After two years of treading water, value added services for wireless are emerging from hibernation. One after another, new tenders are being published for advanced value added service system to replace old products. At the same time, competition is intensifying, since it is now clear to all wireless equipment manufacturers that most of their revenue in the next few years will come from value added services and network management, and they are preparing accordingly.
The procurement of new systems by wireless operators signals the beginning of a new era for the established voice mailbox players - especially for Comverse Technology (Nasdaq: CMVT) subsidiary Comverse Network Systems, which has the biggest share of the European voice mailbox market, and Lucent Technologies (NYSE: LU), the market leader in the US.
In recent years, wireless operators tended to upgrade their existing systems, but now everything is different, and the game rules have changed. Almost none of the new tenders are for upgrading; new systems to replace the old ones are being sought.
No patches, please
”Wireless operators aren’t interested in new patches for their old systems,” a wireless industry source said. “The old systems use proprietary technology, while the new systems provide IP capabilities for the entire platform, including the applications layer, the processing layer, and the storage layer. If one of these elements belongs to the old system, the entire system is handicapped in connecting to new standards and receiving information from other sources. In other words, any link to an old system prevents the operator escaping from the proprietary environment.
”A basic system can be supplied that facilitates joint storage of voice mailboxes and other message content by grafting new systems onto the old, but most operators today prefer systems with better capabilities. For example, the new systems make it possible to store games that the user has downloaded from the Internet, large numbers of short messaging service (SMS) messages, the user’s personal address and telephone directory, and many other applications that facilitate the depositing of content. Furthermore, combining old and new systems requires a complex connection between them, which makes the system awkward, and involves heavy costs for integration services.”
Intensifying competition is another challenge. Among the competitors for a large market share are several of Comverse’s old rivals, integration companies, and equipment manufacturers. Openwave Systems (Nasdaq: OPWV) currently offers a unified platform of IP-based voice mailboxes that include e-mail, although the company has not yet actually installed its voice mailboxes anywhere.
Unisys (NYSE: UIS), one of Comverse’s largest competitors, is now offering advanced generation visual voice mailboxes, combined with video messaging and other advanced value added services. The ranks of Comverse’s competitors also include CTI², Tecnomen (OTCBB: TCNMF), and Glenayre Technologies (Nasdaq: GEMS).
Among the major integration companies that have recently made an aggressive entry into the voice mailbox field, LogicaCMG (LSE, Euronext: LOG) stands out. The company offers a combined voice mailbox-e-mail system. LogicaCMG acquired Amteva Technologies from Cisco Systems (Nasdaq: CSCO) for the purpose, although Amteva was unsuccessful under Cisco’s tutelage. LogicaCMG has already installed its system at several companies, and is leveraging its grip in the SMS and multimedia messaging service (MMS) fields. LogicaCMG, which has a great many loyal customers, uses the storage system of its SMS and MMS systems to provide a complete array of services on one unified platform.
Enter the equipment manufacturers
Another type of major player is now entering the value added services pool with a big splash giant wireless equipment manufacturers. Some of them have cooperated with Comverse up until now, and are now competing with it. The infrastructure manufacturers are well aware that while the wireless operators will continue to buy infrastructure, the big money in the coming years will come from value added and network management services, Except for Nortel Networks (NYSE: NT), almost all the equipment manufacturers have to some extent entered the field.
Ericsson (Nasdaq: ERICY; SX: ERIC), which formerly sold Comverse’s voice mailbox systems, is now selling its own voice mailboxes. It is reasonable to assume that Ericsson will leverage its large infrastructure customer base in order to sell voice mailboxes, as has already done in the MMS field. Siemens (NYSE: SI; XETRA: SIE), which was Comverse’s loyal partner almost since the latter was founded, is now becoming an independent provider of voice mailboxes and value added services. Siemens has not developed a voice mailbox system; it is offering a combination of products from several companies in the field. In a tender by wireless giant T-Mobile USA (formerly VoiceStream Wireless Corp.), for example, Siemens is competing against Comverse with a combination of systems from several companies, including Openwave and Tecnomen. Siemens has developed other value added systems, including a prepaid system, WAP, intelligent networks, MMS, and video messaging.
Another equipment manufacturer that has already been operating in value added services for several years is Lucent, which is offering new IP-based systems, called AnyPath. It appears, however, that Lucent’s challenges are similar to those facing Comverse. In addition, one of Lucent’s largest strategic customers is AT&T Wireless (NYSE: AWE), which has been acquired by Cingular Wireless. It is not clear at this stage whether Cingular will continue to provide Lucent’s systems, or whether it will switch its customers to Ericsson’s voice mailbox systems. Nortel has made a strategic decision to operate through cooperation, and not to supply these systems by itself. Nokia (NYSE, LSE, HEX: NOK) still has no voice mailboxes, but it has MMS systems, WAP, and other services. The question now is whether, and if so, when, the Finnish wireless giant will decide to enter the voice mailbox field.
Industry sources believe that over the past two quarters, Comverse’s MMS market share has risen from 3% to 6%, at the expense of its competitors, and the quality of its customers may also have improved. Nevertheless, Comverse is still regarded as a minor player, with little presence among the tier-1 operators. Ericsson leads this market with a 38% share, compared with 41% in the preceding quarter, and Nokia is next with about 30%, followed by LogicaCMG with over 20%. MMS market shares are measured by numbers of contracts, while actual revenue is determined by the number of potential users. Furthermore, some operators, although not many, work with more than one supplier.
In any case, given the intensifying competition and the trend towards replacing systems, the question arises of how Comverse plans to deal with the new situation. Let it be noted that two years of slashing expenses have brought the company from a $100 million operating loss in 2002 and an operating loss of over $40 million in 2003 to a $2 million operating profit in the first quarter of 2004, net of one-time expenses. Comverse’s first quarter revenue was $150.55 million, of which $104 million came from older systems and $46.67 million came from new applications. After subtracting the effect of growth, this amounts to annual revenue of $186.7 million from the new applications.
The potential of the value added services market, including maintenance services, but excluding content services, is estimated at $1.51 billion in the coming years. More optimistic forecasts, which include the enterprises market, cite a $2.5 billion figure. It can be assumed that, given the growth rates demanded of companies like Comverse, the market potential, and the increasing competition, Comverse is now looking for new growth engines.
One new-old route to growth is the attempt to position Comverse as a real-time billing player. This attempt presents Comverse with a very difficult challenge, because it is known in the industry as a value added player. At this stage, prepaid systems are involved. The real question is whether the company also wants to enter the operations support systems (OSS) field. Comverse’s prepaid system used to be technologically inferior, but wireless industry sources say the company now has good systems, based an intelligent network in tandem with eXalink’s technology.
There is no question that the prepaid sector has good revenue potential, but it, too, is hardly wide open. Major players include Ericsson (40% market share), Alcatel (NYSE: ALA; Paris: CGEN), Siemens (NYSE: SI; XETRA: SIE), and Telcordia Technologies, many of whose prepaid systems are sold by Nokia. There are also smaller players like Megisto Systems, for example.
Billing providers, with Amdocs (NYSE: DOX) in the lead, are another type of player, although there is no competition between Amdocs and Comverse. Industry sources say that Comverse supplies prepaid systems to operators, 80-90% of whose subscribers are prepaid users, while Amdocs provides prepaid systems to operators, most of whose subscribers are postpaid users. If there is any friction between the two companies, it is due to Comverse’s rating engine, which operates mostly in the prepaid field. The prevailing industry opinion, however, is that Comverse will try to avoid competing with Amdocs’s rating engine. Theoretically, the two companies could cooperate, but industry sources say that given the individuals involved, such cooperation will probably never take place.
Will Comverse enter the OSS field, with its fine revenue potential? Comverse has not announced an plans to enter the sector, but the TheDeal.com website reported on July 26, 2004 that Comverse had considered making a bid for the acquisition of integration giant Telcordia, which deals mainly in OSS systems. Whether the interest is real or not, rumors of this type could signal Comverse’s intention to enter the OSS field.
Furthermore, while Telcordia’s prepaid systems were not very dependent on Nokia’s sales promotion, it can be assumed that the combination of Telcordia’s prepaid and OSS business could fit Comverse like a glove.
Sources close to Comverse say that there is a great deal of logic in the company’s entry into the OSS field. At the same time, using an acquisition of Telcordia as an entry seems a little too ambitious, both because of Telcordia’s price tag, and because of the expertise required to absorb an integration giant like Telcordia.
”It’s much more logical for Comverse to acquire a smaller OSS company,” an industry source says. “Telcordia is an integration company, and its business model is therefore completely different from that of Comverse. I can’t visualize Comverse wanting to enter the professional services field in such a massive way, especially because the market gives integration companies much lower multiples.
”Even were Comverse interested in altering its business model, however, it’s by no means sure that Telcordia would be the best choice. There are smaller tier-2 companies, such as Atos Origin, that concentrate on Europe, and might be more suitable.”
One completely new growth engine recently announced by Comverse is i-mode. The Yankee group published figures two months ago indicating that an average i-mode deal amounted to €12-18 million, which is a giant transaction by Comverse’s standards. Up until recently, NEC (Nasdaq: NIPNY; LSE: NEC; XETRA: NIPN) was the sole official supplier of NTT DoCoMo. The latter is now interested in boosting competition between i-mode suppliers, and is choosing additional official suppliers. Comverse has spotted the potential, and as far as is known, has been chosen by NTT DoCoMo as an official supplier.
In mid-June, “Globes” reported contacts between Cellcom and Comverse for the former’s purchase of i-mode. If a deal is inked, Comverse will be able to report the actual installing of a system, not just its choice as a supplier by NTT DoCoMo. At the same time, keep in mind that Comverse has a poor reputation regarding its promises about installing, integration, and absorption of new products. If Comverse wants to ride the i-mode wave, it will have to make a concerted effort to better that reputation.
Published by Globes [online] - www.globes.co.il - on August 12, 2004