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Fragmented market for $1 trillion worth of telecoms business sales

11 July 2012

Provision of telecoms services for the world’s biggest companies is remarkably diverse. A survey carried out exclusively for GTB by BackChannel shows that the world’s biggest 500 companies do not concentrate their custom on a few key operators, and the operators themselves work in a highly fragmented market

Read more: BackChannel AT&T Verizon China Telecom France Telecom BT NTT CWW

Nearly 60% of the IP services that AT&T delivers worldwide go to US-based customers. Of the world’s large operators it is one of the most focused on its home market — only one percentage point above China Telecom’s focus on China for the IP services it delivers.
Both companies, this exclusive survey appears to show, have a long way to go to spread their business away from their respective home markets.
By contrast NTT Communications provides slightly more services in the US than it does in its own home market of Japan. And AT&T’s great rival in the US corporate business market, Verizon, provides a relatively modest 35% of its IP services to the US, 65% in the rest of the world.
Both these companies appear to have achieved the aim — mainly through mergers and acquisitions — of making themselves less reliant than others on the country they call home. 
                 

          
This report is published in full, with tables and 
charts, in the free iPad edition of Global
Telecoms Business. Or you can download the
PDF of the report from here (about 1 meg)                 
                          
                              
Overall, though, data from UK-based network and service analysis company BackChannel, carried out exclusively for Global Telecoms Business, show that the world’s market for IP business services is remarkably fragmented.
In two of the world’s biggest markets, the US and the UK, no one provider has more than a 10% share of IP services. In the UK, 12 companies share 48% of the services, with many more competing for the other 52%. In the US, there are 13 companies — from AT&T with 9.3% in the lead to AboveNet with 2.7% — that share 63% of the business.
This survey, carried out exclusively for GTB and published here for the first time, uses BackChannel’s own in-house search engine technology to discover the use of IP services among a sample of over one million organisations, including companies, public utilities and agencies in more than 180 of the world’s 196 countries.
All of these organisations are owned by companies in the most recent Fortune Global 500, published by Fortune magazine in July 2011 — a list BackChannel used as the most readily available directory of the largest businesses in the world.
Together these companies employ over 50 million people and have revenues of over $24 trillion. Importantly for GTB readers, those companies are spending nearly $1 trillion a year on their telecommunications services. Yet there is remarkably little information about how they are spending that money.
An IDC survey of the people directly responsible for buying and managing communication assets — IT executives and managers — showed that 40% said they did not know their company’s total annual expenditure on telecommunications services.
Yet the average Fortune 500 company, according to a separate survey by the Aberdeen Group, is spending 3.6% of its revenue on telecommunications — and 3.6% of that total $24 trillion revenue is $864 million. 
                          
                      
Half the industry’s revenue 
                      
According to Gartner the total revenue of the global telecommunications industry was $2 trillion in 2009 — so it looks as though the Fortune Global 500 companies account for almost half the industry’s total billing.
The US, Japan and China between them are homes to the headquarters of 265 of the 500 companies. Most of the rest are based in Europe, with only 60 based in the rest of the world.
BackChannel used its technology to look legally at the identifiable IP-based services that these 500 companies and their subsidiaries worldwide consume. The company, based in Cambridge in the UK, discovered 64,500 IP services delivered to the Global 500 by 556 service providers. (Including, it should be noted, a few providers that in this fast-moving industry have recently merged or changed name.)
The survey analysed the data in six key ways:

  1.  IP services by customer country;
  2.  Service provider regional presence;
  3.  IP services by country by service provider;
  4.  IP services by service provider by country;
  5.  IP services by service provider by customer;
  6.  Sector presence of ISPs.
What the survey does not show are analogue services such as traditional voice. It does not show services carried on private circuits — such as those connecting a data centre via metropolitan fibre. It does not show mobile services.
And it does not differentiate the value of those services in terms of how much the corporate customers pay their service providers.
This special report shows a first-level analysis of the data but it is possible to organise the data in a number of different ways, including the analysis of companies, services and service providers by geographic region, by sector, by turnover, by number of employees or by stock market indices. 
                      
                      
North Atlantic concentration 
                      
Looking at the distribution of companies that commission or use the IP services we can see that while service consumption is as globally distributed as the businesses themselves the provision of services is strongly biased towards the US and Europe, including the UK.
Businesses headquartered in the US account for 27% of the Fortune Global 500 and 29% of the IP services detected by BackChannel. But outside of the US, companies in Japan and China — 26% of the 500 — seem not to be reflected in their share of the IP services consumed.
This apparent weighting towards the North Atlantic appears to relate strongly to the high level of business traffic between the huge financial centres of the US, the UK, Germany and France. These major commercial operations seem to dominate much of the world’s IP traffic — perhaps because European companies adopted IP-based services ahead of much of the rest of the world.
UK companies — and UK subsidiaries of US companies — have tended to take up IP standards ahead of businesses in other parts of the world.
This North Atlantic strength is shown again in the distribution of operators that provide these IP services to the Fortune Global 500. Fully 44% of the services detected by BackChannel in this survey were delivered by US providers. UK, German and French telecoms operators delivered a further 26% of the 64,500 services that BackChannel measured.
That means that operators based outside those four countries share only 30% of the IP services delivered to the Fortune Global 500. 
                      
                      
Fragmentation 
                      
The business is hugely fragmented, the BackChannel survey shows. The company analysed in detail the data for customers headquartered in six countries — Brazil, China, Japan, Russia, the UK and the US.
The UK is probably the most fragmented of those six, with 12 companies sharing 48% and all the other providers in the market dividing the other 52% of the services between them. And the UK is also distinctive for the share held by non-UK providers in the business: BT comes top with 10% and Cable & Wireless Worldwide — soon to become part of Vodafone — has 5%; but foreign operators Verizon, Rackspace, Level 3, NTT and AT&T are also among the biggest in the UK.
Corporations in the US, Japan, Russia and China, by contrast, are much more loyal to their own countries’ providers. In the US the biggest non-American provider is NTT, way down the list with only 3.5%.
In Japan Verizon is the biggest non-Japanese supplier with only 3% of IP services. The Japanese market is dominated by Japanese providers, the BackChannel survey shows.
In the same way, China Telecom and China Unicom have more than half the Chinese market between them. And it’s a similar story in Russia and Brazil, with a few local providers taking the biggest shares.
The US is a more competitive market than China, Russia or Brazil, but the competition is largely restricted to local players.
BackChannel thinks that the UK is different from the others because in the 1990s it was a landing point for US-based providers that were taking their first international steps and because the UK was itself an innovator of small, independent service providers.
One of the most advanced was Pipex, founded in 1991, which after a series of takeovers became part of Worldcom MCI — itself absorbed into Verizon in early 2006. Six years after that deal, Verizon is the second biggest provider of IP services to Fortune Global 500 companies in the UK, according to BackChannel.
And this diverse history also gives Verizon a much more international spread than most other operators. True, 35% of IP services provided by Verizon are directed to US businesses — but the UK, France, Germany and Canada are also important to the company.
In many countries — Japan, China and Russia among others — the big local telecoms operators tended to dominate internet service provision. Verizon does well in all three of those: the figures show that it is the biggest foreign provider in Russia, with a 6% share of services, in Brazil with 5% and in China, with a 4% share.
Past mergers account for Cable & Wireless Worldwide’s large market concentration in the UK — where the company absorbed Energis, Thus (formerly Scottish Telecom) and Demon Internet, one of Pipex’s early partners and rivals. Customers in the UK account for 42% of the IP services provided by CWW, says BackChannel.
This is a bigger UK focus than shown by incumbent operator BT, for which 30% of IP services go to UK-based customers. The US, Germany, Spain, France and Australia are also important to BT — showing that the company has a considerable global spread in its customer base. 
                      
                      
Home market focus 
                      
China Telecom, on the other hand, is hugely focused on Chinese customers: 58% of the IP services checked out by BackChannel stay within the country. AT&T has an even greater reliance on its home market, the US, with 59%.
By contrast Japanese operator NTT — whose subsidiaries include US web hosting company Verio — is rather similar to BT in the spread of its business worldwide: 30% of services to Japan, 29% to the US, 8% to the UK and 5% to France. 
                      
 Aviva poster  Linde silo
                          
Two giant companies, Aviva and Linde,  take their IP services from a
remarkably diverse range of suppliers, the survey shows
                        
BackChannel then analysed the survey results in another way — by picking two large diversified companies, Aviva and Linde, and looking at which companies provide them with IP services.
Aviva is a UK-based insurance company, the sixth largest in the world measured by net premium income. It has around 43 million customers in 21 countries, and 36,000 employees. It was created by mergers in 1998 and 2000 which brought together Commercial Union, General Accident and Norwich Union.
Linde is a German industrial gases company, with 50,000 employees, which over the past few years has absorbed rivals L’Air Liquide, BOC and others. It includes manufacturing, production and distribution.
Though both companies have strong central management functions, the surprising revelation from BackChannel’s work is that both have an extraordinary distribution in IP-based telecoms service providers.
The biggest provider to Aviva is NTT, followed by CWW, France Telecom-Orange and Easynet. But Aviva has seven other providers supplying 2-3% of IP services each, including Bharti, KPN, Sprint and BT. A total of 11 companies provide only 38% of services, with a huge number of suppliers of the other 62%. 
                      
                      
Diversification 
                      
Linde’s biggest provider is Verizon, followed by Deutsche Telekom and Colt. Five other companies provide 4-5% of IP services each to Linde, including AT&T, BT and China Telecom. A total of eight telecoms companies provide 39% of IP services to Linde, with BackChannel recording the other 61% of services as coming from "other" suppliers.
According to BackChannel — run by experienced telecoms and finance professionals Steve Barnett and Nick Hutton — this diversification in service provision is highly typical of the market. "It’s no great surprise that CIOs cannot keep track of what is where," says Barnett, not specifically referring to either Aviva or Linde.
This applies to telecoms service providers as much as to corporate customers, he adds.
"There is minimal information even in the company itself as to who is buying what from whom, how it’s performing and when the contracts are due. There is no view of the competitive landscape except what they have built up personally and that can all change the instant there is an acquisition or an employee pushes off."
Barnett notes that a typical international telecommunications service provider will divide its sales operation into global accounts, major accounts, large enterprise accounts and so on. But even though they are providing advanced technological services, often "they have no tools except spreadsheets, Salesforce and their individual experience", he notes.
And complexity is compounded in large diversified international businesses. They may aim to concentrate their telecoms contracts on one or two large providers — so that they can use their strength to get the lowest prices for the best possible quality of service — but it’s rare that they achieve that goal.
Which means that every year the world’s 500 largest companies spend almost $1 trillion on telecommunications services — possibly half the telecoms industry’s total billings — and there is remarkably little information about where it all goes and about whether these large customers are getting the best possible deal.
Global Telecoms Business plans to continue to work with BackChannel to deliver trustworthy and testable information on where corporate customers’ money is spent. GTB

                      




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