Today I read an interesting article with the following headline:
The article referenced some recent research conducted by Heavy Reading (www.heavyreading.com) that predicts the following trends in the telecom industry:
- As network operators continue to look for new ways to reduce operating costs, telecom equipment vendors are nearing a tipping point at which the managed and professional services they provide will deliver substantially more revenue than infrastructure sales
- Driven by network operators’ desire for cost savings, simplified network operations, and shorter time to market for new services, managed and professional services have become a rapidly growing business for telecom equipment vendors over the past five years. Today these services account for 35 percent to 48 percent of total revenues for leading vendors, and this figure is forecast to reach 60 percent within the next seven years.
The Telecom industry, and product companies serving that industry, find themselves smack in the middle of a “services chasm” market as described in “Bridging the Services Chasm.” In this type of market, traditional product revenues and margins have slowed as the market has matured. Product companies in the market must decide if they will change their revenue stream by diversifying into new service lines (we call that a change mix strategy), or stay focused on being a product provider and seek new product markets to pursue (we call that a change market strategy).
Revenue Mix and Maturing Markets
The Telecom industry, and this recent prediction of revenue trends, is a perfect example to help illustrate the dynamics that play out in maturing markets. Historically, telecom equipment providers such as Lucent, Alcatel, and Nortel, have all been very product-centric companies, with the vast majority of their revenues coming from actual product sales. However, the folks at Heavy Reading are predicting a dramatic shift in revenue mix for “leading” telecom providers as documented in the image below:
This mix from product revenues to service revenues is playing out in EVERY technology sector. From storage to servers to software, more and more revenue is being generated through service transactions as opposed to product transactions. This is the trend that leads product companies gasping at the edge of the services chasm. Thank you, Heavy Reading, for reiterating the reality.
Product Providers and the Services Chasm
When markets mature and companies enter the services chasm, there is one type of company that is at extreme risk of failing: The Product Provider. These are companies that receive a majority of their revenues from product transactions and have a small percentage of revenues coming from services. This imbalance makes it very difficult for them to adjust to the type of shift in revenue mix documented above.
As we look at the telecom industry, there were two major technology providers serving North America that struggled in the services chasm:
Nortel went bankrupt—clearly they were unable to navigate the services chasm. Lucent took a hard run up the services hill post 2001. They even hired a senior executive from EDS to lead the charge. However, the effort did little to change the revenue mix of the company. Lucent’s history is discussed in the first chapter of Bridging the Services Chasm. Now, Lucent has thrown its hat into the ring with another historically product-centric company, Alcatel, to ride out the services chasm storm engulfing their industry. Yet, look at the revenue trends for Lucent from 2001 – 2006 and then Alcatel Lucent from 2007 – 2009:
The graphs above show two critical facts:
- Top line revenues for the combined companies is not really growing
- Services remain a relatively small portion of total revenues
How out of sync is the revenue mix of Alcatel-Lucent with the revenue mix predictions from Heavy Reading? This is the risk all product providers face as their market matures. Pay attention Dell. Pay attention Microsoft. Pay attention Cisco. The trends pounding Alcatel-Lucent will be pounding your bottom lines. Change market or change mix. But don’t spend too much time thrashing around in the services chasm.