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2009 | Buch

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Vertical Software Industry Evolution

Analysis of Telecom Operator Software

herausgegeben von: Pasi Tyrväinen, Oleksiy Mazhelis

Verlag: Physica-Verlag HD

Buchreihe : Contributions to Management Science

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

Seldom has any business been in such turmoil as the Communication Service Providers (CSP) business is today. Telecom operators providing communication services constructed the infrastructure of the global information society with their trillion investments on various telecommunication technologies from broadband to mobile. Their investments on software turned their technology-specific in-house procedures into modern layered OSS/BSS.

This book analyzes the status and the future evolution of OSS/BSS software industry from multiple viewpoints including technology diffusion, vertical disintegration and evolution of a vertical software industry. The analysis uses both commercial databases on software market transactions and interviews of operators in Europe and Far East, using quantitative and qualitative methods.

This research complying academic standards aims at serving the practical business needs in the companies shaping the future of communications: the CSPs and the software developers – sometimes found in a single enterprise.

Inhaltsverzeichnis

Frontmatter

Evolving Software Markets

Frontmatter

Introduction

Abstract

This book examines the evolution of vertical software industry, focusing on the industry of telecommunications software. In particular, this study analyzes the diffusion and vertical disintegration of the operations and business support systems (OSS/BSS) commonly deployed by contemporary telecom operators. Taking as a basis several models of industry evolution (technology diffusion, network externalities, evolution of the product, evolution of the vertical software industry), this book considers the current state of the telecommunications software market, analyzes the factors affecting further evolution of the OSS/BSS market, and describes scenarios of the market evolution in the future.

The current state of the telecom software market is considered in the book from the viewpoints of both telecom operators and software vendors. The analysis suggests that the market evolution has not yet reached its stage of maturity and large developments are still expected in near future. The analysis is based on both commercial databases on software market transactions and on interviews of operators in Europe and Far East. Both quantitative and qualitative methods are applied for the analysis.

The book is intended to decision makers in the CSP business as well as to those developing software for this rapidly evolving business sector. The aim is to do research that would satisfy academic standards while providing help in practical business problems for CSPs and software developers, i.e., for companies that are shaping the future of communications and sometimes found in one and the same enterprise. Seldom has any business been in such turmoil as the CSP business is today. This book opens up the possibility to approach analytically and factually the unknowns of the future of this business. For this purpose, Chap. 4 presents a practical toolkit for managers for fast examination of the directions of the OSS/BSS software market. This is followed by a description about how this methodology was developed and instructions on how to apply the methods for another vertical software market.

Pasi Tyrväinen, Mirja Pulkkinen

Vertical Software Industries

Abstract

The software industry (SWI) was born only a few decades ago, and is still relatively young compared to other industries. Its origins can be traced down to the decisions to unbundle some secondary parts of IBM computer development to independent software companies (Campbell-Kelly 2004). The software development was then considered a secondary activity serving the core business, which was at that time computer hardware manufacturing. This focus on hardware is still visible in the brand names of both the global information and communication technology (ICT) giants, such as IBM, and the major professional and scientific establishments of the field, such as the Association for Computing Machinery (ACM).

Gradually, however, software industry has established its position as an independent industry. Also, software business has become a specialized focus of scientific research. First, this research targeted the core of the emerging industry, i.e., independent software vendors (ISV) developing and selling independent software products and software services – these companies are often referred to as the primary software industry (BMBF 2000). The term secondary software industry refers to software business performed by companies that focus on another industry but utilize software as a part of their products or services. At different times, different vertical industries represented the key host industries for the secondary software industry: the automation industry in the 1970s, the electronics industry in the 1980s, and the telecommunication industry in the 1990s. At the moment, e.g., the automotive and to some extent the aerospace industries are the centre of attention for booming secondary software businesses.

Pasi Tyrväinen

Theories Related to Vertical Software Industry Evolution

Abstract

The word innovation often refers to a new product, usually to an industrial or technical invention, although actually all kinds of new ideas should be considered. Following Rogers (2003, p. 12), “[a]n innovation is an idea, practice, or object that is perceived as new by an individual or other unit of adoption.” The birth of a new industry can be considered to occur as this new innovation is introduced to the markets by the first manufacturing firm. At this point the potential customers evaluate whether it is worth to adopt the product or not.

Innovation diffusion theory studies the spread of an innovation within a social system (see, e.g., Rogers 2003). The basic aim is to answer the question of why an innovation – an improvement – is not adopted immediately, i.e., why its diffusion takes time. One of the common answers is that not everyone knows of the innovation right away, others add, for example, that gained advantages or profits vary between potential adopters.

There are several dichotomous classifications of innovations, trying to separate innovations into two categories by their nature. Some of such dichotomous divisions are, for example, the division of innovations into incremental and radical innovations (e.g., Freeman 1994), into sustaining and disruptive (e.g., Bower and Christensen 1995), or into continuous and discontinuous innovations (e.g., Tushman and Anderson 1986). Even though the category names differ, these divisions seem to have the same basic aim: An innovation may be a totally new innovation (e.g., product), but it also could be an improvement to an existing innovation. In practice, however, it is often hard to place an innovation into one of these two categories as it might have some characteristics from both.

Lauri Frank

Model for Evolution of a Vertical Software Industry

Abstract

The interaction of the primary and secondary software industries appears to follow a common pattern, which has been described in the model for evolution of a vertical software industry (Tyrväinen et al. 2008). The evolution is seen as iterating through several phases, shown in Fig. 1 and described below.

The first phase of the model is called the Innovation phase, where the vertical industry enterprises seeking to gain competitive advantage implement their core business processes with some innovative software developed in-house. In service-oriented businesses this means automating manual work with information systems and in companies developing and producing hardware products this means implementing most of the software needed to use their equipment by in-house R&D personnel. In both cases the vertical industry enterprise invests increasingly in ICT and the number of software personnel tends to grow gradually. In case the enterprise has to cut back on software workforce during economical downturn this can be done by relocating these employees to other duties in which they can perform well due to their industry competence. Some of the software development professionals may also become self-employed by establishing micro ventures and capitalizing on their expertise with new types of systems, thus serving as agents of technology diffusion.

Pasi Tyrväinen

Overview of Telecom Operator Software Market

Abstract

Telecommunications is an essential enabler of modern societies and a global vertical industry, providing communication and information services, with its annual revenue of over trillion euros. In this book, a company providing these services is referred to as a telecom operator or communications service provider (CSP). CSPs create value by offering connectivity to and via an infrastructure of networks for transferring signals. The core business processes in a telecom operator company therefore revolve, on one hand, around physical networks and their maintenance, and on the other, managing their customers and their use of the connectivity services over the networks.

In the past, CSPs’ operations focused more on the development and management of network infrastructure. Eventually, as the need for standardization of the systems and operations became apparent, International Telecommunication Union (ITU) provided a set of specifications covering different functional management areas. More recently, the telecom business realized the importance of adopting the so-called “lean” approach, and the focus of standardization efforts switched to streamlining the business processes (Thomsen 2006). In particular, TM Forum provides guidance for such work through a set of reference architecture specifications. To provide an insight into the types of telecommunication software systems and into the vertical software market segmentation, a brief overview of the activities by ITU and TMForum is given below.

Eetu Luoma, Lauri Frank, Mirja Pulkkinen

Current State of the Telecom Software Market

Frontmatter

Process Improvement Through Software

Abstract

The productivity increase and entrepreneurial dynamics in the adoption and efficient use of ICT. Possible lags in the effects of ICT are not very well known. Furthermore, timing between the implementation of ICT and complementing organizational changes remains an open question. According to their research it seems that the additional productivity achieved typically ranges from 8 to 18%. The effect on services tends to be larger than on manufacturing. The effect is often manifold in younger and can even be negative in older firms. Since organizational changes are easier to implement in younger firms and recently established firms have by definition a new structure, this can be interpreted as evidence for the need for complementary organizational changes. Manufacturing firms seem to benefit from ICT-induced efficiency in internal communication whereas service firms benefit from efficiency in their external communications.

Also the results of Maliranta and Rouvinen provide direct and indirect evidence on the importance of competition, education, innovation, organizational change and entrepreneurial dynamics in the adoption and efficient use of ICT. Possible lags in the effects of ICT are not very well known. Furthermore, timing between the implementation of ICT and complementing organizational changes remains an open question. fAccording to the study, one would expect that the two are implemented simultaneously, but anecdotal evidence would seem to suggest that organizational changes that follow show a considerable time lag.

Olli Martikainen

Effect of Software on CSP Performance

Abstract

In order to verify how (if at all) CSP's investments in software affect their business performance, the relationship between (i) CSP's spending on software and (ii) its key performance indicators (KPIs) is considered below. The investments in software are represented by internal, external, and total software spending a year or two years prior to the KPI values, while the KPIs include average revenue per user (ARPU), revenue, net income, EBIDTA, and change in revenue (as an indicator of company growth). Besides, Opex and Capex along with R&D expenses are used as control variables. We use the data collected for the years 2004–2007 (revenue, net income, EBITDA, market capitalization, R&D, CAPEX, OPEX), and 2004–2006 (ARPU). The data is used to construct regression models wherein the dependencies between KPIs and software spending are evaluated in terms of the variance explained by each of the independent (or control) variables.

The dependency of CSP's KPIs on software spending, and Opex, Capex, and R&D expenses are summarized in Fig. 1. The thickness of arrow lines indicates the magnitude of the variance explained (thick line indicates the coefficient of determination of R²>0.5, thin line − 0.1<R² <0.5, and dotted line − 0.05<R²<0.1. The type of the arrows designates the sign of the regression coefficient: the double (single) line corresponds to the positive (negative) value of the coefficient.

Oleksiy Mazhelis, Pasi Tyrväinen, Kimmo Suojapelto

Insights from Operator Interviews

Abstract

The previous section analysed use of software to improve productivity from a general perspective and provided a quick statistical analysis of software usage to the performance of a CSP. Before conducting elaborated statistical analysis on CSP software usage, we need to gain some insight into operator business and understanding on how operators see the role of software in their business as well as how they acquire software.

Telecommunications operators run a software intensive business. Currently, there exist a variety of access networks which form the technological infrastructure for providing communications services. Each network technology may require specific software applications for running services on that network. As seen in the previous sections, the OSS/BSS software is composed of numerous applications each for a rather narrow area of functionality. Further, in the operator business, growth seems to come in the developed countries from services built on top of plain network connectivity. The CSPs provide access to the Internet and to diversifying mobile services (besides telephony, also data transfer, email and chat services, and as a growing area also media, including video and TV), as well as a growing number of other value added content services. PSTN telephony is commonly facing phase-out in the portfolio of CSP services. All this adds to the number of applications a CSP has to maintain in their application portfolios.

Mirja Pulkkinen, Jari Veijalainen

Analyzing the Current Phase of the OSS/BSS Software Market

Abstract

In this section, the evolution of the OSS/BSS software industry is described, and the current phase of the OSS/BSS software market is analyzed using quantitative data. The first analysis uses the viewpoint of the general industry lifecycle stage models. This is followed by an analysis from the viewpoint of the vertical software market evolution model. The last section analyses the mergers and acquisitions of the OSS/BSS market from the last few years.

Lauri Frank, Pasi Tyrväinen, Eetu Luoma

Issues Affecting Telecom Software Market Evolution

Frontmatter

Vertical Integration due to Software Systems' Modularity

Abstract

In their product portfolio, OSS/BSS software vendors make products pre-integrated with each other as well as with other related OSS/BSS products. Prior to the full-scale development and integration, it is vital for these vendors to assess which products are reasonable to integrate. Such integration of software may be aimed at achieving different goals, such as: Reducing software integration efforts. Software vendors aim at maximizing their profits, whereas their customers (i.e., CSPs) aim at minimizing their costs by avoiding the integration job. As a result, to approach a win–win scenario, vendors provide already integrated products or subsystems (pre-integrated modules). Sharing similar knowledge base. When reusing earlier experience in implementing new products or subsystems, the vendors strengthen the quality of the implementation, as compared with the software implemented from the scratch. Other goals, such as sharing the same contact (e.g., technical evaluator) in the customer organization, or the like.

Oleksiy Mazhelis, Pasi Tyrväinen

Vertical Integration due to Small Market Size and High Product Development and Integration Costs

Abstract

An independent software vendor (ISV) recovers the costs of software development and configuration through license fees. However, if the number of ISV's customers is limited, then either the license fees needed for recovering the software development investments may be too high (and hence the customer would prefer to develop the software internally), or the ISV's margin may have to be decreased. Given the costs of development and configuration, as well as the margins set by the ISVs, it is possible to estimate how many customers an ISV has to have in order to recover its costs. Furthermore, given a market of a specific size and the minimum number of ISV's customers, it is possible to assess the maximum number of ISVs that can profitably compete in the market. This number may impact the evolution of the software market – if the maximum number of ISVs is small, the market may not attract enough competition, and the expected evolution of the software market may halt without proceeding to the vertically disintegrated layered set of software products. Below, analytical expressions for such estimates are provided, and are then applied to the context of the OSS/BSS software market.

Oleksiy Mazhelis, Pasi Tyrväinen

Market Polarization due to Difference in Interface Implementation Efforts

Abstract

Another factor potentially affecting the evolution of the OSS/BSS software market is the high complexity of software interfaces. The software provided to a customer – a CSP – needs to be integrated with a number of heterogeneous subsystems deployed by the customer. If the number of integration interfaces is high, a vast amount of special knowledge is needed in the vendor organization. High integration efforts also take up the time of the compentent employees of the vendor organization, thereby reducing the number of customers which it is capable of serving. As a result, only few large vendors can compete in such market, and, due to a lack of competition, the evolution towards a horizontalized market with standardized interfaces and established standard architectures may be delayed or may never take place.

In this section, we shall consider whether the high complexity of the OSS/BSS software interfaces may serve as a potential hindering factor for OSS/BSS market horizontalization. OSS/BSS software provided by a software vendor often needs to be integrated with a large number of heterogeneous subsystems. If the interface implementation efforts are high, we assume that the number of companies capable of providing necessary integration decreases, and hence the OSS/BSS market horizontalization may be delayed.

Oleksiy Mazhelis, Pasi Tyrväinen

Barriers to Horizontal Development

Abstract

The growth of telecommunications has recently been based on mobile services and broadband data. According to OECD statistics (OECD 2005) the number of mobile subscribers of all telecom operators in 2003 was 828 million and in 2006 the number exceeded 2 billion. So the number of mobile connections exceeds by far the number of fixed access lines, which was 503 million in 2003. Already in 2006 the number of VoIP users exceeded 100 million, which is 20% of all fixed connections. It is expected that the Internet Protocol (IP) based traffic will soon grow tenfold compared to the amount of traditional ISDN based traffic. The transition from the existing services to Internet based ones will change the service infrastructure as well as the telecom market.

Traditional telecom and content services are vertically integrated. Each service depends on a dedicated network and corresponding terminals. Examples of such vertical services are fixed telephone services, traditional data services, mobile services and TV broadcasting services. Internet changes the vertical structure to a horizontal one, as described in Figure 1 in chapter “Analyzing the Current Phase of the OSS/BSS Software Market”. All terminals and services will be Internet compatible. Instead of vertical service “pipes” there will be a horizontal structure of services, network and access (Fig. 1).

Olli Martikainen

Future Scenarios for the Teleoperator Software Market and their Evaluation

Frontmatter

Delphi Study

Abstract

The nearby future of the OSS/BSS industry was studied utilizing a Delphi method. The Delphi method is commonly used for future studies, and it utilizes experts, who are asked to evaluate different statements or hypotheses about the future. In this section these hypotheses about the future are referred to as miniscenarios (MS). By combining several related miniscenarios, scenarios about the OSS/BSS market evolution for the next 5 years (2009–2013) can be created.

Lauri Frank

Manager's Toolbox for OSS/BSS Market Analysis

Abstract

The purpose of this section is to provide a set of quick tools for analysts and managers to analyze the status of the telecom operator software market.

The base-line scenario in Fig. 1 represents the expected evolution of the global telecom operator software market. It is based on matching the contemporary OSS/BSS market data and past events to the generic evolution model of a vertical software industry. The figure includes layers for telecom operator business and telecom operator processes at the top and a layer for technology and technology interfaces at the bottom. These three layers have an impact on the OSS/BSS software market (in the middle) and on the emergence of software vendors to these markets.

The market evolution, represented along a time-line from left to right in the figure, starts with national and regional telecom operators implementing in-house software systems and network equipment vendors implementing vendor-specific software for their systems. The key important events in the past shown in the figure include the introduction of early ITU standards, the introduction of mobile communication technology and IP technology, as well as the deregulation of telecom business.

Pasi Tyrväinen

Developing Toolboxes

Abstract

The manager’s Toolbox for OSS/BSS software market analysis is being developed for the analysis of the market during the SmarTop project, and is based on the data sources described in Section “Data sources used”. The method for analysing a vertical software industry which has been elaborated and used in this book is described shortly below; this method can be applied for the analysis of other vertical software markets as well as for the creation and expansion of manager’s toolboxes similar to the one in Chapter 15.

The vertical software industry analysis method used has the following main phases: Baseline creation Indicator calculation Analysis Scenario creation Scenario evaluation Figure 1 visualizes the first three phases related to data collection and analysis while the two latter phases are related to formalizing the results as scenarios. The five main phases are described next.

Pasi Tyrväinen

Evolution of Telecom Operator Software Industry - Conclusions and Future

Frontmatter

Evolution of Telecom Operator Software Industry: Conclusions and Future

Abstract

Analysis of software industry is a challenging task due to the inherent characteristics of software industry. This is not simply due to the immaterial nature of software, or to zero marginal cost of replicating software, nor it is due to knowledge intensiveness of the industry. Most software is vertical software and is developed for the purposes of some vertical industry, such as finance or telecom, whose business the software will support. The major challenge for analysing a vertical software industry comes from understanding the interaction of software technology and the business requirements of the vertical industry.

If the vertical industry is mature and includes a relatively high number of enterprises with standard business processes then software can be seen as a commodity whose cost should be minimized. In this case the vertical software industry is also likely to have entered a mature stage in the industry evolution model. In line with this development, the vertical software industry has most likely reached a dominant design indicating the later phases in the vertical software market evolution model, where a few dominating companies are servicing the vertical industry with their product-based offerings. The other extreme can be found from emerging industries, which use in-house software development or IT consults to create software systems that provide competitive advantage for the enterprises creating a new industry. In both of these cases the model for industry evolution stages and the phases in the model for vertical software industry evolution go hand in hand.

Pasi Tyrväinen

Backmatter

Titel: Vertical Software Industry Evolution
herausgegeben von: Pasi Tyrväinen
Oleksiy Mazhelis
Verlag: Physica-Verlag HD
Electronic ISBN: 978-3-7908-2352-3
Print ISBN: 978-3-7908-2351-6
DOI: https://doi.org/10.1007/978-3-7908-2352-3