Michael Porter's Five Forces model supplies a framework to study the global B2B fixed connectivity market. Strategic business managers trying to gain an edge over competing firms in the global B2B fixed connectivity market can utilize this model to understand better the industry in which the firm operates. The components of each of the forces and the degree of impact of each component in the context of the global B2B fixed connectivity market have been broken down and analyzed.
PORTER'S FIVE FORCES ANALYSIS OF THE global B2B Fixed Connectivity market
THREAT OF NEW ENTRANTS (low to moderate)
There is a significant upfront cost associated with B2B fixed connectivity in many regions, including fiber deployment, spectrum licensing and backhaul and networking equipment procurement. Establishing fiber-based metro and long-haul networks involves major expenses to cover engineering, while fulfilling many required regulatory clearances and right-of-way approvals before construction can begin. Because the incumbent carriers have both a history of scaled cable infrastructure and an installed enterprise customer base, and because new market entrants must achieve a comparable level of operational and technical maturity to deliver similar services with SLA's, entering into the current B2B fixed connectivity market represents a considerable barrier to new service providers.
Infrastructure sharing models, wholesale fiber leasing arrangements, and managed SD-WAN overlays now have lowered the entry barriers for niche providers to provide service. By utilizing only regional ISPs, dark fiber companies and cloud-based networks, new companies may enter target geographical markets or vertical markets without having to own the majority of the network. Additionally, Government-backed broadband expansion projects in emerging economies continue to provide selective incentives for new service providers. Although there are new opportunities for new companies to enter into the B2B fixed connectivity market, replicating nationwide or global enterprise-grade connections will be challenging, limiting the potential for a large-scale disruption. Thus, new entry threats are still structurally at low to moderate.
BARGAINING POWER OF SUPPLIERS (MODERATE)
Suppliers in this market include network equipment manufacturers, optical components suppliers, fibre cabling manufacturers and data centre infrastructure providers. While suppliers have some degree of control over the market for high-performance telecommunications equipment, leading companies exercise significant amounts of power through control of routing, switching and optical transmission technologies on a global scale. Reliance on proprietary software, firmware upgrades and interoperability standards creates vendor lock-in and therefore gives suppliers more power over telecommunications operators and Internet service providers (ISPs).
As a counter to supplier power, there is competition among manufacturers of global telecommunications equipment and increasing adoption of open standards for networking such as Open RAN and white box hardware. Telecommunications operators use a variety of procurement strategies to offset risks associated with dependence on suppliers, including negotiating long-term contracts diversifying their supplier base and utilising volume purchasing to lessen risk. Additionally, advancements in virtualization (NFV/SDN) technologies reduce the need for specialised telecommunications equipment vendors. Thus, while some suppliers maintain moderate leverage over telecommunications operators due to technological complexity and the lack of alternative high-end products, many large scale operators have significant negotiating leverage due to the volume of their purchasing.
BARGAINING POWER OF BUYERS (HIGH)
Large businesses that purchase dedicated internet access, MPLS VPNs, Ethernet services, and managed WAN solutions in the B2B fixed connectivity marketplace typically enter into high-value, multi-year agreements. Large enterprises, particularly those in BFSI, IT, Manufacturing, and Cloud Intense segments, have significant leverage because of their high volumes of contracts and requirements for multiple locations. Buyers use competitive tendering methods, such as reverse auctions and SLA benchmarking, to negotiate lower prices, uptime guarantees, and performance-related penalties. In addition, as alternate forms of connectivity become easier to obtain, including SD-WAN overlays, hybrid WANs, and multi-carrier redundancy, the number of options available to enterprises has opened up new possibilities for collaboration among providers. Enterprises can explore multiple supply sources for the lowest possible cost while achieving maximum performance.
Price sensitivity will remain at historically high levels in sophisticated, established markets where connectivity is viewed as a commodity; however, switching costs can be incurred due to the complexity of integration and the existence of long-term contract commitments. Overall, however, the high level of price transparency and service comparability among service providers will enhance buyers’ negotiating position across most markets globally.
THREAT OF SUBSTITUTES (Moderate)
Substitutes for traditional fixed connectivity include: The use of fixed wireless broadband such as 5G FWA, satellite such as LEO constellations, and private networks. The expansion of 5G enterprise and implementation of SDN technology, there are many viable alternatives available for businesses to connect where either standard fiber deployment is not feasible from a financial perspective or is technically not available. As satellite-based broadband solutions evolve, they are also becoming competitive in terms of overall latency and coverage in many instances, particularly in remote and under-served geographies.
However, fixed fiber-based connections are still the best available technologies for supporting large volume of data transfer with low latency, consistent reliability, and having the capacity to be configured to meet the needs of the enterprise. Financial trading and large data transfer to cloud services require ultra-low latency; therefore, they continue to rely upon fiber-based infrastructure. While both wireless and satellite are complementary services to enterprises, neither will replace high-capacity fiber infrastructure used by the central portion of enterprise operations; thus, substitutes present moderate levels of competitive pressure.
INTENSITY OF RIVALRY (high)
The B2B fixed connectivity industry is extremely competitive, especially in places like North America and Europe. Many Tier 1 carriers, regional ISPs and global managed service providers are competing to provide high-quality network connectivity to businesses. Competitors focus on price; network coverage; service level agreement (SLA) commitments; bundled ICT services, and managed SD-WAN capabilities. Furthermore, as enterprise connectivity becomes commoditized at an increasing rate, many operators are competing on the basis of their cost structures through value-added service integration, ultimately lowering margin opportunity.
In addition to increased competition from within the industry due to the increasing number of operators, the consolidation of telecommunications operators and data centre interconnect providers has increased competition by improving operator's service portfolios and coverages. Additionally, mature economies have saturated the market for fixed-line connectivity. This has created intense price competition and contract renegotiations. Advancements in technology, including software-defined networking (SDN), network function virtualization (NFV) and cloud computing, have also had a significant influence on how operators are strategically positioned in the market place.
