The convergence between telecoms and IT services businesses has long been discussed in the industry, however, it is the last 12 months that has caused the most significant convergence between the two.
It is therefore important to now assess and understand what has changed, and the effects this shift will have on both telecoms and IT services businesses’ growth in the future.
About the author
Tom Wrenn is TMT Partner at private equity firm ECI Partners
Telecoms vs IT services offerings
Traditionally, when walking into an office, it was the norm to see a phone on every desk, and somewhere in the office there would be a “PBX” – the physical hardware which ran the system. There were ‘lines and minutes’ telecoms providers who managed this for the business, initially selling the hardware and then providing the service. Separate to this, businesses would usually have an IT service provider dealing with the company’s desktop PC, server and certain application requirements, and frequently it was different individuals within a business who looked after the two aspects.
The rise of IP telephony over the last decade has driven an increasing convergence of the two, with PBX’s becoming applications in the cloud rather than physical on-site hardware. IP telephony allowed flexible working practices, with employees “logging in” to the phone at the hot desk. In some organisations, it even became the norm for employees to go into the office and plug a headset into the PC at their hot desk and communicate from there – the phone was now an application on the computer rather than a physical device on the desk.
Telecoms providers, who were no longer selling as much hardware and operating in a relatively low organic growth market, recognised that they needed more things in their sales kit bag to sell to customers. Some have used their reseller skill set to move into selling Microsoft 365 or basic cyber products to their telco customer base, blurring the gap between what was traditionally seen as either a comms or IT services product.
As connectivity became increasingly important to customers’ IT environment – no connectivity means no access to cloud infrastructure or applications – IT services providers began to take more of an interest in their customers connectivity set up, perhaps even white labelling a wholesale provider’s service as their own.
The pandemic impact
The Covid-19 pandemic has impacted ways of working for almost every business around the globe. Overnight the way that people communicated, and viewed communication, changed. The question that needed answering was ‘how do we communicate and collaborate with our team when working virtually, and who is going to help us solve this issue?’.
Answering that question has most likely moved convergence between IT services and telecoms forward by at least five years.
Over the last 12 months, business communication platforms, such as Microsoft Teams and Zoom, have become businesses’ main comms service with mobile a distant second. During this period, for many, the office phone has been gathering dust and the key question is whether it will re-boot into life when we all head back to the office, or has our adoption of collaboration platforms over such a prolonged period killed it off?
Despite replacing a “telecoms” product, it is generally IT providers that have led the charge in rolling out these collaboration platforms, selling the licences and then ensuring they are set up appropriately on users’ computers. They are the application/Microsoft experts, who generally have trusted access to end users’ computers, firewall settings and so on.
This convergence has presented a clear challenge for telecoms providers. While the more forward-thinking telecoms companies had been moving into the IT space in recent years, seeing it as an obvious area for future growth, the pandemic’s almost instant change towards online communication caught many telecoms providers off guard, and trying to buy in those cloud skills and services at a time when they were in such high demand was never going to be an option.
What does this mean for the future?
Before the pandemic, telecoms businesses had a relatively low growth profile but were extremely resilient, with high recurring revenue, high cash generation and a good acquisition opportunity due to the fragmented market. Many adopted this buy-and-build model, growing by integrating competitors into their existing core platform and delivering synergies.
Since the pandemic, investors are likely to be more concerned about single-focus, old school telecoms players, unless they can show a clear USP that allows them to compete in a world focused on “collaboration”, or provide some other distinctive proposition such as operating in a vertical market with specific comms needs and complexities.
Realistically, however, the market will adapt to the needs of buyers, who will see an ever-reducing benefit to having two separate suppliers. Telecoms businesses with the right skills base and sales machines that can adapt quickly and pick up more IT services, will be better placed to compete, especially if they can support businesses with the migration to the cloud that has accelerated so rapidly over the last twelve months. The incentive for them to do so couldn’t be larger – IT services providers have been able to use the past year to rapidly grow and demonstrate their value add to customers.
Fundamentally the question is no longer IT services vs telecoms, but which players will be able to offer the right value add services to businesses who will need to not just communicate but collaborate from anywhere, through the cloud.