Jessica Figueras
The slow march of consolidation in telco software
UK-based Axiom Systems has been acquired by Comptel, headquartered in Finland. Both companies are OSS (operational support systems) software vendors, focusing on automating fulfilment processes for telecoms service providers. The purchase price was £7m in cash, with an additional sum of between £4-16m in cash and shares if Axiom's 2008 sales exceed expectations. Comment: We British OSS watchers have had much to get excited about recently, given this is the second acquisition of a UK-based OSS vendor this month (the first being Jacobs Rimell, just acquired by Amdocs). From the perspective of this select group it must seem that the telco software industry is finally maturing, via the same process of consolidation that has reduced the global software industry to a handful of giants. Yet despite some local excitement, the endgame is still a long way off. The telco software industry (particularly the OSS portion of it) is enormously fragmented. It comprises hundreds of small vendors, most of whom are duplicating their R&D efforts by focusing on the same process and technology areas, creating great inefficiency in terms of high integration costs (for their customers) and reduced growth (for themselves). In the age of commodity software, why is this still the case? To begin answering this question, we might note that telco software vendors tend to be more geographically dispersed than is the norm in the (traditionally US-centric) software industry. The UK, for example, has been home to somewhat of a cottage industry in OSS, with vendors including Intec, Cramer and Jacobs Rimell (before they were bought by Amdocs) and Tertio (before it was bought by Evolving Systems). Other respectable OSS vendors come from Finland, Russia, Poland, France, Australia, India, Israel, the US, Canada and beyond. This multi-polarity is not really surprising when you consider that many telco software vendors originated from the R&D labs of the big national telcos, either formally (via spin-outs) or informally (with engineers leaving to commercialise their own ideas). Yet these close associations between individual vendors and their original telco sponsors can persist, to the extent that many vendors never develop as truly independent businesses. Since even a small telco is typically a large enterprise with enormously complex IT requirements, a vendor can survive profitably for years simply by servicing the needs of its first telco customer. Such relationships can be almost parasitic, gradually creating islands of bespoke technology in the telco which fuel continuing dependence on the vendor for maintenance. They can also crowd out vendor resources which might otherwise have been invested in building products, sales and marketing, reducing their own long-term growth prospects. This is one explanation for the continuing existence of a large number of small, undifferentiated OSS vendors. The innovative exceptions (such as Axiom, Jacobs Rimell and Cramer) turned out to be attractive acquisition targets, precisely because they managed to avoid becoming the captives of their early telco customers. So is the situation changing? Yes, but slowly. It will be many years before telecoms software reaches the stage that enterprise software is at today. Two main factors are driving consolidation. On the demand side, telcos are now strongly committed to change in their approach to IT sourcing. With reduced IT spend firmly on the agenda, telcos now aim to concentrate that spend on fewer vendors, and wherever possible migrate away from customised solutions towards products. This strategy favours big vendors with broad product portfolios, making life increasingly difficult for old-school niche providers. On the supply side, two distinct sets of ambitious vendors are acting as consolidators. The giants - primarily Amdocs and Oracle - are in the process of building comprehensive telco software portfolios via aggressive acquisition. Both aim to be strategic partners for the world's telcos, with a footprint that spans functional areas (OSS, BSS, service delivery and beyond) as well as customer types and service lines (mobile, fixed, broadband, cable, etc). Some small vendors are also consolidators. Successful, ambitious players such as Subex, Redknee, and of course Comptel are trying to quickly build scale by acquiring (albeit on a smaller scale). This is always risky for a small vendor. Like their larger counterparts they must successfully integrate their acquisitions, which is never simple - but unlike them, they cannot afford to make the wrong bets about what to buy. If the expected opportunities for up-selling do not materialise, expansion can be a recipe for margin destruction.The particular bet that Comptel has made goes with the grain of the changes in telco IT sourcing that we describe above. Comptel's strength has been in mobile service fulfilment, whilst Axiom has had more success in fulfilment for broadband IP services. By choosing to expand this way, Comptel is betting that telcos will choose to consolidate their fulfilment systems across service lines (mobile, broadband, wireline, etc). So far we have not seen overwhelming evidence that such convergent sourcing within OSS is happening now, but most telcos agree that it is the way forward in the long term. Given the traditionally slow pace of change in the telecoms industry, and with apologies to John Maynard Keynes, let's hope that the innovative small players aren't all dead by then.
