This quarterly analysis of the financial results of 25 of the world’s largest telecoms operator groups covers the period April to June 2018. We focus on the extraordinary progress that Chinese operators are making in diversifying away from their core businesses, the status of CSPs’ IoT businesses and the growing acceptance from many operators that acquisitions may be need to expand into new markets.ICT services a key focus for Chinese CSPs
China’s three telecoms operator groups – China Mobile, China Telecom and China Unicom – are making huge strides as they diversify away from their core businesses and embrace opportunities in ICT services including cloud, data center services and a range of solutions for vertical markets. In doing so they are forging ahead of CSPs in other parts of the world which are becoming increasingly dependent upon acquisitions to expand into new markets.
In our latest analysis of CSPs’ quarterly financial results, for the three months ending June 30, 2018, a slew of data points released by Chinese operators demonstrates how quickly they are expanding into new markets, and in particular ICT services including cloud and IoT.
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China Mobile |
China Telecom |
China Unicom |
ICT services |
21.2% year-on-year increase in revenues. |
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67.9% incease in revenues year-on-year to RMB3.14bn ($460m) |
Cloud |
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145% increase in revenues year-on-year |
39% increase in cloud revenues in 1H 2018 |
Datacenter |
57% rise in data center revenues year-on-year |
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IoT |
155m new connections in 1H 2018 (384m in total). 46.7% increase in year-on-year revenues. |
74.9m IoT connections, up 29.9% year-on-year. 30m new IoT devices in 1H2018, targetting 0m for the whole year. 86% increase in IoT revenues from areas such as smart vehicles, surveillance, public services and bike sharing. |
RMB11.7bn ($1.7bn) in revenues from the industrial Internet in the first half of 2018, equivalent to 8.7% of total service revenues. This is a 39% rise on the first half of 2017. |
Vertical services |
11 separate vertical solutions services each generating annualised revenues of RMB100m ($15m). RMB2bn ($290m) from education solution in first six months of 2018 |
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Application and information services |
23.5% increase in revenues year-on-year |
18% increase in year-on-year revenues to RMB31.4bn ($4.6bn) in the first half of 2018. This is equivalent to 18% of total service revenues. Services include smart family / smart cloud. |
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Even though the delineation between different service categories – for example ICT services, cloud and data center – is not always clear, the absolute numbers demonstrate the speed at which the three operators are moving. While most operators are seeing yearly growth in IoT connections of 10% to 25%, China Mobile and China Telecom recorded annual growth of 47% and 30% respectively. In China Unicom’s case, a staggering 8.7% of total service revenues were from industrial Internet services in the three months ending June 30.
While many telecoms operators in North America and Europe are stepping up their efforts to develop cloud-based services and capabilities that compete with hyperscale service providers, Chinese CSPs are collaborating with Chinese Internet companies.
In 2016, Tencent and Alibaba bought shares of 5.2% and 2% respectively in China Unicom. At the time Tencent’s CEO said that the company was seeking “more and more and deeper collaboration with the telcos “because we believe they can be ecosystem partners”.
Since then China Unicom has launched many joint initiatives with Internet companies including:
- A joint venture with Alibaba to offer customised application software services to government and enterprise users
- The launch of 50 public cloud services branded WO Cloud with Alibaba and Tencent
- Bundling telecommunications products with top-selling products from Tencent, Alibaba and Baidu
- Cooperation with Baidu on risk management API
- Jointly built models with Tencent on financial anti-fraud API
IoT enthusiasm continues but reporting is erratic
Many CSPs globally are building out new IoT capabilities – for example dedicated IoT networks (NB-IoT, LoRA, etc.) – but few are regularly reporting connections or revenue data. Data that did emerge from April-June financial reports include:
- Orange had 7,859,000 M2M customers, up from 6,829,000 a year previously (15% growth)
- KPN had 4m IoT connections at the end of 2018, up from 2.8m end June 2017, a 43% increase
- Telstra’s IoT business “is nearing $200m in revenue”
- Verizon’s IoT revenue rose 13% year-on-year
As CSPs embrace new low-powered wireless access network technologies, giving them the ability to connect lower-ARPU and lower-traffic generating devices than previously, we expect growth in the number of connected objects to accelerate. However, this will not necessarily feed through to corresponding growth in revenues.
Cellular M2M has, traditionally, generated ARPU of, on average $2 per month. But connectivity pricing for services such as NB-IoT is much lower. For example, T-Mobile USA is charging $6 per year for any device up to maximum usage of 12MB on its Magenta NB-IoT network.
Numbers are not all heading in the right direction
Swisscom’s “Solutions” business (vertical solutions, cloud, security, unified communications etc) saw a 7% decline in its April-June revenues to CHF252 million compared with the corresponding period in 2017. Referring to the disappointing results, Swisscom noted that sales cycles can take up to 12-18 months with a transition phase before the implementation business. It also noted that customers have the flexibility to make late decisions about committing to buying a solution. This tends to be a characteristic of cloud-based business more generally.
Even though many operators are reporting encouraging customer and revenue trends for new ICT services, in many cases these are merely compensating for declines in legacy services. For example, SingTel is forecasting that its group enterprise revenues in FY18 will remain unchanged from FY17 at S$6.6bn, but that the share coming from ICT services will grow from 45% to 45%.
In its quarterly results presentation, US telco Verizon reported an overall 4.2% fall year on year in enterprise, “driven by declines in legacy services”.
If you can’t beat 'em, buy 'em
Many operators are making acquisitions to bolster their expansion into new markets. The sheer diversity of these acquisitions is striking.
Most acquisitions are in the B2B sector. Australian telco acquired MTData which provides IoT services in the logisitics sector. And Korea’s SK Telecom invested KRW 702 billion to acquire a 55% stake and management rights to Korea’s second largest security company, ADT Caps.
In the consumer market, there is a continued push into pay TV. In this last quarter Swedish telco Telia acquired Bonnier Broadcasting, the country’s largest commercial broadcaster.
There is no tried and tested best practice for how to integrate new businesses. Some operators let them continue to run independently and take a pragmatic view as to how and when to partner, or integrate with the subsidiary. But US telecoms giants AT&T and Verizon are using their acquisitions to steer the direction of their entire business.
AT&T this month completed the integration of its different advertising businesses into a new business called Xandr. While Time Warner, which AT&T acquired in June for $85bn, might make up the lion’s share of the new Xandr business, there have been other purchases including AppNexus, a global advertising platform which AT&T acquired in June.
Verizon has also created a multi-billion dollar media business which it has named Oath, and built around the acquisitions in 2015 and 2017 of AOL and Yahoo! Oath accounted for 5.9% of Verizon’s revenues in the quarter.