Future network operations
Network issues today
A daunting array of challenges
Today’s telecoms operators face an array of issues with profound implications for the future performance and continued survival of their business.
2011 saw operators spend significant amounts on enhancing their customer billing and retention, and on acquiring rights to new spectrum.
The current issues highlighted by the respondents are shown in Figure 1, led by the need for capital expenditure (capex) to service the growth in data traffic.
Figure 1: Key issues facing operators today
Source: EY operator interviews
There are several drivers behind the capex demands. On the customer side, operators need to manage rapidly changing market conditions and dynamics, including:
- Declining fixed subscriber numbers
- Limited growth in mobile due to near-saturation in mature markets
- Downward pressure on average-revenue-peruser (ARPU) levels
- Widespread move from voice to data
- Ongoing fixed to mobile substitution
- Other increased forms of competition such as over-the-top (OTT) players
These shifts are increasing the need for operating efficiency and the need for greater focus on subscriber retention.
On the network side, operators have to manage fast increasing bandwidth requirements driven by the explosive growth in data traffic. This shift especially affects mobile operators, given the substantial rise in smartphone penetration. The resulting apparently insatiable hunger for bandwidth is creating a need for massive investment in capacity and backhaul.
There are also challenges on the regulatory front, with a lack of certainty in many markets on the regulatory regime for next generation networks. The availability and costs of future high-bandwidth mobile spectrum for LTE/4G are often unclear or only at the proposal stage.
Two key impacts on network management
These current issues have had two main effects on operators’ network strategies and operations:
- The first is an increased focus on the business case for next generation network roll-outs and optimization programs. These projects are no longer regarded as a given in light of the related uncertainties, risks and costs.
- The second is an increased focus on cost containment and reduction, driving efficiency to boost strategic agility and free up resources for value-creating projects and programs.
Key network capital expenditures in 2011
Operators have had to make significant capital investments during 2011. For many, the main focus has been investing in their network assets, including network expansion, upgrade and optimization initiatives.
For mobile network operators, these investments have included:
- Roll-out of 3G capacity and coverage
- Targeted 4G roll-outs in some markets
- Implementation of fiber backhaul in markets where data volumes are significant and growing
For fixed network operators, the main investment priority during the year was rolling out fiber next generation access. Across the industry, there has been a drive to invest in converged internet protocol (IP) core networks.
2011 also saw operators spend significant amounts on enhancing their customer billing and retention, and on acquiring rights to new spectrum.
Current operator approaches to network management
The need to improve operational efficiency is prompting operators in all regions to adopt three specific approaches to network operations:
1. Using vendors or contractors for network roll-out and system integration
Network roll-out and systems integration services relate to the planning, installation and deployment of network equipment. Network roll-out services encompass the design and deployment of the access and transport network infrastructure. Systems integration services concern:
- Design and integration of network systems, such as IP networks and IP multimedia subsystems (IMS systems)
- Application development, integration and deployment of the network operating and service provision IT systems
An increasingly common strategy among our survey respondents is to have network roll-out and systems integration work carried out by vendors or contractors rather than in-house teams. The importance of the third-party expenditure on these services is shown in its rising share of operator capital expenditure, as shown in Figure 2.
Figure 2: Increasing importance of network roll-out and systems integration services in operator capex
Source: EY analysis
The most common rationale for this approach is greater capital expenditure efficiency. Also, these services are provided by deep subject matter experts and at a faster pace.
In general, vendors become involved when the roll-out or integration is especially complex or is being carried out on a very tight schedule. For simpler and more routine projects, operators usually employ smaller contractors.
2. Increased use of managed services
Managed services are long-term outsourcing contracts covering an operator’s entire network operation, or a specific part of it, such as field services. The vendor acts under a service level agreement (SLA) with full responsibility for the activity specified in the contract.
The outsourcing services provided under these contracts can range from field force maintenance to full network operations transfer to the managed services provider.
A further response to the need for operational efficiency is increased use of managed services contracts. Over the past three years, some 81 of these contracts have been entered into or renewed.
It is clear that most operators today are open to managed services of varying scope: 80% of survey respondents say they outsourced at least one network function, with most having some field maintenance functions outsourced.
However, as Figure 3 shows, some operators have gone further, opting for full outsourcing of network operations spanning areas including:
- End-to-end service management
- Network management
- Operational engineering
- Construction and integration
In setting up these managed services contracts, operators’ main goal has been improved cost efficiency — a result of the outsourcing vendor’s ability to realize economies of scale, and the global knowledge and experience of the delivery partner.
In general, the decision to contract for managed services is made at operating-company level based on local circumstances.
While managed services contracts have cost efficiency built in, operators still need to see hard evidence of major cost advantages before they are convinced to outsource more activities. As Figure 4 confirms, not all the respondents’ experiences of managed services are positive, and many remain uncertain over the results.
Figure 4: Has outsourcing achieved its goals?
Source: EY operator interviews
3. Adoption of network sharing and alternative ownership models
Mobile operators are also increasingly considering network sharing and alternative ownership options.
Most of our survey participants are now involved in network sharing, primarily in sharing of passive infrastructure. With the ongoing constraints on investment in new network roll-outs, passive sharing of tower and related infrastructure is continuing to increase, as is sharing that also includes active equipment.
The increase in the number of network sharing deals since 2007 is shown in Figure 5.
Figure 5: Cumulative number of announced network sharing deals: 2007–2012 (YTD)
Source: Telecom Finance, Thomson, company press releases
There is also a trend toward sale and leaseback of tower infrastructure. Operators’ use of this technique varies on a regional basis, reflecting a lack of infrastructure players in some markets, and the fact that some regulatory authorities do not allow it.
There is also a degree of uncertainty over the extent of the benefits to operators — and over whether the tower companies will share the same objectives as the operators in the future.
Figure 3: Scope of outsourcing agreement×
Source: Ernst & operator interviews