Outsourcing 4G: Build Or Buy?
01 December 2010 |
Tim Phillips takes a look at the possible changes in the business models of mobile operators as they look to develop 4G networks.
The evolution to 4G and the widespread adoption of LTE is forcing change on the industry, and some difficult decisions: build or lease? How do we charge for data? Should we share infrastructure? Juniper Research estimates that worldwide service revenues generated by LTE mobile networks will reach $100 billion by 2014, but investors are wary that this should be delivered profitably, and with a long-term strategy that is realistic for operators.
After 3G, do it differently
If there's one rule of thumb for operators, it's that whatever you did for 3G, you should do it differently this time. The early entrants to 3G often had a massive licence cost, huge network build costs and a strategy that if they built a platform for services, then those services would come. Some of the largest operators could absorb the costs, but smaller operators struggled. Later entrants did what many operators preparing for 4G are doing: they outsourced, shared and partnered.
They also took a fresh look at how services deliver profitability. The analysis is even more important for 4G, because it means overturning some of the consensus conclusions that the mobile industry has reached. Having created a boom in mobile data with “all you can eat” data plans, the risk has fallen largely on the operator, and the reward has been mostly for the application providers and handset manufacturers. 4G will be costly to provide: Cisco predicts mobile data traffic will exceed 3.5Tb per month in 2014, overwhelmingly from video. Not surprisingly, only 12.5% of operators plan to persist with their flat-rate data plans for 4G, according to Juniper.
Nevertheless, 4G is coming and decisions need to be made. Tele2 in Sweden is launching 4G services imminently, and will, in the words of CEO Niclas Palmstierna, “continue to develop affordable offerings while we continue to compete for the customers.” But it's doing this by partnering with Telenor to jointly operate an LTE network.
Andy Doyle, head of telecoms consulting services at Mott MacDonald, warns that: “Investors do not think that 4G will revolutionise the industry. The future is about incremental business. You're not getting an immediate bump in revenues when you move to 4G from 3G. Carriers have forgotten the amount of money they rubbished on 3G licences. Some effectively bankrupted themselves.”
The driver, he thinks, will be to add services and control cost. Coverage is no longer a differentiator, but the ability to retain users will be. “Five years ago there was reticence about working with outside companies, but now operators understand it's all about how you stop churn,” he says.
To do that, says Andreas Herzog, president of Alcatel-Lucent Managed Services, operators need to realign in two ways. The first is to outsource basic network operation to a partner who can measure how satisfied the customer is with the service, not with the network availability or speed. The managed service needs to measure “performance criteria that are going into the customer experience, not the network performance parameters we had in our business model five years ago,” Herzog says. “It is difficult to measure. I can tell you a simple workaround today: measure by customer trouble tickets and calls to the call centres. In the future, you need new tool sets.”
Secondly, the goals for the outsourcing relationship have to change. “It is predominantly about tools that don't exist today. You can easily install software that measures the customer service in the customer's environment. We must ensure we aren't measuring what's sent out of the switch, but what arrives at the customer.”
This is complicated, as investors shy away from outsourcing relationships where they perceive risk. Relationships where we are measuring performance on evolving criteria are more complex.
Also, Herzog adds, Tier 2 and Tier 3 operators may want an even more flexible approach. “Typically in 3G, with a few exceptions, customers were buying the equipment themselves and asking either the vendor or a non-supplier services vendor to run these networks. We believe that the next generation of networks will drive business models that some people call managed capacity, where they don't have to buy equipment up-front, but can buy capacity on demand. That's less relevant to Tier 1s; for Tiers 2 and 3 a sharing model is more interesting.”
In managed capacity, network ownership moves beyond formal sharing to a model that's closest to leasing. It's easiest for greenfield operators, Herzog admits, and impossible without an advanced view of what customers want to experience from 4G or LTE.
Valter D'Avino, vice president and head of managed services at Ericsson, sees that network sharing is the new reality for many operators, but says: “It is not so simple. It implies cultural alignment for the operators.” But recent history shows it has been hard for operators to achieve a cultural alignment with companies who wish to manage their networks. However, managed services suppliers are not in competition with them. When sharing a network in the evolution to 4G, operators should not be distracted by competitive feelings towards their sharing partner, and concentrate on their non-network strategy, d'Avino says, adding: “It is very difficult to do that. Network sharing is not only a technical problem, it is something much more profound. You must agree on at least some of the principles. Top managers should not rely on the CTO's capabilities to make this work, because the CTO manages the hard part; but the soft part, the culture, should not be neglected. The managed services operator is the third person in this marriage. A partnership in managed services is for three, five, even seven years, so the governance model is fundamental. You have to have some common objectives. Everyone has a different agenda, but you must find what you have in common, some common target at the end of the year.”
Marketing and development
Away from network operations, 4G will place more responsibility on other outsourcing partners, whether providing OSS/BSS or application platforms. Kevin Freeman, manager of strategy and marketing at Amdocs Managed Services, says: “4G requires exceptional focus on marketing and product development. It presents a unique opportunity for operators to re-evaluate the value of outsourcing, and to determine if specific functions once considered 'core' could be externalised. For example, when Sprint outsourced their 3G network operations to Ericsson in July 2009, their focus was not only on cost, but improving the end customer experience and bringing new open devices, applications and services to the market.”
Freeman suggests that an increased focus on capabilities like content ingestion, testing, fulfilment and assurance and revenue management might force a re-evaluation of whether the operator is best placed to do these tasks. In that case, the operator might transfer existing 3G systems to an outsourcing partner, who repurposes and improves them in time for the launch of 4G. “This allows service providers to fund the evolution to 4G, using the opex savings generated through the legacy outsourcing engagement,” he adds. “A managed services provider has a vested interest in optimising efficiencies during the transition and deployment phases, so they can achieve contractual service level agreement targets.”
A radical approach
One of the most radical approaches to 4G network provision comes from the US wireless industry, where Lightsquared has signed an eight-year agreement worth $7 billion with Nokia Siemens to deploy, install, operate and maintain its 4G network. The aim is to create a wholesale wireless broadband network that combines terrestrial and satellite coverage. Its customers will be retailers, traditional service providers, cable operators and even content providers. Headed by CEO Sanjiv Ahuja, the former CEO of the Orange Group, the company will create 40,000 base stations covering 92% of the US population by 2015. The company claims it is the largest ever deployment of wireless network in the US: and the operator will have no retail operation at all.
Having outsourced the building and operation of its 4G network, Lightsquared aims to sell to operators who want to outsource themselves. In the words of Ahuja at the July launch of the concept, this isn't a 4G network the managed services model has made it a “network ecosystem.”