"A network operator's life is never an easy one....prompted by many pressures, a new value-chain for mobile is emerging. "
FRAZER BENNETT, COMMUNICATIONS TECHNOLOGY CONSULTING, PA CONSULTING GROUP
A network operator's life is never an easy one. New subscriber adoption rates are down, but the existing subscribers' hunger for costly-to-deliver data services is up. Margins go down, yet the pressure from regulators on policing these margins goes up. And while the expected infrastructure costs required to support emerging data services keep rising, so the customers' willingness to pay for these services just falls. Who, then, would be a network operator, asks Frazer Bennett?
Commentators have observed for some time that the traditional business model through which network operators have demonstrated past success is unlikely to sustain them in the future. Although long aware that value-added services must be embraced to derive value from their precious, and costly network, operators have remained perplexed, turn-on-turn, by the emerging models that internet companies, and more recently emergent handset vendors, have created to realise such services.
Prompted by these and many other pressures, a new value-chain for mobile is emerging. And, despite what many may say, we believe that this new value-chain represents great opportunity for the incumbent network operators to realise new sources of value. If they get it right, they can win hands-down.
But the combination of having to deal with existing operational pressures, whilst embracing ongoing change leaves network operators with questions about focus. Where should they focus their energies?
Two key insights
We offer a couple of insights into two areas that must be at the forefront of an operator's thinking as this new value-chain emerges (at the forefront of its thinking, yes, but also at the forefront of its planning, and its actions).
First, options for the network operator's cost model continue to change and must continue to be considered. Outsourcing and/or sharing of network services should make the prospect of adopting new infrastructure more palatable - should help to control costs. But finding the most effective approach is not that simple.
Second, the new value-chain sees the consumer placed right at the centre - at the centre and expecting more freedom, not shepherded or shielded by any one party and particularly not the network operator. Many expect that this central positioning of the consumer will be rewarded by a much greater amount of their spend being on, or through, the mobile platform. But how can the operator capture this value
The new cost model
The days when a business could compete based on its facilities - its tangible infrastructure - are gone. Infrastructure is not a direct revenue generator and is no longer a customer attractor. This comes as no surprise. The histories of the provision of many essential services - electricity, gas, even roads - have followed a similar path. What starts as a unique differentiator, an almost monopolistic asset, becomes - as a result of both innovation and regulation - a very costly component of a heavily service-centred industry.
But infrastructure is an asset that can be shared. A variety of operating models have emerged to enable network operators to exploit, and drive greater efficiency out of, this infrastructure through sharing or outsourcing in one form or other.
For a typical network operator, infrastructure and operations IT costs represent 45% of operating expense and 75% of capital expense. So the potential cost savings are sizeable. It's no surprise that network outsourcing and network sharing have become commonplace.
But the decision about whether a network operator should outsource or not, and the appropriate outsourcing model it should employ, remains a complex one. From site-sharing to RAN sharing, through real-estate outsourcing to full operational service outsourcing, the spectrum of options demands careful, and ongoing analysis. The trick is to find balance across cost saving and risk whilst focusing on competitive positioning. There is no one-size-fits-all.
Technology changes also impact outsourcing decisions. The advent of the all-IP RAN, and the rise of the femtocell (and indeed the potential need for much smaller femto-like cells to meet future data-service-level requirements) are two examples here. Operators are looking to these technologies to drive down operating costs over all, and in particular to make the provision of higher quality data-centric services more cost-effective. In their infancy, should innovations like these be managed internally by the network operator, or can they be trusted to third-parties to exploit them as much as possible?
Novel infrastructure architectures - encouraged by the all-IP RAN - should make inter-changeability of infrastructure components more straightforward. Further, they should enable an easier translation of internet-centred content onto mobile infrastructure. But, once again, is this something that needs to be driven from the core service-offering of an operator, or can it be left to third-party service providers to manage? Once again, there is no rule book and no standard formula here.
RAN sharing and network outsourcing make it possible for network operators to focus on the thing that they need to do best - the thing that demands their focus more than any other. Our second observation on focus for network operators in the new value chain is the need to be engaging, enchanting and to keep the customer.
The need to keep happy customers is hardly an insight in itself, and certainly not something that arises as a novelty in a transforming value chain. But when we consider how customers' expectations of the mobile network have changed - and they have changed much faster than the network operator's ability to meet them - we can see that a new approach is necessary. A new approach is both necessary and, we believe, possible.
As has been widely observed, network operators were traditionally afraid of the loss of control that new service models and ‘open' platforms might cause. This is the so-called ‘dumb pipe' threat - the fear that a network operator's value proposition might erode to being one of mere bit provision.
The mid-1990s saw an explosion of fledgling Internet companies - all born with ‘free' bit-provision underneath them. The network was an assumed, and essentially free, resource. The challenge for these new companies was to devise monetization models for any service offering or application that they might come up with to ride over that network.
Mobile network operators, on the other hand, had a well tested monetization model from the outset. However, this model presumed, and indeed required, a great degree of control over the end customer. Control over applications, content, and delivery model. Today it is exactly this control which has been, and we believe must be, eroded for network operators to capture most value.
Early ventures into openness, relinquishing the fist of control, resulted in frustration and, largely, failure. "Open access" meant walled gardens, operator-selected applications enabling third parties to have a relationship directly with the operator, but not with the customer. This lead to considerable frustration all round. As Juniper Research observed in 2008: "the level of control exerted by mobile operators rankles with, and exasperates, the content providers (In) an environment not necessarily conducive to the introduction and mass-adoption of innovative mobile services...operators are, after all, mobile specialists and not content specialists".
But the dumb-pipe fear is unfounded. This pipe has never been the most valuable asset that the network operator owns. Rather, it is the relationship with the customer that matters most. No wonder that it is this asset that has been under attack from handset vendors and, increasing, software vendors in recent years. They too prize it greatly.
And here's the surprise. In order to keep this most valuable of assets, in order to extract most value from it, the network operator should open up the customer relationship as widely as possible - open it to providers of new services, applications, and indeed platforms. We believe this openness can be brought about without fear of loss of control, without fear of loss of income.
Four levels of openness
To help clarify what openness means in this context, consider this simple model. We introduce four levels of openness that a network operator could adopt in his relationship with customers and third-party content/application providers.
In the first level, ‘doing it all ourselves', a completely closed world is presented - one in which the network operator is sole arbiter of the content that the consumer can reach. Original mobile data access models were like this, and the ill-fated ‘walled garden' approach is one such example. In reality, the network operator is giving up no control, and there is no openness here.
At the second level, operators can choose to license out certain aspects of the user experience to be under the control of third parties. Search, and perhaps advertising or gaming-platforms, are examples here. In the case of search, customers have certain expectations of search brand that might have in fact forced operators to open up this experience. Operating at this level, operators have generated licensing revenue and the customer's choice has been restricted only in a small number of areas, but restricted it remains.
The third level sees the connection with the customer being opened up, unrestricted, to web-based services through a browser. Third-parties are no longer obliged to have a relationship with the operator, and can engage directly in the provision of such services. With the exception of ‘appstore' models (which we touch on next) this is arguably the current state of things, and the one that customers are accustomed to through their use of wireline internet connections. It is understandable that it is this third level that has left network operators fearful of contracting ‘dumb-pipe syndrome'.
But it's the fourth level that will liberate them. It's the fourth level that will enable network operators and content providers alike to capture value from the relationship with the customer. This level of openness acknowledges the additional value that the network operator holds in the relationship with the customer through the information it holds - all manner of information about usage, address book, history, location, service level, all manner of second-order data about user behaviour.
By opening up this information - and providing a service delivery platform through which third parties can exploit and reach the customer with services built around it, network operators make themselves more attractive to third-party providers and customers alike. The fourth level entails the network operator identifying, capturing and exploiting the real value that they carry because of their unique relationship with the customer.
Why would this help network operators succeed in capturing more value? And how does this help them to retain customers?
First, note that opening up information of this kind will enable new services and applications to be developed. Network operators can't determine what will succeed a priori, nor should they try to. In an open world, the customer will be able to determine which are valuable and which aren't. By opening service and application delivery up, and by augmenting application content with operator-derived data, the developers and customers themselves will determine what's valuable and what's not. Innovation is about creating an environment in which others can innovate, and sharing the reward with them.
Second, only an open world of this kind will enable the customers themselves to create the value. Value is the stuff that customers leave behind. In a closed world there is little scope for customers to do this, but in an open world the options are much greater. Think of the value that Amazon holds through its 9 million book reviews and more than 200 million book ratings. All left by customers. So, too, the three billion photos that are hosted by Flickr. Given the chance, customers will create their own value, leave it behind, and be very likely to return to it.
As technology changes, regulatory pressure and customer expectation forces change across the value chain. We can be sure that things will not stand still. But with such an historically strong position, and the all-important direct relationship with the customer, network operators can undoubtedly turn such change to their advantage.
Controlling cost through judicious use of network sharing, and service outsourcing, must be consistent with a broader strategy. But when effective, the 45% operating costs of maintaining infrastructure can be kept in check.
But the most valuable asset is the direct relationship with the customer, and as internet models have shown, openness is what will strengthen this relationship and create more value for operators - and third-parties - in the future. Being open in the service delivery model, and encouraging innovation by opening APIs, will attract both developers and customers and keep them hooked.
About the author
Frazer Bennett is a consultant in communication and electronic systems, PA Consulting Group. He can be contacted via email.
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