‘Vendor-operator landscape is broken’

• Entry of China vendors have caused brutal price wars
• Innovation needs to be valued and paid for

IT is no surprise that the impact of China vendors Huawei and ZTE in the telecommunications vendor space has forced a brutal slashing of prices. Established players such as Ericsson, Motorola, Alcatel-Lucent, Siemens and Nokia have been forced to undertake dramatic restructurings to compete.
 
Some have fallen off, like Motorola, which is now just focusing on phones, having sold its network business and patent library to Google.
 
Nokia and Siemens on the other hand merged to form Nokia Siemens Networks or NSN. Upon merging, it started undertaking an aggressive restructuring to not just be able to compete but to ensure its survival. It has slashed about 9,000 of the 17,000 jobs it announced in 2011, shifted its research and development (R&D) from Germany and Finland to India and China, and moved manufacturing to China.
 
In fact, its manufacturing facility is spitting distance from Huawei's. As a result of the painful but needed steps, today, the new NSN is a leaner company.
 
Make that “much” leaner. "We pretty much have the same cost base as the Chinese vendors," says John Lancaster-Lennox, Asia South head of NSN.
 
"Strategically, we decided focusing on the entire telco landscape was not feasible anymore. So, we are focusing on mobile broadband, customer experience management and excellence in delivery. Our products clearly have to be fantastic and we are focusing on executing well.”
 
The company has raised the financing it needs to get to its eventual IPO, restructured all its loans, is generating free cash on a quarterly basis and is doing well in Asia. "So, the fight is one [for market share]."
 
There are two aspects to executing well. Speed to market for the customer, and on NSN's side, to deliver this within cost and without suffering any damages (financial) to itself, which means excellent execution is key.
 
User-friendly probing
 
One set of tools that NSN is banking on is its CEM (Customer Experience Management), a tool that gives its telco clients more insight into their customers to that they can serve them better and extract more revenue from them.
 
"Telcos want to get more money out of every customer they touch while giving those customers a better experience,” says Lancaster-Lennox.
 
Today, NSN has tools that can probe the network in a very user-friendly way to extract insight for operators.
 
Apparently this simplicity is a big deal. Lancaster-Lennox notes that in the past one had to almost be "a rocket scientist" to understand the data that came out of the network. NSN has worked to make this complex information available to the customer service center and the sales team.
 
By understanding the customer better, CEM allows for opportunities to sell tailored services to customers too, or offer them a better user experience and make their service stickier with less chance of the customer leaving the network, he claims.
 
For instance, two customers are sitting on the same table and if the network happens to be congested at the moment both are making a call, the premium customer will be allocated priority to put his or her call through.
 
This has long been the holy grail for operators worldwide, with all vendors claiming to be able to deliver on this. Lancaster-Lennox feels NSN has.
 
"The real value of our CEM will come when operators realize it is not a tool for their engineers but for their entire organization," he says.
 
He also feels that operators have to understand that they are buying more than hardware from NSN. "They believe they are buying still hardware from us but do not see the value of our software. We spend close to two billion euros a year on R&D and that has to somehow be paid for."
 
Broken landscape
 
But if operators perceive they are just buying boxes from their vendor, they will only pay a certain amount for it then. Which is why Lancaster-Lennox feels that the "operator-vendor landscape is a bit broken at the moment."
 
Operators still want more than 40% EBITDA (earnings before interest tax, depreciation and amortization) and it is considered a crisis for them if this drops below 40%.
 
"That's considered a crisis for them!" he says. "Wouldn't we love that type of crisis. We can't even dream of those numbers."
 
His point is that both parties need to understand each other better. "We [vendors in general] have done so many innovative things over the years to save them money but they still erode our value all the time and it keeps getting eroded."
 
At the same time, he says the vendors have not helped the situation too. "‘European vendors used to compete with each other then came the Chinese vendors and the competition intensified."
 
As a result of the rabid competition between vendors, almost to the point of being unhealthy, their value in the eyes of operators has been reduced where they are totally expendable, says Lancaster-Lennox.
 
"Today it is NSN in the network, tomorrow it could be Huawei and so on." He feels this is something the industry needs to fix but admits he does not know how it can or will be fixed.
 
Meanwhile, he says the best NSN can do is to make itself "as lean and mean as can be." It has reduced its cost base, focused on what it has to, know its true value to customers and what it is good at.
 
"We are investing money into what we are good at and telling customers this is what we do and they should know they get high quality boxes and software coupled with excellent delivery capability,” he claims.
 
However, he acknowledges that operators will not likely sympathize with him and be willing to pay more. "But if we can bring true innovation that saves them lots of money, it would be nice if we can extract more money from that innovation."
 
Unfortunately, at the moment his assessment is that this is not happening. To put it simply, "there is not that respect [to value innovation and pay for it] in our industry," he feels.
 
Clearly, this is a situation that needs to be rebalanced. But while waiting, not hopefully, for that to happen, all vendors are geared for a no-holds-barred battle.