Financial Watch : OSS Recovery Slated for 2004

The dark days in the telecom industry have translated to slow times for the OSS industry, but a recent report from RHK suggests that a turnaround will begin next year.

In the report, RHK forecasts that the worldwide OSS market will increase from $31.2 billion in 2003 to $41.9 billion in 2006, for a compound annual growth rate of 10 percent after a four percent overall decline from 2002 to 2003.

The report splits the numbers into in-house and commercial off-the-shelf (COTS) offerings. For the in-house side of the market, the forecast goes from $17.6 billion in 2003 to $21.8 billion in 2006. The COTS market will grow from $13.6 billion in 2003 to $20.1 in 2006, according to the report.

The numbers are compiled from several different sources, says Patrick Kelly, senior analyst at RHK.

First, the research firm compiled both historic and planned capital expenditures for wireline and wireless service providers to establish the foundation for the forecast. Then, the analysts reviewed the financials for the top 100 public telecom operators worldwide and segmented wireless and wireline into geographic regions.

RHK analysts also talked to ISVs, systems integrators and the top equipment manufacturers. “Companies like Alcatel, Lucent, Siemens, Ericsson and Nokia are very influential in what kind of software actually gets deployed,” he says. In addition, RHK spoke with application integration suppliers such as BEA Systems and IBM. “There’s a big push with service providers to start to consolidate a lot of these systems, and that’s where the integration framework suppliers will play a role.”

Kelly points out that relying solely on OSS contracts to forecast the health of the market can be very deceptive because many contracts do not ever get announced. He adds that there are probably more OSS-related contracts that are not announced than are announced.

The numbers in the report include both licenses and professional services, because it’s difficult from a forecasting perspective to separate the two, Kelly says. “We allocated the professional services side of the revenue on the COTS side if it was an ISV; if it was a systems integrator, that got allocated under in-house spending because the service providers deal directly with them.”

The Findings

RHK is predicting a soft market until the second half of 2004. “A lot of that is based on the fact that if you look at the reporting, the revenue can’t be recognized on a lot of these projects until the project is completed,” he says.

“I think there are a lot of planned initiatives underway,” Kelly adds. “The fundamental problem and why we believe that 2003 will be another down year is that a lot of the service providers are still trying to get a stronger balance sheet and are using a lot of the funds they are generating to pay down debt. As a result, a lot of projects are essentially being put on hold.”

He says that although many projects in North America are on hold, he points to Bell Canada’s recent contract with Cramer Systems and Telus Mobility’s contract with ADC as examples of spending.

But, Kelly says that from a regional perspective, Asia-Pacific has been the most steady. He attributes this to the fact that in this part of the world, providers haven’t really leveraged software investments. “In some of the more developed countries like Korea, Japan, Australia and some provinces in China, there are investments that are being made where they weren’t being made in the bubble years of the late 1990s in North America,” he says. “So there is a bit of a catch-up going on there.” He adds that RHK projections show that North America will continue to be the largest regional segment of spending through 2006.

Considering that the pundits have been predicting a turnaround in the telecom market for some time, why is next year so crucial?

Kelly points to a metric called the capital intensity ratio, which is the percentage of capital expenditure to overall sales or revenue by a service provider. He says that in the peak year of 2000 in North America, capital intensity ratios were about 36 percent. Today they stand in the 13 percent to14 percent range. “A lot of that has been because service providers have simply cut their cap ex, or in some cases some of these providers are no longer in business,” Kelly says.

He adds that if service providers go much below 12 percent capital intensity, they run the risk that their competitors will actually capture their customers. “Theoretically, you can go below that, but at some point you have to consider your options, like whether or not you’re going to be a viable competitor in the marketplace or [if you need to] consider a merger or acquisition,” Kelly says.

The growth areas RHK has projected within OSS include mediation, network resource management, service-centric management and on-demand services. This includes automated flow-through provisioning for broadband, Web-enablement of customer-facing processes and activation.

Because the OSS vendors largely are at the mercy of telecom providers, RHK is paying close attention to what moves the providers make next. And, any future consolidation on the part of providers will naturally cause a ripple effect to the OSS vendors.



Note: The information in this article should not be used as the primary basis for investment decisions. The information is based on sources BillingWorld & OSS Today believes to be reliable. The statements expressed are not necessarily those of Billing World & OSS Today.