Ovum has spent much of the past several months in conversation with leading communications service providers (CSPs) and their technology vendor partners, discussing their strategies for 2019 and well into the future. One theme has been constant: these market players are increasingly focusing on the enterprise as a source of growth and differentiated revenue.
There are a few core drivers for this, which go beyond the usual "declining ARPUs from consumer services." The first is the need to gain traction in IoT. Many CSPs and vendors have made significant investments in building up IoT teams and capabilities, but even for the market leaders, finding traction and building value at scale have proven challenging. IoT revenues are growing, but still account for less than 2% of revenue for the largest, market-leading CSPs; for others, the proportion is smaller still. It's becoming clearer that to monetize IoT investments effectively, deep links to, and knowledge of, the vertical industries that solutions are being sold into is a need-to-have rather than a nice-to-have.
Monetizing 5G is also high on the agenda for CSPs and their infrastructure partners, and the enterprise will play a key role in this. 5G rollouts have been brought forward in a number of markets (e.g., the US), and investment in both infrastructure and spectrum is becoming a key strategic line item for CSPs sooner than some would have expected. This has been partly driven by marketing and competitive agendas; nevertheless, it has created significant pressure to find the "right" use cases for 5G, and the clear message is that these are largely going to center on enterprise solutions that leverage multiple characteristics of this new technology. These include network functions virtualization to enable dynamic allocation of capacity, network slicing, and the ability to support both massive-scale connectivity and "mission-critical" low-latency/high-bandwidth use cases.
Automation and efficiency-related outcomes sit at the heart of the new CSP and vendor "pitch" to enterprises, supported by IoT, analytics (and eventually AI) capabilities, cloud, and eventually 5G – although there is plenty of room for LTE for years to come, both public and private, and LPWA technologies will play a growing role in "massive" IoT deployment. For this to translate into sales, CSPs and vendors must demonstrate a clear link between outcome and capability – the discussion becomes more than ever about the enterprise's goals, and less than ever about the technology itself.
Vendors are looking farther ahead, with particular emphasis on using IoT and 5G to transform industrial operations. Nokia's new Future X demo lab at the former Bell Labs, which we recently visited, offers a vision of the 5G-enabled, fully automated factory and logistics operations of the future, complete with autonomous vehicles for package picking and delivery, high-precision automated robotic arms, and a rolling avatar of lab head Marcus Weldon that obeys verbal commands. Leaving the avatar aside, it was clear how these solutions could translate into value for industry.
CSPs have often focused on areas where their ongoing communications customers are looking to extend, but many are now looking to M&A and dedicated vertical teams to drive IoT and digital solutions deeper into specific industries. At a recent analyst summit, Vodafone's enterprise business leaders described their intention to "pivot to an industry services model and away from connectivity." Vodafone has already been successful in building a strong end-to-end offering, centered on IoT and telematics, for the automotive industry. It is now looking to extend this success to other verticals. Examples ranged from a digitally transformed farm to a smart retail operation, not forgetting the smart manufacturing and logistics solutions being deployed for longtime Vodafone communications customer Aston Martin. Taglines linking social benefit or business benefit outcomes to specific Vodafone vertical technology solutions (e.g., "Your fight against malnutrition – our real-time connectivity for smart mills") brought the industry-centric, outcome-led message home, but it remains to be seen how compelling enterprise customers find this, and whether it will persuade them to go to Vodafone directly for such solutions.
Making this shift is not necessarily straightforward. CSPs have not been the go-to partner of choice for enterprises looking to undertake digital transformation agendas, develop and integrate analytics solutions, or even to deploy IoT projects. Ovum's research has found that fewer than 5% of enterprises deploying IoT solutions have their primary IoT contract with a CSP. Positioning will be an ongoing challenge. Bringing enterprise digital transformation agendas back to a more pragmatic, outcome-led approach, and focusing on deeper offerings for specific enterprise verticals, will become ever more critical as the need to monetize IoT and 5G investments grows.