Telco economics: Network sharing in a 5G world

Introduction

Network sharing is well established

Network sharing has become well established as a useful means of reducing capital and operating expenditure by mobile network operators and sharing of passive infrastructure such as towers has become commonplace. The main reasons for sharing are a need or desire to:

reduce capital expenditure
reduce operating expenditure
achieve faster rollout or upgrade
extend coverage at a lower cost
improve operational and/or organisational efficiency
more efficient use of spectrum efficiency
as a precursor for possible merger or acquisition.

The speed at which operators wish to roll out their 5G networks will depend on a number of factors, including their need for additional capacity to meet market demand, respond to or pre-empt competitive actions by other operators, and their overall business strategy. Minimising the costs of doing so will be important, although some dominant and well-funded operators, such as Verizon, may choose to avoid sharing to put pressure on weaker competitors. Operators choosing to share have several options which may include mergers or acquisitions.

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Where are the largest current costs?

Analysis of data from mobile operators in both developed and developing countries shows that network operating costs are split between three main areas:

the radio access network (RAN)
the core network
IT systems and service platforms.

While the proportions of the total operating costs taken by each of the three areas vary between operators, the overall pattern is the same for all. Typically, the RAN accounts for over half of operating costs, and the core network from one eighth to a quarter. IT and platforms account for the rest. Average operating cost splits for mobile operators are shown in Figure 4. Most operators find that around half of the RAN cell sites generate insufficient revenue from the traffic they carry to cover their operating costs, although such a simple measure does not take account of the benefit that wide coverage brings to overall business revenues. Nevertheless, it is important to manage the costs of the RAN effectively to ensure that resources are used in the most efficient manner. Typical cost splits are shown below.

Typical top-level split of network opex costs

Source: STL Partners

5G is bringing changes

5G is designed to cater for the rapidly growing demand for mobile broadband and for new use cases that require higher speeds and lower latency while at the same time minimising capital and operating costs. To cater for these requirements the use of higher frequency bands is being introduced, together with network slicing and wherever possible the use of standard computing equipment. The use of mid band frequencies of 3.5GHz and above and millimetre wave (mmWave) will enable much higher speeds, but these frequencies have shorter range and are less able to penetrate most buildings. The impact of the poorer propagation will depend on several factors.

Where very high levels of traffic are concentrated in a small area the extra bandwidth provided may permit the replacement of a number of low frequency base stations by a single mid-band or mmWave base station. In other cases where traffic is more thinly spread but still heavy enough to warrant the use of and investment in high capacity high frequency base stations then it is likely that more base stations will be required to provide equivalent coverage, placing greater demands on the availability of suitable sites and provision of associated infrastructure for backhaul and power.

In more remote areas use of low frequencies will be required to provide wide area coverage, but their use may place limits on the bandwidths that can be economically delivered.

In-building coverage may well prove more difficult to provide, and although some tests suggest the problem may be less severe than initially feared, in many cases it will require the provision of alternative means of delivering in-building coverage. Options include the provision of indoor base stations, potentially meaning multiple installations to support different carriers, the use of neutral hosts or increased reliance on Wi-Fi. The requirements of different industries, large and small businesses and individual householders or tenants will vary enormously, and means will need to be found to meet a wide variety of situations in an economic manner. Neutral hosts for 4G already exist in some venues and products are appearing that connect an internal network to an antenna installed externally.

With rollout of the first 5G networks beginning soon, operators need to ensure that they can deploy their networks fast enough to meet market demand and any regulatory targets whilst at the same time containing costs to a level consistent with their revenues. However, in some cases plans for sharing, especially active and spectrum sharing, may result in delays caused by the time required to reach agreements with prospective partners and to gain any necessary regulatory approvals. They will also wish to ensure that they at least maintain or preferably improve their position relative to their competitors.

Technical changes that can be expected to affect the need for and viability of sharing therefore include:

Use of spectrum in higher frequency bands:
- shorter range of higher frequencies
- densification and the availability of sites and backhaul links – and ease of access.
- availability of sufficient low frequency spectrum for rural areas
- spectrum sharing
- regulatory factors
Changes in architecture for:
- slicing
- NFV, cloud
- use of off-the-shelf IT components and their reliability and availability.

Contents:

Executive Summary
Introduction
Network sharing is well established
5G is bringing changes
Obstacles: MNO fear of sharing
Other Issues
Structure of report
How will 5G drive demand for sharing?
Overview
Spectrum: Use of higher frequency bands
Options for sharing
How will 5G affect costs of sharing?
Current costs
How will networks costs be split in the future?
NFV, Cloud and Slicing
How soon does the market need 5G?
Other options for MNOs
Neutral host
Implementation: Lessons from experience
Timing is important to obtain best results from sharing
Lessons from existing sharing arrangements
Conclusions & recommendations
Recommendations for telcos

Figures:

Figure 1: Types of network sharing
Figure 2: Typical network cost splits of no sharing versus sharing active RAN
Figure 3: Modelled effect of 3.5 GHz RAN sharing on 5G rollout speed in UK
Figure 4: Typical top-level split of network costs (opex)
Figure 5: Losses from building penetration as frequencies increase
Figure 6: MORAN sharing
Figure 7: MOCN Sharing
Figure 8: Shared spectrum efficiencies
Figure 9: Examples of spectrum sharing
Figure 10: Range of typical network costs as percentage of total
Figure 11: Typical breakdown of RAN opex costs
Figure 12: Network and IT costs
Figure 13: Effect of increased number of cell sites on proportion of network cost in RAN
Figure 14: Population and coverage data for the UK
Figure 15: Capex and opex infrastructure costs
Figure 16: Population coverage for different levels of gross annual capex
Figure 17: Base case coverage (£2 billion per annum)
Figure 18: The effect of sharing small cell layer on rollout
Figure 19: Effect on regional rollout of sharing small cells
Figure 20: Ericsson mobile data growth forecast
Figure 21: Ericsson forecasts data traffic growth 2018–2023 by region
Figure 22: Growth in traffic for different applications
Figure 23: Neutral host configuration for US 3.5GHz CBRS
Figure 24: Red Compartida coverage targets

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5G: ‘Just another G’ – yet a catalyst of change

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5G: Cutting through the hype

This briefing document is being published in June 2018. This report does not re-hash the familiar background story to 5G – the original specifications, the much-ballyhooed early thoughts on use cases, nor the breathless rhetoric about how it is going to change the world (or in the risible words of one hyperbolic tech CEO, “be more important than electricity”). Neither is it a hatchet job decrying the whole exercise as worthless. Instead, it looks at the factors acting as brakes and accelerants for 5G, and how they may affect the overall ecosystem’s evolution.

What is needed, however, is a way to cut through the spin – especially where it is aimed at policymakers and investors, who often latch on to simple but unrealistic stories. Some of the most absurd ‘5G-wash’ hyperbole emanates from Brussels and Washington DC, and in the run up to the next World Radio Congress in 2019 (where spectrum allocations are debated) it is critical that rationality and critical thought prevails over glossy lobbying. It is harmful to us all if 5G hype means it ends up overshadowing worthy parallel developments in satellite communications, private wireless and other technologies that also deserve attention, spectrum or subsidised research projects.

It is understandable that many in the industry ‘talk up their own book’, especially given consolidation and profitability concerns in the vendor space. The 2018 market for telecoms infrastructure is expected to decline, and there are huge hopes at Ericsson, Nokia and Huawei that 5G can help turn it around in 2019–20. But that is not an adequate excuse to exaggerate. Neither is it an excuse to mislabel and market diverse other technologies (advanced versions of 4G, Wi-Fi and so on) as ‘5G’ – although such egregious duplicity is one of the few certainties here. It is probably enhancements and capacity additions for 4G that will prove the biggest moneyspinners over the next 12–24 months.

The next 24 months for 5G

In theory, the next 24 months should be when it all happens for 5G. Early demonstrations and trials have been well publicised, including various global cities’ testbeds and the South Korean Winter Olympics in Pyeongchang. Almost every week yields new press releases, lauding everything from medical diagnosis (NTT DoCoMo) to self-driving snowploughs (Telenor). It is unclear how much any of these shiny announcements actually accelerate real, commercial deployments – or real business models.

This period is also a critical juncture for standards, starting with the formalisation of the first phase of standards at the June 3GPP meeting (Release 15), leading up to the full ratification of 5G as the official IMT2020 technology by the International Telecoms Union (ITU ) in 2020.

Much of the technology media is trying to pitch the development and deployment of 5G as a race, either between countries or individual operators. The first fixed-wireless deployments are under way, while the earliest mobile devices are expected by the year end (probably portable 5G/Wi-Fi hotspot modems). 2019 should see a flurry of early launches and the first 5G-capable smartphones becoming available.

Yet those forms of 5G broadband – fixed or ‘enhanced mobile’ – are hardly novelties, despite the gigabit speeds and low latencies promised. In many ways, they risk being overshadowed by continued evolution of 4G networks, which is occurring in parallel.

There are also plenty of IoT-type demonstrations, whether for delivery drones, autonomous vehicles or automated industrial machinery. Yet these seem much less real for now – the value-chains are far from clear, and often they will need networks to be built in new locations, rather than reusing existing towers and backhaul. It also isn’t obvious that large enterprises are willing to pay much for such connectivity, and whether they’ll be happy with ‘slices’ of MNO-controlled networks or if they want to own them outright.

There remain many hard-to-answer questions about 5G’s emergence:

Will global consumers switch to 5G phones en masse in 2021–22 or more from 2023–24?
Will today’s mobile operators consolidate further or will there be an explosion of new niche providers targetting verticals or specific uses?
Is there a ‘race’ between countries to deploy 5G, and if so, why? Do arguments about 5G ‘leadership’ really translate to economic benefit and jobs, and if so, for whom?
Will the US, Japan, South Korea and maybe China take a significant lead on 5G, or is it more about geopolitical grandstanding in the Trump/Xi age, and helping national-champion vendors and operators gain a reputational boost?
Will 5G, NFV, SDN and edge computing work in true synergy, or will delays or limitations in one area have knock-on impacts on the others?
What are the unexpected practical ‘gotchas’ for 5G that might add friction, cost or delay to deployment, or complexity to operations? Is fibre availability for backhaul a critical prerequisite?
Does 5G pose an opportunity for new niche suppliers of technology – for example in small cells – or will thinning margins and price pressure from operators and open source force many aspirant vendors out of the market?
Will ‘verticals’ and IoT really matter for 5G, and if so will telcos view enterprises more as customers, partners or even suppliers and competitors? Which industries are realistic opportunities for 5G’s new capabilities for low latency or ‘massive IoT’?
Who, if anyone, will make a profit from 5G-enabled networks, devices, services and embedded capabilities?

The truth is that many of these questions cannot be definitively answered today, despite the emphatic nature of a lot of industry comment. Here, we present some scenarios and especially look at the idea of pre-requisites: what needs to be done first, for 5G to be successfully deployed or monetised? There are potential bottlenecks ahead, as well as opportunities.

Hopefully, we have plotted the roadmap, even if the industry cannot ‘drive autonomously’ yet.

The rest of this report is structured into the following sections:

5G positive signals – standards, trials and enthusiasm
5G cautions – prerequisites, questions and complexities
Verticals – huge opportunity or more market fragmentation and competition?
Timelines and practicalities

Think of this report as a weather forecast. 5G will be much like the UK climate: patchy clouds, with rays of sunshine and the occasional storm. The summer will be late but warm, but you’d best pack a 4G or Wi-Fi umbrella just in case.

And just as with weather, trying to do long-range forecasts is very risky. There’s a good chance that circumstances will prove you wrong. But despite that, we have some qualitative predictions stretching out to 2026, at which point we expect to be bombarded with 6G hype, alongside 5G reality.

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5G positive indicators: reasons to be happy!

In many ways, the development of 5G is going remarkably well, especially compared to some of the partisan inter- and intra-technology standards warfare of the past.

In the recent past we have seen:

Approval by 3GPP of the first New Radio (NR) specifications in December 2017, for Non- Standalone mode, which means that 5G NR can be deployed using the existing 4G core networks.
Early engagement by the cellular industry with various industries’ representatives, notably automotive, manufacturing and healthcare. A number of joint bodies have been set up, with the objective of defining ‘vertical’ and especially IoT-centric requirements and testbeds.
A timeline for silicon and device availability that aligns much better with that for networks than was the case with 3G or 4G.
A whole range of cool demonstrations in Pyeongchang at the South Korean Winter Olympics in early 2018.
Research labs for 5G set up around the world.
High awareness of 5G among governments, businesses and media, even if it is often over-hyped,as that is hardly unusual for new technologies.
An ongoing procession of spectrum auctions for frequencies suitable for 5G, and ready availability of test licences.
Good (albeit uneven) progress in adjacent mobile areas such as NFV, SDN, edge computing, cloud RAN, network slicing, automation of processes, AI and so forth.
Continued growth of 4G usage, and likelihood of capacity constraints driving the need for future upgrades.
Commendable work by both large and small vendors in creating early equipment, and approaching target speeds and latencies more closely than many observers (including the author) thought were probable.
Some good early results from trials, especially of high-frequency mmWave networks, which show decent propagation properties and even indoor penetration – albeit through glass, not solid walls – exceeding the (admittedly low) expectations. For instance, AT&T has tested for weather resistance of its mmWave 5G trials – important as some have expected rain or snow to have an impact on propagation.
The effectiveness of MIMO (multiple-in, multiple-out) antennas appears to negate some of the poor notional radio properties of midband spectrum in the 3–4GHz range as well. Essentially beam-forming and beam-steering allows radio ‘spikes’ to concentrate power towards actual users’ positions (including indoors), rather than radiating uniformly and thus wastefully.
No major fights (yet) over IPR and costly patent licences.
Encouraging forecasts from some analysts (not published by us, so we won’t quote them) and trade associations about 5G subscriptions and related services.

Early trial results and 5G deployment plans

While many operators and international laboratories and organisations are testing 5G, a few of the experiments stand out.

Probably the most high profile have been the various South Korean initiatives that took place during the Pyeongchang Winter Olympics, and Verizon’s work on fixed-wireless access in the US. KT and SKT showed various approaches to 5G-connected cars, novel camera footage from 5G-connected drones, real-world usage of mmWave radios and numerous other showcases. Korea is expecting to see launches of commercial 5G services around March 2019.

Verizon announced at the end of 2017 that it was aiming to light up a handful of cities – Sacramento, California most notably – by the end of this year. More details have become clearer recently: initially it will launch fixed 5G for mostly residential users, with mobile variants following around six months afterwards. Samsung has had its 28GHz-band routers approved for both indoor and outdoor use in the US, and these are expected to feature in Verizon’s early offerings. (STL Partners is writing a separate briefing report digging more deeply into Verizon’s 5G strategy, which includes an estimate of its huge investment into fibre for back/fronthaul).

(Mobile launches usually lag fixed-wireless services, as they need more coverage, more testing and a lot more complexity around cell-to-cell handoffs. And within mobile uses, it is usually easier to provide simple devices such as modems or cellular/Wi-Fi hotspots, as phones and voice access require even more work.)

AT&T is being aggressive with its ‘proper’ 5G rollout, as well as its controversial “fake” branding of advanced 4G as ‘5G Evolution’. It is intending to launch standards-based 5G, capable of supporting mobile devices (initially mobile Wi-Fi hotspot ‘pucks’) in at least 12 cities by the end of 2018.

AT&T started demonstrating and testing pre-5G technology in late 2016, including an enterprise trial in mmWave bands, together with Intel. In June 2017, it extended the trials to residential users in Austin, Texas, doing video streaming over fixed-wireless access. This was followed by a small-business fixed- wireless trial in Waco, Texas, which generated good results including 1.2Gbps throughput speeds and 9–12 millisecond latencies. That said, it seems less enthusiastic than Verizon about the general fixed- wireless opportunity1, especially given the backhaul fibre investment needed.

Telco operators that are well advanced on 5G plans include:

Japanese operators: NTT DoCoMo, KDDI and SoftBank have all been running multiple trials, for a wide variety of use cases and deployment scenarios. All are expected to have networks up and running in time for the 2020 Summer Olympics. NTT in particular has been very visible, signing contracts with vendors including Nokia and NEC.
Chinese operators: Spurred on by its government and Huawei as national champion vendor, all three telcos are deploying significant test networks, in a total of 16 cities across the country. Importantly, the regulator has shown commitment to issuing 5G spectrum in large tranches, and also seems to be encouraging infrastructure both between the operators and also China’s electricity grid operator. Chinese operators have also been quite aggressive on other key technical enablers such as AI/automation and network slicing.
Sprint and T-Mobile US: Both operators had previously been talking up 5G, but this has taken on a new perspective since the announcement of their potential merger. T-Mobile’s plan to use 600MHz spectrum for 5G is fairly unique and points to a possible nationwide network much earlier than its peers. Sprint’s hoard of 2.5GHz frequency is also extensive and could be a key differentiator given that the US has been slower to release 3.5–4.5GHz ‘midband’ spectrum than other markets. If their merger goes ahead (possibly a big if, given previous regulatory reluctance) the new T-Mobile may try to do for 5G what Verizon did for 4G – use it as a competitive differentiator to gain market share. It may face challenges getting devices supporting its unique 600MHz band, though – a similar problem that plagued it with the early days of 4G.
Deutsche Telekom: Aligning with its US arm, the domestic German arm of DTAG is perhaps the most vocal early enthusiast for 5G in Europe, deploying a growing test network in Berlin in particular. It is also getting its backhaul house in order, deploying tens of thousands more fibre kilometres annually.
Telstra: In Australia, local operator Telstra has launched a number of trials, including 5G for fixed-access backhaul to some publicly available Wi-Fi hotspots on the Gold Coast.
Spark: In New Zealand, local operator Spark has signalled an intent to deploy 5G (probably for fixed wireless) as early as possible, if it can get spectrum.
MTN: One of the few notable developing market 5G trials is that by MTN in South Africa, with Huawei.
India: The Indian government has signalled that it expects to announce its overall 5G strategy in June 2018. Although some are talking of 2020, it seems unlikely to gain a broad deployment fast, given economic limitations, especially driven by the 4G rollout and subsequent price war and consolidation between operators.

There are some notable absentees from this list. The UK has various government and MNO-sponsored trials, but little commitment by the telcos to move towards commercial launches yet. The Scandinavian operators, early on 3G and 4G, also seem more diffident this time. So too are the smaller countries in developed Asia; Singapore and Taiwan are also (comparatively) lagging the timelines that might be expected, again reflecting caution over business case.

In the Middle East, Ooredoo, Etisalat and STC have all been keen to be early to market with demo networks, but it’s unclear whether that will translate to broader, rapid deployments.

5G Spectrum

As always with new mobile networks, one of the input requirements is suitable radio spectrum. Generally, 5G seems to be doing fairly well in this regard. Many countries have started initial awards or have them planned for the next year or so.

Various European countries are releasing 3.5GHz ‘mid-band’ spectrum, while the US has earmarked both 600MHz (which T-Mobile has large amounts of) and 28GHz as priorities. Japan’s early focus is on 4.5GHz. In addition, there is a strategy by many operators to progressively switch off old 2G and 3G networks, and ‘refarm’ the bands for 5G.

The general expectation is that 5G will require a combination of three broad sets of frequencies:

Low-band, mostly below 2GHz, for wide-area coverage and good indoor penetration
Mid-band between 3GHz and 6GHz, for densified, mostly urban networks, probably with complex MIMO antennas
High-band above 6GHz, and probably mostly from 20–40GHz, although some are speaking of 90GHz or even higher for local usage.

Notably, many markets are not waiting for the official seal of approval from ITU and its World Radio Congress at the end of 2019, which was supposed to define the first set of ‘harmonised’ 5G frequencies (more accurately, IMT2020). A second set is expected, based on ITU’s ridiculously leisurely process, to be ratified only in 2023. Instead of this timeline, many regulators are either pre- guessing the outcomes (fairly uncontroversial for the 3.5GHz band) or just ignoring them (such as 28GHz in the US and South Korea). We wrote about 5G spectrum in early 2017, discussing this in more depth.

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5G is becoming real

In other words, 5G is becoming ‘real’, it’s getting a lot of interest and investment, and the basic technology enablers seem to work, at least in the lab and limited field trials. There are plenty of suggested use cases, and even if some of them prove far away or unrealistic, there should be some that make it through the funnel, plus others that are unanticipated.

That said, there is a cliché that states that any parts of a sentence or speech before the ‘but’ should probably be ignored.

Contents of the 5G report

Executive Summary
Introduction
5G positive indicators: reasons to be happy!
Early trial results and deployment plans
Spectrum
Summary – the good news!
But what are the obstacles to 5G?
Densification and network sharing
In-building coverage
A lack of 5G business models
5G-specific models in a hybrid-network world?
Devices and silicon
Other issues and concerns
Verticals: customers, partners or competitors?
Overview
Operator networks for verticals? Or private 5G?
Thoughts on specific verticals
Vendor attitudes to verticals and private networks
Timelines and practicalities
5G in name only?
Conclusions

Figures:

Figure 1: 5G predicted timeline, 2018–2026
Figure 2: Who are the 5G bulls and bears?
Figure 3: 5G antennas may be larger and heavier than 4G equipment
Figure 4: Multiple dimensions for future wireless networks’ use cases and requirements
Figure 5: Creating private 5G networks involves significant complexity for enterprises
Figure 6: Predicted 5G relevance to verticals, 2023-25 timeframe
Figure 7: Numerous applications of machine learning and AI for 5G networks
Figure 8: Overall 5G predicted timeline, 2018–26

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The value of “Smart Pipes” to mobile network operators

Preface

Rationale and hypothesis for this report

It is over fourteen years since David Isenberg wrote his seminal paper The Rise of the Stupid Network in which he outlined the view that telephony networks would increasingly become dumb pipes as intelligent endpoints came to control how and where data was transported. Many of his predictions have come to fruition. Cheaper computing technology has resulted in powerful ‘smartphones’ in the hands of millions of people and new powerful internet players are using data centres to distribute applications and services ‘over the top’ to users over fixed and mobile networks.

The hypothesis behind this piece of research is that endpoints cannot completely control the network. STL Partners believes that the network itself needs to retain intelligence so it can interpret the information it is transporting between the endpoints. Mobile network operators, quite rightly, will not be able to control how the network is used but must retain the ability within the network to facilitate a better experience for the endpoints. The hypothesis being tested in this research is that ‘smart pipes’ are needed to:

Ensure that data is transported efficiently so that capital and operating costs are minimised and the internet and other networks remain cheap methods of distribution.
Improve user experience by matching the performance of the network to the nature of the application or service being used. ‘Best effort’ is fine for asynchronous communication, such as email or text, but unacceptable for voice. A video call or streamed movie requires guaranteed bandwidth, and real-time gaming demands ultra-low latency;
Charge appropriately for use of the network. It is becoming increasingly clear that the Telco 1.0 business model – that of charging the end-user per minute or per Megabyte – is under pressure as new business models for the distribution of content and transportation of data are being developed. Operators will need to be capable of charging different players – end-users, service providers, third-parties (such as advertisers) – on a real-time basis for provision of broadband and guaranteed quality of service (QoS);
Facilitate interactions within the digital economy. Operators can compete and partner with other players, such as the internet companies, in helping businesses and consumers transact over the internet. Networks are no longer confined to communications but are used to identify and market to prospects, complete transactions, make and receive payments and remittances, and care for customers. The knowledge that operators have about their customers coupled with their skills and assets in identity and authentication, payments, device management, customer care etc. mean that ‘the networks’ can be ‘enablers’ in digital transactions between third-parties – helping them to happen more efficiently and effectively.

Overall, smarter networks will benefit network users – upstream service providers and end users – as well as the mobile network operators and their vendors and partners. Operators will also be competing to be smarter than their peers as, by differentiating here, they gain cost, revenue and performance advantages that will ultimately transform in to higher shareholder returns.

Sponsorship and editorial independence

This report has kindly been sponsored by Tellabs and is freely available. Tellabs developed the initial concepts, and provided STL Partners with the primary input and scope for the report. Research, analysis and the writing of the report itself was carried out independently by STL Partners. The views and conclusions contained herein are those of STL Partners.

About Tellabs

Tellabs innovations advance the mobile Internet and help our customers succeed. That’s why 43 of the top 50 global communications service providers choose our mobile, optical, business and services solutions. We help them get ahead by adding revenue, reducing expenses and optimizing networks.

Tellabs (Nasdaq: TLAB) is part of the NASDAQ Global Select Market, Ocean Tomo 300® Patent Index, the S&P 500 and several corporate responsibility indexes including the Maplecroft Climate Innovation Index, FTSE4Good and eight FTSE KLD indexes. http://www.tellabs.com

Executive Summary

Mobile operators no longer growth stocks

Mobile network operators are now valued as utility companies in US and Europe (less so APAC). Investors are not expecting future growth to be higher than GDP and so are demanding money to be returned in the form of high dividends.

Two ‘smart pipes’ strategies available to operators

In his seminal book, Michael Porter identified three generic strategies for companies – ‘Cost leadership’, ‘Differentiation’ and ‘Focus’. Two of these are viable in the mobile telecommunications industry – Cost leadership, or Happy Pipe in STL Partners parlance, and Differentiation, or Full-service Telco 2.0. No network operators have found a Focus strategy to work as limiting the customer base to a segment of the market has not yielded sufficient returns on the high capital investment of building a network. Even MVNOs that have pursued this strategy, such as Helio which targeted Korean nationals in the US, have struggled.

Underpinning the two business strategies are related ‘smart pipe’ approaches – smart network and smart services:

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Porter

Strategy

Telco 2.0 strategy

Nature of smartness

Characteristics

Cost leadership

Happy Pipe

Smart network

Cost efficiency – minimal network, IT and commercial costs. Simple utility offering.

Differentiation

Full-service Telco 2.0

Smart services

Technical and commercial flexibility: improve customer experience by integrating network capabilities with own and third-party services and charging either end user or service provider (or both).

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Source: STL Partners

It is important to note that, currently at least, having a smart network is a precursor of smart services. It would be impossible for an operator to implement a Full-service Telco 2.0 strategy without having significant network intelligence. Full-service Telco 2.0 is, therefore, an addition to a Happy Pipe strategy.

Smart network strategy good, smart services strategy better

In a survey conducted for this report, it was clear that operators are pursuing ‘smart’ strategies, whether at the network level or extending beyond this into smart services, for three reasons:

Revenue growth: protecting existing revenue sources and finding new ones. This is seen as the single most important driver of building more intelligence.
Cost savings: reducing capital and operating costs.
Performance improvement: providing customers with an improved customer experience.

Assuming that most mobile operators currently have limited smartness in either network or services, our analysis suggests significant upside in financial performance from successfully implementing either a Happy Pipe or Full-service Telco 2.0 strategy. Most mobile operators generate Cash Returns on Invested Capital of between 5 and 7%. For the purposes of our analysis, we have a assumed a baseline of 5.8%. The lower capital and operator costs of a Happy Pipe strategy could increase this to 7.4% and the successful implementation of a Full-service Telco 2.0 strategy would increase this to a handsome 13.3%:

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Telco 2.0 strategy	Nature of smartness	Cash Returns on Invested Capital
As-is – Telco 1.0	Low – relatively dumb	5.8%
Happy Pipe	Smart network	7.4%
Full-service Telco 2.0	Smart services	13.3%

Source: STL Partners

STL Partners has identified six opportunity areas for mobile operators to exploit with a Full-service Telco 2.0 strategy. Summarised here, these are outlined in detail in the report:

Opportunity Type	Approach	Typical Services
Core Services	Improving revenues and customer loyalty by better design, analytics, and smart use of data in existing services.	Access, Voice and Messaging, Broadband, Standard Wholesale, Generic Enterprise ICT Services (inc. SaaS)
Vertical industry solutions (SI)	Delivery of ICT projects and support to vertical enterprise sectors.	Systems Integration (SI), Vertical CEBP solutions, Vertical ICT, Vertical M2M solutions, and Private Cloud.
Infrastructure services	Optimising cost and revenue structures by buying and selling core telco ICT asset capacity.	Bitstream ADSL, Unbundled Local Loop, MVNOs, Wholesale Wireless, Network Sharing, Cloud – IaaS.
Embedded communications	Enabling wider use of voice, messaging, and data by facilitating access to them and embedding them in new products.	Comes with data, Sender pays delivery, Horizontal M2M Platforms, Voice, Messaging and Data APIs for 3^rd Parties.
Third-pary business enablers	Enabling new telco assets (e.g. Customer data) to be leveraged in support of 3^rd party business processes.	Telco enabled Identity and Authorisation, Advertising and Marketing, Payments. APIs to non-core services and assets.
Own-brand OTT services	Building value through Telco-owned online properties and ‘Over-the-Top’ services.	Online Media, Enterprise Web Services, Own Brand VOIP services.

Source: STL Partners

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Regional approaches to smartness vary

As operators globally experience a slow-down in revenue growth, they are pursuing ways of maintaining margins by reducing costs. Unsurprisingly therefore, most operators in North America, Europe and Asia-Pacific appear to be pursuing a Happy Pipe/smart network strategy. Squeezing capital and operating costs and improving network performance is being sought through such approaches as:

Physical network sharing – usually involving passive elements such as towers, air-conditioning equipment, generators, technical premises and pylons.
Peering data traffic rather than charging (and being charged) for transit.
Wi-Fi offload – moving data traffic from the mobile network on to cheaper fixed networks.
Distributing content more efficiently through the use of multicast and CDNs.
Efficient network configuration and provisioning.
Traffic shaping/management via deep-packet inspection (DPI) and policy controls.
Network protection – implementing security procedures for abuse/fraud/spam so that network performance is maximised.
Device management to ameliorate device impact on network and improve customer experience

Vodafone Asia-Pacific is a good example of an operator pursuing these activities aggressively and as an end in itself rather than as a basis for a Telco 2.0 strategy. Yota in Russia and Lightsquared in the US are similarly content with being Happy Pipers.

In general, Asia-Pacific has the most disparate set of markets and operators. Markets vary radically in terms of maturity, structure and regulation and operators seem to polarise into extreme Happy Pipers (Vodafone APAC, China Mobile, Bharti) and Full-Service Telco 2.0 players (NTT Docomo, SK Telecom, SingTel, Globe).

In Telefonica, Europe is the home of the operator with the most complete Telco 2.0 vision globally. Telefonica has built and acquired a number of ‘smart services’ which appear to be gaining traction including O₂ Priority Moments, Jajah, Tuenti and Terra. Recent structural changes at the company, in which Telefonica Digital was created to focus on opportunities in the digital economy, further indicate the company’s focus on Telco 2.0 and smart services. Europe too appears to be the most collaborative market. Vodafone, Telefonica, Orange, Telecom Italia and T-Mobile are all working together on a number of Telco 2.0 projects and, in so doing, seek to generate enough scale to attract upstream developers and downstream end-users.

The sheer scale of the two leading mobile operators in the US, AT&T and Verizon, which have over 100 million subscribers each, means that they are taking a different approach to Telco 2.0. They are collaborating on one or two opportunities, notably with ISIS, a near-field communications payments solution for mobile, which is a joint offer from AT&T, Verizon and T-Mobile. However, in the main, there is a high degree of what one interviewee described as ‘Big Bell dogma’ – the view that their company is big enough and powerful enough to take on the OTT players and ‘control’ the experiences of end users in the digital economy. The US market is more consolidated than Europe (giving the big players more power) but, even so, it seems unlikely that either AT&T or Verizon can keep customers using only their services – the lamented wall garden approach.

Implementing a Telco 2.0 strategy is important but challenging

STL Partners explored both how important and how difficult it is to implement the changes required to deliver a Happy Pipe strategy (outlined in the bullets above) and those needed for Full-service Telco 2.0 strategy, via industry interviews with operators and a quantitative survey. The key findings of this analysis were:

Overall, respondents felt that many activities were important as part of a smart strategy. In our survey, all except two activity areas – Femto/pico underlay and Enhanced switches (vs. routers) – were rated by more than 50% of respondents as either ‘Quite important’ or ‘Very important’ (see chart below).
Activities associated with a Full-service Telco 2.0 strategy were rated as particularly important:
Making operator assets available via APIs, Differentiated pricing and charging and Personalised and differentiated services were ranked 1, 2 and 3 out of the thirteen activities.
Few considered that any of the actions were dangerous and could destroy value, although Physical network sharing and Traffic shaping/DPI were most often cited here.

Smart Networks - important implementation factors to MNOs

Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=107

NOTE: Overall ranking was based on a weighted scoring policy of Very important +4, Quite important +3, Not that important +2, Unimportant +1, Dangerous -4.

Overall, most respondents to the survey and people we spoke with felt that operators had more chance in delivering a Happy Pipe strategy and that only a few Tier 1 operators would be successful with a Full-Service Telco 2.0 strategy. For both strategies, they were surprisingly sceptical about operators’ ability to implement the necessary changes. Five reasons were cited as major barriers to success and were particularly big when considering a Full-Service Telco 2.0 strategy:

Competition from internet players. Google, Apple, Facebook et al preventing operators from expanding their role in the digital economy.
Difficulty in building a viable ecosystem. Bringing together the required players for such things as near-field communications (NFC) mobile payments and sharing value among them.
Lack of mobile operators skills. The failure of operators to develop or exploit key skills required for facilitating transactions such as customer data management and privacy.
Culture. Being too wedded to existing products, services and business models to alter the direction of the super-tanker.
Organisation structure. Putting in place the people and processes to manage the change.

Looking at the specific activities required to build smartness, it was clear that those required for a Full-service Telco 2.0/smart services strategy are considered the hardest to implement (see chart below):

Personalised and differentiated services via use of customer data – content, advertising, etc.
Making operator assets available to end users and other service providers – location, presence, ID, payments
Differentiated pricing and charging based on customer segment, service, QoS

Smart Networks - how challenging are the changes?

Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=100

NOTE: Overall ranking was based on a weighted scoring policy of Very easy +5, Relatively straightforward +4, Manageable +3, Quite difficult +2, Very difficult -2.

Conclusions and recommendations

By comparing the relative importance of specific activities against how easy they are to implement, we were able to classify them into four categories:

Category	Importance for delivering smart strategy	Relative ease of implementation
Must get right	High	Easy
Strive for new role	High	Difficult
Housekeeping	Low	Easy
Forget	Low	Difficult

Rating of factors needed for Telco 2.0 'Smart Pipes' and 'Full Services' Strategies

Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=100

Unfortunately, as the chart above shows, no activities fall clearly into the ‘Forget’ categories but there are some clear priorities:

A Full-service Telco 2.0 strategy is about striving for a new role in the digital economy and is probably most appropriate for Tier 1 MNOs, since it is going to require substantial scale and investment in new skills such as software and application development and customer data. It will also require the development of new partnerships and ecosystems and complex commercial arrangements with players from other industries (e.g. banking).
There is a cluster of smart network activities that are individually relatively straightforward to implement and will yield a big bang for the buck if investments are made – the ‘Must get right’ group:
More efficient network configuration and provisioning;
Strengthen network security to cope with abuse and fraud;
Improve device management (and cooperation with handset manufacturers and content players) to reduce the impact of smartphone burden on the network;

Although deemed more marginal in our survey, we would include as equally important:

Traffic shaping and DPI which, in many cases, underpins various smart services opportunities such as differentiated pricing based on QoS and Multicast and CDNs which are proven in the fixed world and likely to be equally beneficial in a video-dominated mobile one.

There is second cluster of smart network activities which appear to be equally easy (or difficult) to implement but are deemed by respondents to be lower value and therefore fall into a lower ‘Housekeeping’ category:

Wi-Fi offload – we were surprised by this given the emphasis placed on this by NTT Docomo, China Mobile, AT&T, O₂ and others;
Peering (vs. transit) and Enhanced switches – this is surely business-as-usual for all MNOs;
Femto/Pico underlay – generally felt to be of limited importance by respondents although a few cited its importance in pushing network intelligence to the edge which would enable MNOs to more easily deliver differentiated QoS and more innovative retail and wholesale revenue models;
Physical network sharing – again, a surprising result given the keenness of the capital markets on this strategy.

Overall, it appears that mobile network operators need to continue to invest resources in developing smart networks but that a clear prioritisation of efforts is needed given the multitude of ‘moving parts’ required to develop a smart network that will deliver a successful Happy Pipe strategy.

A successful Full-Service Telco 2.0 strategy is likely to be extremely profitable for a mobile network operator and would result in a substantial increase in share price. But delivering this remains a major challenge and investors are sceptical. Collaboration, experimentation and investment are important facets of a Telco 2.0 implementation strategy as they drive scale, learning and innovation respectively. Given the demands of investors for dividend yields, investment is only likely to be available if an operator becomes more efficient, so implementing a Happy Pipe strategy which reduces capital and operating costs is critical.

Report Contents

Executive Summary
Mobile network operator challenges
The future could still be bright
Defining a ‘smart’ network
Understanding operator strategies
Video: Case study in delivering differentiation and cost leadership
The benefits of Smart on CROIC
Implementing a ‘smart’ strategy
Conclusions and recommendations

Report Figures

Figure 1: Pressure from all sides for operators
Figure 2: Vodafone historical dividend yield – from growth to income
Figure 3: Unimpressed capital markets and falling employment levels
Figure 4: Porter and Telco 2.0 competitive strategies
Figure 5: Defining Differentiation/Telco 2.0
Figure 6 – The Six Opportunity Areas – Approach, Typical Services and Examples
Figure 7: Defining Cost Leadership/Happy Pipe
Figure 8: Defining ‘smartness’
Figure 9: Telco 2.0 survey – Defining smartness
Figure 10: NTT’s smart content delivery system – a prelude to mobile CDNs?
Figure 11: Vodafone India’s ARPU levels are now below $4/month, illustrating the need for a ‘smart network’ approach
Figure 12: China Mobile’s WLAN strategy for coverage, capacity and cost control
Figure 13: GCash – Globe’s text-based payments service
Figure 14: PowerOn – SingTel’s on-demand business services
Figure 15: Telefonica’s Full-service Telco 2.0 strategy
Figure 16: Vodafone – main messages are about being an efficient data pipe
Figure 17: Collaboration with other operators key to smart services strategy
Figure 18: Verizon Wireless and Skype offering
Figure 19: Content delivery with and without a CDN
Figure 20: CDN benefits to consumers are substantial
Figure 21: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas
Figure 22: The benefits of smart to a MNO are tangible and significant
Figure 23: Telco 2.0 Survey – benefits of smart to MNOs
Figure 24: Telco 2.0 survey – MNO chances of success with smart strategies
Figure 25: Telco 2.0 survey – lots of moving parts required for ‘smartness’
Figure 26: Telco 2.0 survey – Differentiation via smart services is particularly challenging
Figure 27: Telco 2.0 survey – Implementing changes is challenging
Figure 28: Telco 2.0 survey – Prioritising smart implementation activities

Introduction

Network sharing is well established

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Where are the largest current costs?

Typical top-level split of network opex costs

5G is bringing changes

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5G: Cutting through the hype

The next 24 months for 5G

There remain many hard-to-answer questions about 5G’s emergence:

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5G positive indicators: reasons to be happy!

Early trial results and 5G deployment plans

Telco operators that are well advanced on 5G plans include:

5G Spectrum

The general expectation is that 5G will require a combination of three broad sets of frequencies:

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5G is becoming real

Contents of the 5G report

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Preface

Rationale and hypothesis for this report

Sponsorship and editorial independence

About Tellabs

Executive Summary

Mobile operators no longer growth stocks

Two ‘smart pipes’ strategies available to operators

Smart network strategy good, smart services strategy better

Regional approaches to smartness vary

Implementing a Telco 2.0 strategy is important but challenging

Conclusions and recommendations

Report Contents

Report Figures

Sample Reports