As the U.S. business communications market continues to consolidate, service providers need to constantly evaluate new potential revenue sources.

While the profitability of most wireline networking products is high and the market for data connectivity services is growing, the market for many voice applications and associated services is shrinking. In aggregate, CSMG Adventis estimates that the market for traditional business wireline communications services is growing less quickly than the economy as a whole.

In contrast, the market for IT services is expanding more quickly, as businesses large and small seek support from service providers in upgrading, managing and controlling their telecom and IT environments. The line between traditional realms of IT and telecom services are increasingly being blurred. For example, system integrators are entering the market for outsourced network services, and in an all-IP business communications environment, many telecom services are just another hosted application.

Although this trend is resulting in increasing competition, the collision of these markets also creates an opportunity for traditional telecom service providers to “move up the IT value stack” from selling basic connectivity services to providing higher value-added managed and professional services. While this trend is not necessarily new, there is a heightened focus on these markets by telecom services providers, who are increasingly viewed as trusted sources of these services.

However, outside of core network managed services, many providers will need to create growth strategies and develop new capabilities, in many cases through partnerships or acquisitions. For example, earlier this year, Verizon Business acquired Cybertrust, a leading provider of managed security services, and BT acquired INS, a network consulting and professional services firm. Smaller service providers also are partnering or deploying homegrown capabilities to address these market opportunities.

To develop a strategy for moving up the IT value stack, companies must carefully evaluate their options before developing new capabilities. The first step is to assess how market trends will influence customer demand for specific services. For example, the market for security and business continuity services is expected to grow quickly, while the market for basic equipment is expected to grow less robustly. Similarly, some markets may be dominated by a few large competitors where scale is a requirement, whereas others may have more room for smaller providers or new entrants. Finally, different customers have different needs, so any evaluation must include a careful segmentation of businesses by size and vertical market.

Providers also must assess their current capabilities relative to these market needs (and relative to the competition) to evaluate where they will be viewed as credible service providers. Products and services that are too far away from a company's core value proposition may be a more challenging sell to any demanding business customers. Service providers seeking to move up the IT value stack will need to identify the areas where they are most likely to drive profitable growth, given the likely need to invest in new capabilities and partnerships.

At this point, both IT and communications service providers are continuing to explore the best way to move from their core businesses into these rapidly developing adjacent markets. Based on our observations, there is no single blueprint for market success, so individual strategies can and should vary. For those companies that crack this difficult code, significant new market opportunities await.

Ed Naef is a vice president for CSMG Adventis, a strategy consulting firm focused on the media, communications and technology industries. He can be reached at ed.naef@csmg-global.com.