested heavily in the sector only to lose many tens of million dollars as the companies they acquired lost focus and the market spiralled into recession.
It's too early call whether such moves are being made. "With NEC's acquisition of NetCracker, I wonder if it is just an apparently odd one or if it is representative of the way that equipment vendors will try and force their own way in the industry?" says Willetts. "If it is the start of a trend, there's not a lot left to buy or assemble a rounded portfolio with. Is NEC going to buy something to go with Netcracker?"
Others question the motives of companies buying up smaller players to gain products. "A single vendor environment is utopia and the reality is that it won't be possible," says Cato Rasmussen, head of solution strategy, Martin Dawes Systems. "If you look at companies that have been on an M&A spree to fill their shelves with products, you have to ask is it really for the benefit of their customers' efficiency?"
If constructing a single vendor environment is a step too far, an appetite from streamlining the number of systems in the back office is clearly present. Doing so lessens carriers' integration burden and, as a consequence, reduces the opex that systems integration requires. A more realistic outcome is that carriers sectionalise their OSS/BSS taking a portfolio of systems from a single vendor that may address one entire function such as Revenue Management or Rating and Billing, for example.
"The majority of service providers don't want to buy an OSS here and an OSS there," explains Willetts. "They want a big player to come in with big chunks [of the OSS/BSS]. The Oracles and IBMs that have acquired companies have the development and integration challenges but also have the financial muscle to provide such chunks."
Gazing into the crystal ball to attempt to assess the prospects for the sector for 2009 is a difficult challenge. There is a giant elephant in the room in that nobody knows for sure how the recession will impact on the OSS/BSS market. "That's the million – or billion – dollar question," agrees Bartram at Comverse. "And everyone has to take it into account from a planning perspective."
There is the faint hope that the recession may even stimulate the market. After all, the back office is one area that can generate significant efficiencies for a limited outlay. "An acceleration of OSS/BSS projects is obviously something we'd welcome," she adds. "And that may happen as the focus on expenditure reduction strengthens."
Cato Rasmussen, at Martin Dawes Systems, also takes cautious comfort from this. "The telco industry is not growing much but it is not falling as fast as other industries," he says.
However, Rasmussen warns that many professionals' jobs will come under threat. "A lot of emphasis will be on reducing cost, labour and opex," he adds. "When it comes to BSS, there is going to be system consolidation as well as consolidation in terms of the number of people within an organisation. CIOs with large staff will have to get rid of significant numbers. If those are engineers, what impact is that going to have on new products and service launches?"
Acknowledgement of the downturn is tempered by the hope that investment in the back office is sustained. Dominic Smith, marketing director, Cerillion, agrees that; "Financial issues will probably feed through and selection cycles for new systems may become longer," But he warns; " Neglecting BSS would be a very short-term strategy for when things go back to the upturn. If suitable investment hasn't been made, operators will be a step behind the curve. There is still a very high level of interest in the BSS."
Andrew Taylor at Intec has even more faint positive views to offer in spite of feeling that his company is well equipped to deal with the situation because of its presence in many different sectors and markets. "I don't think anybody is going to be insulated from this," he says. "There's already a downturn hitting the enterprise hardware side of the telecoms business with worrying indications from Nortel and Cisco Systems and you will see delays turn into cancellations and ultimately that will have an impact in the OSS/BSS. However, because OSS/BSS is all about delivering a means to drive down costs and to protect and generate more revenue there is an element of insulation and we may see some prioritisation from some customers."
For others, specific points of the industry might be hardest hit. "Obviously the whole industry is concerned about the macro-economic situation, but what does it mean for mobile data for example?" asks Tony Holcombe, president and CEO, Syniverse. "We see sub-20% global penetration of smartphones and there is some concern that that might stagnate. Outside the macro-economic situation, the long term trends remain positive."
Those that do manage to extract positives from the negative financial situation will have to act cleverly and bring their systems to market in innovative ways. The rise of software as a service (SaaS) and managed service offerings will provide a means for carriers to control expenditure, but the extent to which such offerings appeal is yet to be determined. Rasmussen reckons it will be a case of horses for courses. "Operators will look for suppliers that can engage in various commercial models," he says. "Licensing may be best for some, managed services may be best for others."
Smith at Cerillion thinks that some carriers will simply have to invest in OSS/BSS to support their new service aspirations and that will provide a lifeline to the vendor community. "One of the obvious things is that mobile operators will look to make a bigger play in the broadband space by either offering bundled fixed broadband access and also wireless access," he says. "From an OSS/BSS perspective the ability to manages these services and bundle and unbundle will be critical."
There are many variables facing the OSS/BSS sector in 2009. What is clear is that carriers are unlikely to be able to do without continued investment in their back offices. However, vendors will need to cope with longer sales cycles, an even tighter focus on cost efficiency and the imperative to offer their systems in flexible and agile ways.