Why are telcos de-aggregating their network value chain?

Telecom operators are demanded to increase (in some cases improve) their profit margins in an aggressive and continued pressure to optimize their cost structures, whilst simultaneously looking for monetization opportunities above and bellow the line. The final objective is to revamp the entire telecom business model, heavily affected by the effect of new entrants in the value chain (e.g. OTT providers) or the role evolution of some of their existing participants (E.g. Infrastructure providers).

Most of clients have recently come the conclusion that top-line growth is almost impossible nowadays, so the optimization opportunity has to come from CaPex / OpEx reduction programs. Being network & IT, the top-two cost contributors in a telecom operation, investors and shareholders in the telecom space are recurrently demanding to their C-levels a complete transformation of the relationship between telcos and their network (and/or IT systems).

The initial evolution of this relationship already started some years ago, when outsourcing and managed services were two hot-topics in the CTO/CIO’s agenda. The externalization of what was not understood as a non-core competency, developing a focused strategy to hire best-in-class capabilities through outsourcing this non-core activities to experienced and specialist partners, was a natural way to improve their in-house performance whilst reduce costs heavily.

Network has never been considered a non-core element. On the contrary, telcos have always considered their network infrastructure as a “key core competency”… until nowadays. Always-important focus on retaining quality of network operations is no longer a barrier. Cost reduction is a must and everything is on the table (if it can justify a strong business case). This uncommon movement has unveiled a new telecom trend in the industry, mostly known as “de-aggregation (or dis-aggregation) of the network value chain”. This trend started a couple of years ago with the network infrastructure externalization to TowerCos, and will smoothly evolve towards RAN and network transmission sharing.

Note: RAN sharing is about taking the costliest pieces of an operator’s network – the cell sites and towers, base station equipment, and the transmission network – and sharing this infrastructure with partners and/or competitors.

This unprecedented movement will not only improve scale and switch fixed costs to variable costs. It will leverage on specialists’ expertise and will permit telcos to focus on what’s really core: their customers. Access will remain the backbone of most telcos’ business but they will complement their current access strategy to (i) be more cost-effective in their broadband network build-up, (ii) re-align and streamline their operating model and (iii) focus on access-plus activities to defend the relationship with their end-customers.

RAN sharing models also mean that there will be a loss in revenue for Infrastructure vendors like Ericsson, Nokia Siemens, Alcatel-Lucent, etc. in terms of site-level hardware as well as core hardware. On the contrary, these savings will be rebalanced on to the customers in the form of better user experience, capacity increase for the big-data era coming, and better personalization of the overall service ecosystem.

But defining the right access strategy is not a simple and straightforward task. There are 3 key aspects to consider when designing it: 1) Capacity planning 2) Technical options and sharing models and 3) Cost savings.

The first step is to clearly trade-off between the bandwidth requirements of our customers and the spectrum demand / spectrum supply that we, as a telco, can offer. Telcos have recently started to consider capacity seriously, once most of their net-adds hold a smartphone with a data flat-tariff in it, and when the data-related congestion constraints are directly proportional to the CapEx investment rate increase. It’s important to clearly (and accurately) project and manage the data demand and its direct implications on CaPex and OpEx costs.

Side note: Most of the operators are denying the lack of spectrum available, but in our opinion the problem is not lack of spectrum but inefficient use of it.

Challenge: If telcos really want to give users access to the abundant wireless capacity around them, they have to accept the fact that their network is no longer that core-asset they thought and that a multi-collaborative access-exchange environment can provide significant efficiencies to current model apart from a several-fold capacity increase that would be made available for little or no additional infrastructure cost.

The second step is defining the right technical model based on the telco’s situation and their current network approach. A good sample is LTE and its impact on existing network deployments. Once obtained the license, operators have to decide whether they have to go under a green-field, buy-in or consolidation situation, but most importantly, they have to decide the most suitable tech option (passive site sharing, MORAN, MOCN, DNB, All-IP core, etc.). Each of these options is perfectly valid depending on the starting point of the telco and unveils different levels of optimization. The challenge resides in identifying the feasible, cost-effective, ease-to-deploy option through assessing different scenarios and measuring the different alternatives.

The third option basically identifies and measures the CapEx/OpEx cost savings derived from a potential evolution of the access strategy towards a transmission / RAN sharing model. Each of the scenarios identified in step 2 should be modeled in detail to preempt any financial risk, establish faster coverage and improve time-to-revenue rate.  At the end of the day, telcos are measuring the effect of a tentative de-aggregation of the network value chain and the overall financial benefit of such an exercise. With potential CaPex reductions from 10% to 25% (depending if we speak of network costs, ran costs or general costs), its worth investing in this trend, right?

Amazing stuff. May you have any additional inquiry on the topic, feel free to contact me.

Happy reading. CVA

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