Financial Watch : Telecom Software Spending Entering Growth Period

Since the telecom slowdown began 4 years ago, it seems everyone has joined the collective office pool to take a guess at when things will improve.

According to analyst group OSS Observer, commercial software spending increased 6 percent from $1.8 billion in the fourth quarter of 2002 to $1.9 billion in the fourth quarter of 2003. The group states that the first half of 2003 marked the bottom for OSS spending as providers were more concerned with paying down their debt than spending on new services.

“We expect to see the back half of this year increase in spending,” says Patrick Kelly, a partner and cofounder of OSS Observer. “When we talk to service providers, there are certain projects that have gone beyond the RFP process.”

While there is a general build-up in spending across the service provider landscape, demand seems to be taking place in pockets rather than across a larger swath, according to Marianne Wolk, equity research analyst at Susquehanna Financial Group. She says that interest in next-generation services has reached a level where providers need to upgrade their back-office systems to support them. Competitive pressures are forcing the providers to look at advanced services, which will require automation and software to support high-volume activity.

Spending in Wireline and Wireless

“We’re seeing demand for voice over IP [VoIP], 3G rollouts and applications, cable broadband and continued strength in CRM and the areas of e-care and electronic ordering,” Wolk says. Another area she sees growth in is wireless content management, which involves ensuring that wireless applications work with various operating systems and handsets and that proper fees are billed for the applications.

Kelly adds that new services to keep an eye on include MPLS-based VPNs, and he supports Wolk’s assertion that VoIP is a growth area. “VPNs are beyond the hype phase, and we’re starting to see real revenue,” Kelly says. “VoIP is not there yet; 2005 will be the start, and what will follow is OSS investment.” Kelly also thinks that OSS spending will increase for technologies such as fiber to the premises and Gigabit Ethernet.

VPNs and VoIP will be crucial to wireline providers, which have been losing money for the past few years. “Revenues are dropping; despite the struggle to reduce CapEx, it’s not enough,” says Leif Hoglund, OSS director at RHK. “Revenues are dropping 4 to 5 percent, which represents half of the CapEx.” Turning to OpEx, Hoglund adds that wireline providers are employing a variety of strategies such as consolidating their wireline and wireless networks and the OSSes that go along with that. “A lot of big carriers are making this decision, including Telecom Italia, British Telecom, AT&T and Sprint.”

For example, Hoglund says that Sprint cut its IT budget by 30 percent, which translates to $300 million. “Normally the purchasing power of OSS is split up by divisions; who gets what and prioritization happens at completely different places,” he says. “Sprint has decided a change is necessary and has taken active steps to do this.”

Kelly points to Nextel as another provider that’s been shifting its operational view. “I think they have leveraged a strategy where what they are doing from an operations perspective has been leveraged across the entire business,” he says. “This is about service providers leveraging operations—billing, CRM, service assurance, service fulfillment—to impact the overall organization, and this clearly impacts the financial numbers.”

Wolk says back-office consolidation has been taking place, but it takes a tremendous amount of time. “These are multi-year projects, and most carriers have the longer-term goal of having a centralized OSS,” she says. She adds that CRM consolidation and integration is one of the key projects for many providers.

As for wireless spending, besides 3G rollouts, other areas of spending include CDMA network upgrades in North America and increased interest in UMTS in other parts of the world, says Kelly. Hoglund adds that roaming, fraud and revenue assurance will also dominate providers’ list of concerns going forward.

Another interesting spin in the carrier space is the idea of outsourced services, says Kelly. “For wireline and wireless providers, as the complexity of delivering services increases the skill set doesn’t always match,” he says. One example he gives is Telecom New Zealand, which outsourced its next-generation networks to Alcatel and Lucent. “In order for Tier 2 and 3 providers to compete with bigger incumbents, they’ll have to look at this kind of relationship,” Kelly says.

OSS Bright Spots

On the OSS front, Kelly’s list of growth areas include service fulfillment, service assurance, customer care and billing. According to OSS Observer, for the 20 OSS vendors reporting, aggregate operating income improved $289 million from the fourth quarter of 2002 to the fourth quarter of 2003.

Kelly says that all the major billing vendors reported revenue increases in the first quarter of 2004 except CSG Systems, which saw a 16 percent decrease from the previous quarter. This is likely due to the company’s recent arbitration with Comcast which resulted in CSG having to pay millions of dollars to the cable provider. Since the ruling, CSG was awarded a contract extension from Comcast that runs through 2008. This and a revamped Kenan billing offering will likely turn CSG’s fortunes around, according to Kelly.

Another area Kelly is bullish on is service management, which links legacy management, performance systems, inventory and activation. “Verizon, SBC and AT&T are all building out in this area,” he says. “When you link all this together you allow a service provider to deliver service in a shorter period of time or support it after it’s been activated.”

Hoglund says mediation and inventory management will see continued growth, and he adds service quality from vendors such as Lucent, Telcordia and HP to the list but doesn’t think it’s quite ready for prime time. “There’s probably not going to be a lot of business yet with service quality because most people are interested in performance management.”

The bottom line is that as providers increase their support of new technology and services in the mobile and wireline data markets over traditional services, we will continue to see OSS spending ramp up at least through 2007, Kelly says. By that time, the carrier landscape will likely look very different from today.

Mergers & Acquisitions

VeriSign has acquired the assets of Unimobile, a provider of mobile messaging solutions for carriers and enterprises. VeriSign will incorporate the Unimobile technology to offer a new set of short message service (SMS), multimedia messaging service (MMS) and secure content delivery capabilities. The new services will allow the exchange of data between different types of wireless networks, applications and service offerings. The services will enable secure messaging with encryption to allow “eyes only” messaging, along with a spam filter to keep out unsolicited emails and messages. It also allows content delivery from third parties via a special content hub.

Pitney Bowes will acquire Group 1 Software for $321 million. Group 1 will become a wholly-owned subsidiary of Pitney Bowes within its Global Enterprise Solutions segment, continuing to operate under its current management. Subject to approval by Group 1's stockholders and completion of other conditions, the transaction is expected to close in the third quarter of 2004.





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.