Outsourcing leads to sharing (a single infrastructure)

Here is an interesting read on a case of outsourcing. CTO Don Price of Bharti Airtel acknowledges to having been an avid opponent ("I was screeming the loudest about not outsourcing"), but now he sees all the benefits:

What happened immediately was that rather than me getting 30 messages an hour relative to network performance, sites being down, trouble tickets being raised, with my phone ringing off the hook, that was all happening to my managed services partner. We were having dinner together, my phone was relatively quiet and he was on the phone constantly. And I'm saying this model is great!'

There are many interesting topics. As you will see, outsourcing leads to network sharing, even to a single infrastructure! That obviously leads to separation and open access. There you go - all my favorite topics.

• Managed capacity (equipment supply) v. managed services (planning, operations, maintenance).
• The motivation is efficiency ("I have a group of roughly 200 people who are managing a subscriber base of more than 60 million and a base station count of roughly 70,000").
• "When I was building sites I was building 400 a month, now my partners are building 3,000 a month."
• "There's one argument that says your managed services partner should be vendor-agnostic, because he will bring you the best in breed kit. Then there's another argument that says there's nobody better to operate and maintain the network than the guy who designed and manufactured it. But as an operations person having done this for a number of years, I would tend to say go with the latter, because there are benefits."
• About not outsourcing: "The things you would want to retain are things like market planning. I want my business guys to draw my cloud for me in terms of where they need coverage. I wouldn't just leave that up to a third party because ultimately they have to deliver a P&L."
• "This is the most difficult part of the entire exercise because people feel that network is their core competence, their key differentiator."
• "... first of all, the network is important. But if you look at the relative importance today versus a few years ago, it's changing. A few years ago network was a potential delight factor. Somebody got their phone, they pull it out of the box, they make their first call and they are absolutely thrilled. Now if they pull the phone out of the box, pop the SIM card in it and if it doesn't work in the parking garage in the basement, they get pissed off. So network has moved form a delight factor to a dissatisfaction factor because expectations have increased."
• "As a network person I can do very little do drive the top line but I can certainly do a hell of a lot to drive cost out of the middle. So therefore I believe things like passive network sharing, site sharing, co-building of sites and ultimately even the active network sharing is the right path to go down. If you and I are competing in the same market, it doesn't make sense for both of us to do the build out. We have an expense that we can't reduce, you're left with an expense that you can't reduce. You're on the left side of the highway, and I'm on the right side of the highway. What did we do? We crossed the finish line six weeks apart. So as we go forward in the industry, as a network community, let's build one highway, one common infrastructure and let the sales and marketing guys compete on the cars."
• "If you are a managed services partner, you have a business of trying to drive growth in terms of your revenues and profitability. You're getting a fixed amount from me for services. But beyond that you're somewhat limited. So what do you do? You try and figure out ways that you can take cost out of the middle as well. So you start outsourcing to other agencies. So you get double and triple hop outsourcing. All of a sudden I come into a meeting, look across the table at the other people. They're not my guys, they're not NSN guys, they're a third party. The guy's been out of school six months. He can barely spell RF and he's designing my network. (...) But at the same time a part of me says that as long as you're meeting my KPIs and SLAs, why should I be bothered? But the guys I work with, it's an emotional thing, it drives them absolutely crazy. I have to pull them back and say: "Are the KPIs better? Are the site deployments better? Is the customer satisfaction better?" If the answer is yes to all three then there's really nothing to discuss."

Interesting read and event from STL (Telco 2.0)

STL Partners (who trademarked the Telco 2.0 term), the firm of Simon, Martin, Keith et al, plan to do another brain torturing event in April. I was lucky to get a view of the accompanying report (they will also present some entirely new research). Their concepts are thought-provoking, highly original and totally worthwhile for anybody in the industry, or even with an interest in business models in general.

I will not try to replicate the report, or even give a summary, but I do wish to put anybody interested on the right track, as the report (165 pages) is quite a challenging read. I also recommend the STL blog to come prepared.

In short, the message is that new wholesale is telco's salvation.

The building blocks of their views may be presented as follows:

1. All-IP is a given. STL is specifically looking beyond it (for which in itself they may be applauded, because most people are still trying to get to grips with NGNs per se) and sees the broadband incentive problem, the problem of all-you-can-eat pricing, as well as the threat for operators to be reduced to dumb pipes. Of course there are several ways out of this: fix the flat-rate or all-you-can-eat pricing (see Benoit's post), embrace the dumb pipe (if you wish to forego a big revenue opportunity), or follow STL (design new business models). Obviously, STL is presenting itself as the sector's saviour.

2. Hence, new business models are needed (or rather: revenue models). STL's answer involves the two-sided business model (see from slide 47 of this Arvetica presentation), implying operators should view themselves as logistics services companies, making use of their specific strengths. I suppose the cable industry could be an example too, where upstream partners (networks) are teamed with and shared revenue with. Networks should be seen as platforms, where operators, upstream (content and application providers, ecommerce, payment systems, advertising (cf. Project Canoe in the NYT ) etc.) as well as downstream (device and set-top box makers) meet. It also involves breaking-up and re-assembling the value chain. Effectively, the BSP (broadband services provider: ISP + apps) is born. Focus of the report is on exploring new wholesale opportunities and partnering in all its manifestations (co-op, sharing, outsourcing).

3. Also, STL give a top-down market approach, estimating the global telecoms market (at the retail level). It is set to double from 2006 to 2017 (from GBP 680 to 1300bn), with the share of the largest 12 countries dropping from 50% to 40% (from GBP 341 to 514bn). This implies a 3.9% CAGR (same as during the 2001-2006 period). However within the numbers (they asked me to be a little discreet about them) are big variances: access is very low growth (esp. mobile), the platform thing (and wholesale to a lesser extent) is where future growth opportunities are. Keep in mind however that these numbers are the results of STL's assumptions, not the other way around, and therefore they are basically the result of reverse engineering.

4. Input is mainly STL's own qualitative research about distribution systems. They see both parallels (mainly in shipping) and early movers (such as Amazon). Further, STL use a large-scale survey among industry workers, consultants and analysts.

Demand drives FTTH drives separation

FTTH and separation are probably the most important trends in telecom right now. They are also linked.

I believe demand for bandwidth and nations competing for a larger share of the worldwide GDP pie will drive investments in FTTH networks. Telcos feel the heat and are preparing investors for a large capex round.
At the same time, realisation builds that there is value in both networks and services. Telcos are leaning toward the latter, and are preparing for their new roles by introducing sharing, outsourcing and separation.

Below I elaborate on these issues.

1. Drivers

1.1 Demand

Demand growth remains high. Statistics from internet exchanges, IPTV, the rising popularity of YouTube, monitoring services, etc. are used to corroborate this point. Add to that the following. As long as there is no true end-to-end connection and bandwidth is shared at some stretch (either on the open internet or in the last few yards), bandwidth should be redundant. So, if you need let’s say 30 Mbps, you really need peak performance of 100 Mbps. Check out Dean’s remarks.

1.2 Competition among nations

A valued reader suggested that there is a race going on between nations. Already, eastern European countries leapfrog places like Germany by building FTTH networks. If you want to maintain your share of the world’s GDP, you better not stay behind. Places ranging from Chattanooga (Tennessee) to Malaysia acknowledge this. No wonder Italy is weighing a massive investment into Telecom Italia’s network, once the company is separated. No wonder also why Ofcom launched a consultation, apparently aimed at paving the way for FTTH.


2. Future proof solution: FTTH

This point hardly needs any back-up, even if your long-term view is that the last few feet will be wireless. You better bring fiber at least to the doorstep of all the places where people like to hang out.
As I have written before, telcos are actually preparing investors for the big plunge.


3. Sharing

I believe sharing is going to gain popularity. Right now it appears to be concentrated in areas where demand or scale is limited. You can find examples in such diverse areas as mobile TV (German operators jointly building a single network), WiMAX (look at this consortium in Malaysia), FTTN/VDSL (altnets in both Australia and Germany) and 3G (in the UK, for instance).
The question remains: which part are you willing to share? The passive (dumb) layer is an obvious candidate, but you want to remain in control of traffic and services. The Vodafone/Orange UK example takes (tower and antenna) sharing one step further than sharing deals elsewhere (including the Sprint/Clearwire deal), which are mainly focused on extending coverage to rural areas. For Vodafone and Orange, sharing means: separating the network from the services. It implies that the network must be redundant (so there will not be an issue over who gets how much capacity), and also that the days of network coverage as an USP are behind us.


4. Outsourcing and separation

4.1 Outsourcing

The next logical step seems to be outsourcing. If you decide to sacrifice full network control, why not let some third party handle the network?
KPN is a case in point, since it started outsourcing many tasks in its fixed network to a whole range of IT providers. To be sure, I do not believe that KPN will save on costs. We all know the ways of IT companies. There will be lots of talk and writing policy documents. I counted at least 7 IT companies involved. IBM will be the lead integrator, but I am unconvinced that this structure will save KPN any opex within the next 3 years. I believe the move is designed to sharpen the focus on services, perhaps even pave the way for more (i.e. core network outsourcing and structural or even ownership separation).

4.2 Separation

The new focus on services opens the gates to (further) separation. In fact, it is already amongst us. First of all, let’s not forget that selling the tower business by mobile operators can be viewed as a form of separation, even if this only sets site sharing apart (and not antenna sharing or any activities ‘higher up’).
But there is much more. In Switzerland, Swisscom Broadcast received a DVB-H license, but it must provide equal access to all operators. Shortly before, TeliaSonera took the unusual step to create a separate infrastructure/wholesale unit in Sweden. Another voluntary action comes out of EchoStar, which proposed to split its satellite fleet (with wholesale operations) form the service provisioning unit (the Dish Network).

Telecom New Zealand will be split along the well known BT Openreach lines, creating a unit in charge of the access network in order to jumpstart LLU.
It remains to be seen if this effectively creates a new stumbling block on the road to FTTH, as the new structure focuses on LLU and therefore on maintaining ADSL(2+). It would be my preference to try and leapfrog intermediary technologies as much as possible and go straight to FTTH.

Some companies are obviously atttracted by the wholesale business model (the NetCo part of the business, as opposed to the higher valued ServiceCo units), providing a ‘natural monopoly’ and ditto cashflows. Consider such diverse players as Reggefiber (the FTTH company in the Netherlands), Frontline Wireless (plans a national safety network in the US, stresses the importance of wholesale access to the new 700 MHz spectrum in order to foster new entrants) and even Gaiacomm International (whose proposed VLF/terahertz network would not compete with exiting service providers).

KPN pushes outsourcing to the max

John Marcus of Current Analysis recently wrote an article on outsourcing coming to fixed telcos. Now, KPN has been doing its own over the past few weeks, outsourcing several tasks (CRM, billing, testing, graphical systems) to a range of IT companies (Accenture, IBM, Capgemini, LogicaCMG, Satyam, Sogeti and ICT Automatisering). Before, several wireless access networks were outsourced to Ericsson and E-Plus outsourced construction, operation and maintenance to Alcatel-Lucent.

Obviously, this raises the question: how far will KPN go? Will the fixed network in the Netherlands follow? Could that be a first step toward sharing, selling, separation, or even FTTH? Will KPN develop as a service provider?

More to follow.