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By Farzin Arsanjani

There is universal recognition among service providers that in order to take advantage of the rapidly growing cloud market, they must diversify into OTT data services. Data traffic is growing exponentially, while voice traffic is flat. The future is clearly more data-centric, and service providers that deliver value-added OTT services while controlling where data is stored will have strategic leverage. Service providers are perfectly poised to leverage their position in the data-delivery value chain and to capture market share without sacrificing margins or seeding the market for nontraditional competitors hailing from the technology sector.

In addition to delivering a long-term strategic benefit, this helps business managers hit hard numbers, grow margins and reverse a downturn in ARPU. This recognition has sunk in, but the next big question is, what categories should service providers invest in?

The Growth of the Enterprise Cloud

A parallel development is the growth of the cloud (Gartner predicts that from 2013 through 2016, $677 billion will be spent on cloud services worldwide). While consumers got off to an early start, the really dramatic shift took place when businesses started embracing cloud services and moving their IT workloads to the cloud. This has led to a rapid growth of the “enterprise cloud” and business SaaS services. The meteoric growth of the cloud can be attributed in large part to the success of communication and collaboration services like social collaboration, UCC and video/Web conferencing, which by their very nature, are designed to bring together people spread across locations. Wintergreen predicts that the cloud collaboration market will grow to $17 billion by 2018. IDC found that collaboration was one of the top three areas of growth in enterprise software, growing at nearly twice the rate of other categories.

Perfect Fit for Service Providers

As PwC insightfully observed in its recent report, service providers are perfectly positioned to serve the enterprise cloud market for the following reasons:

1) They own the network upon which the cloud applications and services are delivered; they can guarantee exceptional SLAs and value-added services. This option is not available to pure cloud vendors, who deliver their services over the public network.

2) They have expansive networks, universal brand recognition and trust, which gives them broad reach.

3) They have experience in managing large communication and hosting centers, thereby being able to achieve high levels of scalability and application performance, capabilities not available to smaller vendors.

4) They already provide businesses key connectivity services, which gives them the opportunity to offer cloud services through innovative service bundles, and offering a unique customer experience will be the key to their success.

5) Service providers typically have more established IT customer relationships and can up-sell and cross-sell cloud services easily to current customer bases and increase account penetration.

The good news for service providers is that the cloud collaboration market is fragmented and offers significant growth opportunities. Google Apps and Microsoft Office 365 are estimated to have generated around $1 billion each in revenue in 2012, roughly representing 12 percent market share, while the rest was captured by hundreds of smaller vendors.

The opportunity is clearly here and now. The options for service providers however are not as clear. There are two paths forward:

Passively resell services from third party technology vendors like Google or Microsoft. This is a convenient option that offers an incremental rather than transformative approach. There is the potential to generate short-term revenue by riding the coattails of another technology vendor at the risk of a diminishing role in the service value chain, eroding margins and lowering customer barriers for exit – classical side effects of selling a commodity. In addition, this approach is potentially damaging, as service providers will effectively seed the market for cloud technology vendors that have already shown an appetite for competing directly with them.

Actively participate in this market by offering a branded service. It is understandable that service providers are skeptical of building their own cloud applications and developing new competencies. But this concern can easily be addressed by private-labeling proven collaboration services that they can control. Using this approach, service providers can drive their long-term strategic goals as well as effective sales strategies by packaging, pricing and deploying collaboration services that meet the requirements of their target markets. By investing in their brand and promoting a unique, value-added offering, service providers can take control of their sales and marketing plans, protect their customers and enjoy much better margins. Furthermore, service providers can choose the deployment option (their data centers or third-party data centers) that protects their customers, offers added value and drives their long-term strategy.