By Angel Dobardziev, practice leader, emerging markets, Ovum
Capacity and connectivity services, the core business of many wholesalers, remain under fierce pricing pressure in Central and Eastern Europe which is creating huge challenges for most players.
The long-anticipated consolidation has not occurred at the pace the industry expected, and many players appear to be locked in a struggle to outlast competitors.
Competition is intense for both new and existing business.
Price erosion remains relentless too, and it is not confined to legacy services such as voice or IP transit, but also new services such as carrier Ethernet.
Many service providers are being left with little choice but to offer 40–50 percent price reductions at contract renewal in order to keep a contract.
Yes, there is customer appetite for faster or better products, with growing demand for 40Gbps or 100Gbps circuits from customers that used to buy 1Gbps or 10Gbps circuits, but this is only partially offsetting the impact of price erosion.
Yet amid the perception of commodity status of many of these products, any revenue gains from the better products seem to be quickly eroded by an array of competitors hungry for business.
In this market environment, many players are sprinting as far as their sales effort is concerned, but standing still in terms of revenue growth, and often going backwards in terms of margins.
Indeed, many wholesalers are on razor-thin or negative margins which, combined with their stagnant revenue growth rates, do not inspire hopes of great prospects for attractive return on investment in the near future.
What then is the end game for the CEE wholesale market?
There are still far too many players competing for a limited amount of non-captive business.
The fact that many of the leading CEE wholesalers – Deutsche Telekom, KPN and Telekom Austria – have wholesale foundations in the captive business from their sister companies is part of the current structural rigidity in the industry, as many players are prepared to compete for non-captive business on a marginal cost basis.
That is fine to get a short-term boost to the top line, but brings poor overall margins and return on investment.
That said, players such as Deutsche Telekom could well act as more aggressive agents of regional wholesale consolidation, much in the same way as in the retail markets in CEE.
There have been enthusiastic pronouncements that traffic growth driven by video, as well as higher value services such as HD voice and cloud services, will be the answers to the wholesalers’ growth conundrum.
Video traffic is growing rapidly, and is one of the key reasons for wholesale customer demand for higher speed data circuits.
HD voice is proving interesting to many enterprise customers and mobile operators, even though few are prepared to pay a premium for it.
Yet on the whole, it is hard to see HD voice or video traffic growth compensating for the willingness of many wholesalers to aggressively discount their services when pressed by an intensely competitive bidding process – unless there is a change in the crowded industry structure we have in place today.
The other possible growth avenue for wholesalers is charging OTT players such as Google and Facebook fees for the rapidly growing network traffic volumes their services generate.
Indeed, we note resentment from some telcos at having to carry ever-growing traffic volumes at the same or declining prices, while these players enjoy huge revenue growth and margins.
However, we think this is a prospect that telcos in general, and wholesalers in particular, will struggle to advance quickly.
Ultimately, the challenges come from the old demand and supply equation; as long as there is a market where players are willing to offer ever-lower prices for ever-greater bandwidth, revenues and margins will continue to be squeezed.