OSS Market Size and Growth
A funnel perspective
by Ezio Subissati and Mark Frutkin, Current OSS Research Group

Market size and growth trends in OSS markets are necessarily a function of broader trends within the overall telecommunications market. In order to place the OSS market in perspective, it must be seen in the context of the telecommunications market as a whole.

In this analysis we will take a top-down—or funnel view—of telecom markets, starting at the macro level with a perspective on total telecom industry revenues in the United States. From there, we focus on the local revenue portion of total industry revenues. Narrowing our focus yet again, we look at the situation among emerging players in the local portion of the telecom industry, such as competitive local exchange carriers (CLEC). And finally, at the bottom of the funnel, we take a micro-level view of the OSS industry itself, especially in relation to emerging competitors within the telecom industry.

The industry context

The Federal Communications Commission (FCC) estimates that total 1998 revenues for the telecommunications industry in the United States were about $246 billion* (Telecommunications Industry Revenue 1998). Excluding revenues derived from inter-carrier sales (access charges), industry revenues can be estimated at about $200 billion. This represents roughly 2.5% of the US economy as a whole, making telecommunications revenue slightly greater than revenue for the US auto manufacturing industry. Of the $246 billion in revenues, an estimated $105 billion came from local services and $105 billion from toll services, with the remainder attributed to wireless services.

The local market

Traditionally, revenue growth for the telecom industry lies in the range of 8 to 10% per year, with long-distance revenue growing faster than local service revenue. In the early 1990s, growth in local revenue began to catch up to the traditional annual growth rate in long distance, driven by such things as demand for second lines for Internet access and home offices, as well as competition in local services.

The current growth rate of 10% per year for the telecommunications industry is almost double the growth in the economy as a whole.

More recently, growth in local access lines increased by 12% from 1997 to 1998-a significant growth rate compared to the economy as a whole. Clearly, telecommunications is a dynamic industry with significant future opportunities for further growth. Let us look now at the local service market more closely and determine how the $105 billion in revenues in the local portion of telecom breaks down among carrier types.

The majority of local revenues are earned by incumbent local exchange carriers (ILEC) or regional Bell operating companies (RBOC), and other independent incumbents. These giants garner $98 billion of the total (Federal Communications Commission 1998). The remaining $7 billion is split between the interexchange carriers (IXC) and wireless carriers ($3 billion) on one hand, and the emerging local competitors ($4 billion) on the other. Among the local competitors, the FCC reports that competitive local exchange carriers (CLEC) account for roughly $2.5 billion of the total. However, the CLEC total in the FCC data excludes CLECs that use their own facilities.

The CLEC market

The New Paradigm Resources Group and Strategis, both of which include all CLECs in their figures, estimate that for 1998 the entire CLEC portion should be about 6 to 7% of the total local market, which comes to approximately $6 to 7 billion. (Technology Research Institute 1999).

Narrowing our view further, let us consider the projected annual growth rates for the CLEC portion of total telecom revenue. Estimates from various research groups differ on annual growth rates for CLECs, although they all agree that these competitive carriers will experience significant growth in the short term. Taking a conservative approach, we estimate that the current 75% plus growth in CLEC revenue will slow to about 50% over the next few years.

We also estimate an annual growth in CLEC market share of 3% per year over the short term: from 6% in 1998, to 9% in 1999, to 12% in 2000. Market penetration by local competitors should be less rapid than that experienced by toll competitors when the toll market was opened to competition. This view is based on two main factors: the margins were greater in the long-distance market and there was divestiture structurally separating the local from the long-distance market in the United States.

Even with these favorable circumstances, new long-distance competitors increased their market share by only about 5% per year in the decade following divestiture. Nonetheless, market share growth of 3% per year in a $100 billion market is exceptionally strong growth.

OSS markets

Now let's consider the situation in OSS markets, starting at the worldwide or global level. Recent estimates show the worldwide OSS market growing at a rate of roughly 13 to 17% per year.

Within the global OSS market, Robertson Stephens estimates the overall third-party segment of the market is growing at a healthy 20% per year (Wolk 1998). CLEC spending on OSS is growing at a strong 35% per year, reflecting the significant growth of CLECs themselves, and the importance they place on OSS systems.

Finally, let us focus on the narrowest part of our funnel: the OSS market in the United States. The United States accounts for approximately 60% of the global third-party OSS market. This might, in fact, be a conservative estimate considering that the US telecommunications market opened up to competition sooner than other markets and that there are fewer entry barriers to new competitors in the US market. Using this 60% estimate, one can gauge that, if the worldwide OSS market is estimated at about $25 billion in 2000, then the US portion of that market is roughly $15 billion. This total includes the self-serve market, comprised mostly of large incumbents that handle their OSS needs through internal departments.

The third-party portion of the total market is estimated at approximately 25% of the whole, leaving $3.5 billion of the $15 billion, for third-party vendors, although, as noted above, this is probably a conservative estimate. The third-party market may be as high as 35% of the total US market, or $5 billion. On a global scale, the OSS market is above the $6 billion mark.

All of our research leads to an inevitable conclusion: if your target market is one of the most rapidly growing markets in the telecommunications industry, your own growth trends should reflect that. There is no doubt that strong demand fundamentals will continue to benefit the overall telecommunications industry, as well as new CLEC competitors, leading to significant growth opportunities in the OSS market.

References:
Agarwala, Michael K. 1998. Telecom Software: Turning Telecom Technology to Telecom Services. New York: UBS Securities LLC.
Federal Communications Commission. 1999. Telecommunications Industry Revenue: 1998. Washington, DC: International Transcription Services.
Guzman, Victor and Jerry Holt. "OSS Case Study: CLEC Improves Market Share Efficiency with Next-Gen OSS Solution." Telecommunications Magazine (September 1999).
Lewis, Kim. 1999. Global Spending in the OSS Market. The Insight Research Corp.
New Paradigm Resources Group, Inc. 1998. Research Report on CLEC Issues.
The Yankee Group. 1999. CLECs & OSS: Building Strategic Portfolios. Audio conference. Eftia OSS Solutions Inc.
Technology Research Institute. 1999. The Market for Telecom IT Solutions: A Research & Analysis Report. Sudbury, MA: Technology Research Institute.
Wolk, Marianne. 1998. Telecom Operation Support Systems: A Strategic Guide to the OSS Market of the Next Decade. New York: Robertson Stephens.

From Current OSS, Spring 2000, Vol. 1, No. 3. Published by Eftia OSS Solutions.