Software Defined Networking (SDN): A Potential ‘Game Changer’

Summary: Software Defined Networking is a technological approach to designing and managing networks that has the potential to increase operator agility, lower costs, and disrupt the vendor landscape. Its initial impact has been within leading-edge data centres, but it also has the potential to spread into many other network areas, including core public telecoms networks. This briefing analyses its potential benefits and use cases, outlines strategic scenarios and key action plans for telcos, summarises key vendor positions, and why it is so important for both the telco and vendor communities to adopt and exploit SDN capabilities now. (May 2013, Executive Briefing Service, Cloud & Enterprise ICT Stream, Future of the Network Stream). Potential Telco SDN/NFV Deployment Phases May 2013

Figure 1 – Potential Telco SDN/NFV Deployment Phases
Potential Telco SDN/NFV Deployment Phases May 2013

Source STL Partners

Introduction

Software Defined Networking or SDN is a technological approach to designing and managing networks that has the potential to increase operator agility, lower costs, and disrupt the vendor landscape. Its initial impact has been within leading-edge data centres, but it also has the potential to spread into many other network areas, including core public telecoms networks.

With SDN, networks no longer need to be point to point connections between operational centres; rather the network becomes a programmable fabric that can be manipulated in real time to meet the needs of the applications and systems that sit on top of it. SDN allows networks to operate more efficiently in the data centre as a LAN and potentially also in Wide Area Networks (WANs).

SDN is new and, like any new technology, this means that there is a degree of hype and a lot of market activity:

  • Venture capitalists are on the lookout for new opportunities;
  • There are plenty of start-ups all with “the next big thing”;
  • Incumbents are looking to quickly acquire new skills through acquisition;
  • And not surprisingly there is a degree of SDN “Washing” where existing products get a makeover or a software upgrade and are suddenly SDN compliant.

However there still isn’t widespread clarity of what SDN is and how it might be used outside of vendor papers and marketing materials, and there are plenty of important questions to be answered. For example:

  • SDN is open to interpretation and is not an industry standard, so what is it?
  • Is it better than what we have today?
  • What are the implications for your business, whether telcos, or vendors?
  • Could it simply be just a passing fad that will fade into the networking archives like IP Switching or X.25 and can you afford to ignore it?
  • What will be the impact on LAN and WAN design and for that matter data centres, telcos and enterprise customers? Could it be a threat to service providers?
  • Could we see a future where networking equipment becomes commoditised just like server hardware?
  • Will standards prevail?

Vendors are to a degree adding to the confusion. For example, Cisco argues that it already has an SDN-capable product portfolio with Cisco One. It says that its solution is more capable than solutions dominated by open-source based products, because these have limited functionality.

This executive briefing will explain what SDN is, why it is different to traditional networking, look at the emerging market with some likely use cases and then look at the implications and benefits for service providers and vendors.

How and why has SDN evolved?

SDN has been developed in response to the fact that basic networking hasn’t really evolved much over the last 30 plus years, and that new capabilities are required to further the development of virtualised computing to bring innovation and new business opportunities. From a business perspective the networking market is a prime candidate for disruption:

  • It is a mature market that has evolved steadily for many years
  • There are relatively few leading players who have a dominant market position
  • Technology developments have generally focussed in speed rather than cost reduction or innovation
  • Low cost silicon is available to compete with custom chips developed by the market leaders
  • There is a wealth of open source software plus plenty of low cost general purpose computing hardware on which to run it
  • Until SDN, no one really took a clean slate view on what might be possible

New features and capabilities have been added to traditional equipment, but have tended to bloat the software content increasing costs to both purchase and operate the devices. Nevertheless – IP Networking as we know it has performed the task of connecting two end points very well; it has been able to support the explosion of growth required by the Internet and of mobile and mass computing in general.

Traditionally each element in the network (typically a switch or a router) builds up a network map and makes routing decisions based on communication with its immediate neighbours. Once a connection through the network has been established, packets follow the same route for the duration of the connection. Voice, data and video have differing delivery requirements with respect to delay, jitter and latency, but in traditional networks there is no overall picture of the network – no single entity responsible for route planning, or ensuring that traffic is optimised, managed or even flows over the most appropriate path to suit its needs.

One of the significant things about SDN is that it takes away the independence or autonomy from every networking element in order to remove its ability to make network routing decisions. The responsibility for establishing paths through the network, their control and their routing is placed in the hands of one or more central network controllers. The controller is able to see the network as complete entity and manage its traffic flows, routing, policies and quality of service, in essence treating the network as a fabric and then attempting to get maximum utilisation from that fabric. SDN Controllers generally offer external interfaces through which external applications can control and set up network paths.

There has been a growing demand to make networks programmable by external applications – data centres and virtual computing are clear examples of where it would be desirable to deploy not just the virtual computing environment, but all the associated networking functions and network infrastructure from a single console. With no common control point the only way of providing interfaces to external systems and applications is to place agents in the networking devices and to ask external systems to manage each networking device. This kind of architecture has difficulty scaling, creates lots of control traffic that reduces overall efficiency, it may end up with multiple applications trying to control the same entity and is therefore fraught with problems.

Network Functions Virtualisation (NFV)

It is worth noting that an initiative complementary to SDN was started in 2012 called Network Functions Virtualisation (NFV). This complicated sounding term was started by the European Telecommunications Standards Institute (ETSI) in order to take functions that sit on dedicated hardware like load balancers, firewalls, routers and other network devices and run them on virtualised hardware platforms lowering capex, extending their useful life and reducing operating expenditures. You can read more about NFV later in the report on page 20.

In contrast, SDN makes it possible to program or change the network to meet a specific time dependant need and establish end-to-end connections that meet specific criteria. The SDN controller holds a map of the current network state and the requests that external applications are making on the network, this makes it easier to get best use from the network at any given moment, carry out meaningful traffic engineering and work more effectively with virtual computing environments.

What is driving the move to SDN?

The Internet and the world of IP communications have seen continuous development over the last 40 years. There has been huge innovation and strict control of standards through the Internet Engineering Task Force (IETF). Because of the ad-hoc nature of its development, there are many different functions catering for all sorts of use cases. Some overlap, some are obsolete, but all still have to be supported and more are being added all the time. This means that the devices that control IP networks and connect to the networks must understand a minimum subset of functions in order to communicate with each other successfully. This adds complexity and cost because every element in the network has to be able to process or understand these rules.

But the system works and it works well. For example when we open a web browser and a session to stlpartners.com, initially our browser and our PC have no knowledge of how to get to STL’s web server. But usually within half a second or so the STL Partners web site appears. What actually happens can be seen in Figure 1. Our PC uses a variety of protocols to connect first to a gateway (1) on our network and then to a public name server (2 & 3) in order to query the stlpartners.com IP address. The PC then sends a connection to that address (4) and assumes that the network will route packets of information to and from the destination server. The process is much the same whether using public WAN’s or private Local Area Networks.

Figure 2 – Process of connecting to an Internet web address
Process of connecting to an Internet web address May 2013

Source STL Partners

The Internet is also highly resilient; it was developed to survive a variety of network outages including the complete loss of sub networks. Popular myth has it that the US Department of Defence wanted it to be able to survive a nuclear attack, but while it probably could, nuclear survivability wasn’t a design goal. The Internet has the ability to route around failed networking elements and it does this by giving network devices the autonomy to make their own decisions about the state of the network and how to get data from one point to any other.

While this is of great value in unreliable networks, which is what the Internet looked like during its evolution in the late 70’s or early 80’s, networks of today comprise far more robust elements and more reliable network links. The upshot is that networks typically operate at a sub optimum level, unless there is a network outage, routes and traffic paths are mostly static and last for the duration of the connection. If an outage occurs, the routers in the network decide amongst themselves how best to re-route the traffic, with each of them making their own decisions about traffic flow and prioritisation given their individual view of the network. In actual fact most routers and switches are not aware of the network in its entirety, just the adjacent devices they are connected to and the information they get from them about the networks and devices they in turn are connected to. Therefore, it can take some time for a converged network to stabilise as we saw in the Internet outages that affected Amazon, Facebook, Google and Dropbox last October.

The diagram in Figure 2 shows a simple router network, Router A knows about the networks on routers B and C because it is connected directly to them and they have informed A about their networks. B and C have also informed A that they can get to the networks or devices on router D. You can see from this model that there is no overall picture of the network and no one device is able to make network wide decisions. In order to connect a device on a network attached to A, to a device on a network attached to D, A must make a decision based on what B or C tell it.

Figure 3 – Simple router network
Simple router network May 2013

Source STL Partners

This model makes it difficult to build large data centres with thousands of Virtual Machines (VMs) and offer customers dynamic service creation when the network only understands physical devices and does not easily allow each VM to have its own range of IP addresses and other IP services. Ideally you would configure a complete virtual system consisting of virtual machines, load balancing, security, network control elements and network configuration from a single management console and then these abstract functions are mapped to physical hardware for computing and networking resources. VMWare have coined the term ‘Software Defined Data Centre’ or SDDC, which describes a system that allows all of these elements and more to be controlled by a single suite of management software.

Moreover, returning to the fact that every networking device needs to understand a raft of Internet Request For Comments (or RFC’s), all the clever code supporting these RFC’s in switches and routers costs money. High performance processing systems and memory are required in traditional routers and switches in order to inspect and process traffic, even in MPLS networks. Cisco IOS supports over 600 RFC’s and other standards. This adds to cost, complexity, compatibility, future obsolescence and power/cooling needs.

SDN takes a fresh approach to building networks based on the technologies that are available today, it places the intelligence centrally using scalable compute platforms and leaves the switches and routers as relatively dumb packet forwarding engines. The control platforms still have to support all the standards, but the platforms the controllers run on are infinitely more powerful than the processors in traditional networking devices and more importantly, the controllers can manage the network as a fabric rather than each element making its own potentially sub optimum decisions.

As one proof point that SDN works, in early 2012 Google announced that it had migrated its live data centres to a Software Defined Network using switches it designed and developed using off-the-shelf silicon and OpenFlow for the control path to a Google-designed Controller. Google claims many benefits including better utilisation of its compute power after implementing this system. At the time Google stated it would have liked to have been able to purchase OpenFlow-compliant switches but none were available that suited its needs. Since then, new vendors have entered the market such as BigSwitch and Pica8, delivering relatively low cost OpenFlow-compliant switches.

To read the Software Defined Networking in full, including the following sections detailing additional analysis…

  • Executive Summary including detailed recommendations for telcos and vendors
  • Introduction (reproduced above)
  • How and why has SDN evolved? (reproduced above)
  • What is driving the move to SDN? (reproduced above)
  • SDN: Definitions and Advantages
  • What is OpenFlow?
  • SDN Control Platforms
  • SDN advantages
  • Market Forecast
  • STL Partners’ Definition of SDN
  • SDN use cases
  • Network Functions Virtualisation
  • What are the implications for telcos?
  • Telcos’ strategic options
  • Telco Action Plans
  • What should telcos be doing now?
  • Vendor Support for OpenFlow
  • Big switch networks
  • Cisco
  • Citrix
  • Ericssson
  • FlowForwarding
  • HP
  • IBM
  • Nicira
  • OpenDaylight Project
  • Open Networking Foundation
  • Open vSwitch (OVS)
  • Pertino
  • Pica8
  • Plexxi
  • Tellabs
  • Conclusions & Recommendations

…and the following figures…

  • Figure 1 – Potential Telco SDN/NFV Deployment Phases
  • Figure 2 – Process of connecting to an Internet web address
  • Figure 3 – Simple router network
  • Figure 4 – Traditional Switches with combined Control/Data Planes
  • Figure 5 – SDN approach with separate control and data planes
  • Figure 6 – ETSI’s vision for Network Functions Virtualisation
  • Figure 7 – Network Functions Virtualised and managed by SDN
  • Figure 8 – Network Functions Virtualisation relationship with SDN
  • Table 1 – Telco SDN Strategies
  • Figure 9 – Potential Telco SDN/NFV Deployment Phases
  • Figure 10 – SDN used to apply policy to Internet traffic
  • Figure 11 – SDN Congestion Control Application

 

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:

  1. 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.
  2. 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;
  3. 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);
  4. 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 logo

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:

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).

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%:

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 3rd Parties.

Third-pary business enablers

Enabling new telco assets (e.g. Customer data) to be leveraged in support of 3rd 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

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:

  1. Competition from internet players.  Google, Apple, Facebook et al preventing operators from expanding their role in the digital economy.
  2. 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.
  3. 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.
  4. Culture.  Being too wedded to existing products, services and business models to alter the direction of the super-tanker.
  5. 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