What is the future for mobile operators?

The multi-trillion dollar wireless industry has been feeling a little chilly during 2009 and its problems are set to continue into 2010. As former gatekeepers to all mobile services, including the mobile web, mobile operators have seen their garden walls scaled in the past year by hordes of subscribers armed with smartphones, demanding the right to download any web-based application, whether developed and controlled by mobile operators or not.

Innovations from the likes of Apple and Google are opening the floodgates to a tide of free or inexpensive mobile data services at a time when mobile operators’ capex and opex are rising, their markets are saturating and their traditional service revenues are flattening, if not falling. This is not a comfortable place for mobile operators to be. “They are facing an entirely new business model, huge demand for data in their access networks, their profits are falling and demand is unpredictable,” summarises Terry Norman, principal analyst at Analysys Mason. “An uncertain position makes any business feel vulnerable and want to reduce risk.”

Mobile operators are in a dither. They are committing to upgrading their access networks to handle mobile data, with plenty of 3G roll-outs taking place in developing markets round the world. LTE is beginning to come on stream in the developed markets, following hot on the heels of HSPA upgrades, and Wimax is being deployed in both emerging and mature markets. Sprint’s Clearwire venture, for example, which recently received a further $1 billion injection of investment, has its Wimax network up and running in 24 US cities with connections to 80 more cities planned in 2010, and the ability to reach 100 million US citizens by the end of 2010. Many parts of the world will, in the not too distant future, enjoy almost 100% mobile broadband coverage at speeds that will leave fixed network providers, labouring away on limited fibre build-outs, in the dust.

Yet in general, mobile operators have no clear ideas about how to make money out of so much bandwidth. “They are updating their networks in the old-fashioned way – because the technology is there and that’s what they’ve always done,” says Saverio Romeo, industry analyst at Frost & Sullivan. “But they are shying away from considering what other roles they can play.”

In other words, mobile operators don’t know whether they should bite the bullet and become service providers in competition with Apple, Google, Facebook and other internet players or whether they should play an enabling role, bringing their access pipes and control over quality of service to the internet service party, but leaving service development and revenue to others.

There is a division of opinion between Teliasonera, for example, whose CEO, Lars Nyberg, has gone on record saying that access is a pretty good business to be in and that Google is not his competitor, and Vodafone, which, with the 2009 launch of its 360 social networking app and its investment in the Betavine open service creation platform, is very clearly shooting across the bows of Google et al. Most analysts, like Romeo, support the mobile operator as a service provider model: “It’s a dangerous choice to remain a pipe. You can differentiate for a while on technology and coverage but in five to six years’ time, you lose this advantage again,” Romeo says.

Wholesale operators have a vested interest in mobile operators focussing on service provision and the retail customer in an all-IP world. When the network is no longer a differentiator, there is a strong imperative to outsource it and the mobile market potentially offers rich pickings for managed services providers. Several outsourcing models are developing in the current market, from the outsourcing of the implementation and operation of shared radio access networks (RAN), a model which 3GIS in Sweden and the UK’s 3/T-Mobile MBNL venture have been pioneering, to the outsourcing of the mobile backhaul networks, and beyond this, the outsourcing of the entire mobile infrastructure, thereby enabling MVNOs.

The major network equipment vendors are busy doing business in the first category. They are seizing on a growing trend for mobile operators to share base station infrastructure and operational resources to reduce opex by up to 50%. MBNL, for example, expects to make cost savings of £2 billion over the next 10 years for its parent companies as a result of network sharing. Outsourcing the RAN to a neutral third party, such as Ericsson or Nokia Siemens Networks, is attractive as it keeps shared ventures “honest”, but whether carriers with systems integration arms can strike similar deals remains to be seen. The backhaul outsourcing market is of high interest to wholesale players, however. Even if mobile operators don’t intend to play at the service level in the emerging internet value chain, outsourcing the backhaul network is on the table since Analysys Mason’s Norman believes it is an important element in taking risk out of any mobile operator’s business in the current climate.

Mobile operators urgently need to expand capacity on their backhaul networks to cope with the huge growth in mobile data but at the same time, they need to reduce backhaul costs. The leased lines they will continue to use for voice for the foreseeable future are too expensive and inflexible to handle variable and rapidly increasing amounts of data traffic. “What mobile operators would like is backhaul as a utility service, paying by the Mb as they call capacity down,” Norman suggests. This would allow mobile operators to align service usage at different points in the access network with backhaul costs, reducing their risk.

Ethernet is the ideal technology for delivering utility backhaul and mobile operators are already experimenting with its potential. BT Wholesale signed a landmark deal with Vodafone UK in April 2008 to migrate Vodafone’s backhaul network from TDM to Ethernet and it has since picked up similar business from O2 and MBNL, gaining the latter as a customer when MBNL failed to persuade Virgin Media to invest in building out to its base station sites. As a result of moving to shared, Ethernet-based backhaul, MBNL’s parent companies have reduced the amount they had jointly been paying by two-thirds and quadrupled their backhaul capacity. A “major European mobile operator” group is using Colt’s GigE services to implement a variable backhaul capacity solution similar to the type of service Norman suggests. Current Analysis’s Joel Stradling points to Level 3’s Tower Access programme as another example of a wholesale carrier chasing the mobile backhaul opportunity. In October 2009, Level 3 announced plans to connect more than 300 potential cell tower sites on or near the carrier’s network to its facilities, provide them with a portfolio of voice, data and internet services and offer them to multiple mobile operators prepared to network-share.

But carriers are not the only companies in the running to provide the mobile industry with backhaul solutions. Network equipment vendors are looking beyond the RAN to the backhaul network, with Ericsson, which manages the BTW contract within MBNL, talking about the possibility of providing shared backhaul infrastructure for multiple mobile operators in certain parts of the world. TV mast and wireless infrastructure player, Arqiva in the UK would also be well-positioned to provide a utility backhaul service. The mobile backhaul network is likely to become a supplier battleground in the next two years, with big benefits for mobile operators.

The most extensive network outsourcing opportunity – providing MVNOs with a “network in a box” – has had mixed fortunes. Of the many MVNOs that sprung up in the US market, only two have been notably successful, Virgin Mobile USA, which Sprint is acquiring, and Tracfone. In Europe, advertising-based MVNO, Blyk, pulled out of the market in summer 2009.

Sprint, which pioneered the MVNO proposition, says it’s time to reinvent the model. “The barriers to entry are too high and in a fiercely competitive market, prices have been dropping fast,” says Dan Dooley, president of Sprint Wholesale Solutions. Dooley points out that the MVNOs have large costs in setting up distribution and sourcing and subsidising handsets on top of running the business. So Sprint is extending its outsourcing offer beyond the network, with a turnkey “MVNO-lite” solution that includes back-office activities such as provisioning, rating and billing for smaller MVNOs and handset offers and service bundles for cable operators, which Sprint is targeting as “the next generation of MVNOs. Cable providers have the critical mass, scale and distribution to be successful here but they can’t enter the market with just a wireless play,” Dooley says. “They need a service bundle to compete.”

Sprint has the MVNO-enablement of the retail sector in its sights, since retailers have the critical distribution capability an MVNO needs, with a deal with Kroger, the second largest US retailer after Walmart, already under its belt. The carrier has also spotted an opportunity to serve the systems integration and equipment manufacture market: such players can effectively become MVNOs by bundling Sprint connectivity with their services/boxes, such as ATMs and e-readers, when developing machine-to-machine solutions including utility smart grids and location-based tracking services. “There is huge potential for wireless growth in this space today,” Dooley says.

International carriers spent 2009 consolidating and extending their offers to mobile operators in the hope of enticing them to outsource more of their international business. Mikael Schachne, head of mobile data product management at Belgacom International Carrier Services (BICS), says that the recession and the need to offer more services and value to subscribers are driving mobile operators to try “to do more with fewer resources”. This is opening up two outsourcing opportunities: full outsourcing of a mobile operator’s entire international business and the outsourcing of bilateral relationships for services such as SMS/MMS and roaming. “Full outsourcing deals, such as those we have concluded with MTN and Swisscom are coming more frequently into the picture but they require more strategic, long-term cooperation between operators and take a long time to bring to fruition. Hubbing is the faster growing outsourcing opportunity,” Schachne says. Schachne describes BICS’ agreement with African mobile operator, MTN Group, which will see MTN folding its international carrier services unit into BICS, as “a major leap forward in this market” since it is a group deal – BICS now takes over the responsibility for meeting the international capacity and service needs of MTN’s 22 subsidiaries. BICS also becomes, at a stroke, a leading international wholesale operator in Africa.

The competition to serve mobile operators in the hubbing market is heating up among wholesale carriers. “The hubbing proposal doesn’t replace activities performed by mobile operators but allows them to strengthen their existing operations in a more efficient way,” Schachne says. Telecom Italia Sparkle (TI Sparkle) points to MMS hubbing as the most successful of the hubbing services so far, with 300 out of the 450 mobile operators with MMS services migrating to a hubbing model, largely because MMS is a much younger service than SMS or roaming. Almost 100% of TI Sparkle’s bilateral relationships for MMS have now moved to its MMS hub, although because MMS usage is still low, the global MMS hubbing market is small in terms of revenues, at around E10 to E15 million.

But where roaming is concerned, hubbing is still “in an embryonic phase”, according to Paolo Teotino, TI Sparkle’s head of mobile product marketing. “Most operators have bilateral relationships in place for roaming so it’s tough to get them to move to a hubbing model. The opportunity for the roaming hub is to serve existing operators’ new, marginal relationships and all the greenfield operators which would find it costly and slow to set up new bilateral relationships.”

Bernd Hoogkamp, head of mobile sales at Teliasonera International Carrier (TSIC), agrees: “The first step for mobile operators is to offload to the roaming hub 80% of the contracts that generate 20% of the value.” Hoogkamp points out that many mobile operators need to shake off their conservatism and recognise that “they don’t need to employ people to negotiate bilaterals and international traffic destinations – they can outsource these together and benefit from the larger scale efficiencies of an international carrier”. TSIC and TI Sparkle provide such economies of scale because they serve both the mobile operations within their parent company groups and third parties, while Orange, Vodafone and Telefonica are developing their own roaming hubs in competition. “Orange, Vodafone and Telefonica are planning to be the hub destinations for all the operators in their communities,” Teotino points out. “Over the next three years, we expect their coverage to be comparable to our own.”

In the race to own the hubbing market, international carriers are beginning to shift tactics from offering individual services, such as MMS and roaming hubbing, to bundling these services into packages. BICS’ Global Mobile Village and Deutsche Telekom ICSS (DT ICSS)’s Mobile World suite are examples that have appeared over the past year. “We want to encourage mobile operators to outsource all their international services in order to achieve economies of scale – if they buy five or six services from us, the price will be lower,” Teotino says.

Carrier packages vary in the sets of services they bundle and the level of integration under the covers differs, depending on the carriers’ network capabilities. TI Sparkle, for example, emphasises its ability to support high-quality VoIP interconnection, a particular draw for the emerging markets of Africa and Asia and Teotino expects the large mobile operator groups in mature markets “massively to adopt VoIP for their opcos” in the next couple of years. The combined strength of these players will mean a marked shift in the mobile market away from TDM voice, Teotino predicts.

DT ICSS, which has yet to roll out its next-generation voice network, is focussing its Mobile World suite around IPX and the “anywhere, anytime access to applications,” explains Claudia Buhne, head of product management at DT ICSS. “We see IPX as the future interconnection mechanism for all services and we have already brought MMS onto our IPX platform, to be followed over the next few months by our signalling and SMS services,” she continues. “We have decided to be early in the IPX market to make it as valuable as possible for any mobile service, including mobile streaming between content providers and operators and other Web 2.0 applications.”

Buhne admits that voice interconnection is not yet a target for the IPX, but it will be added once the carrier has its next-generation voice network in place. DT ICSS’s IPX implementation has four classes of service in place to handle high quality voice, streaming, data and best effort internet.

TSIC and TI Sparkle are more sceptical about the market need for IPX in 2010, with Teotino commenting, “The needs of mobile operators are not aligned with IPX characteristics yet, with the exception of VoIP.” Hoogkamp adds, “GSM and Vodafone are pushing for IPX because it is a means of carrying out IP-based interconnection that keeps the existing business model of charging per minute per application. Whether this will be a viable business model in the years ahead remains to be seen.” Although TSIC is “working hard on an IPX hubbing product”, Hoogkamp warns that the adoption of IPX will depend on mobile operators choosing to become service providers with distinctive sets of internet applications they wish to extend to roaming customers – and this decision is not yet a done deal for most companies.

One business mobile operators that are keen to enter is mobile banking and international carriers have identified a lucrative service opportunity to enable international money transfer and top-up services. “BICS developed ‘HomeSend’ in partnership with eServGlobal to allow mobile subscribers to transfer money internationally,” reports Stradling, while TI Sparkle will roll out a similar solution in 2010.

Growing uncertainty and aversion to risk in the mobile market plays to carriers’ advantage providing they have the right strategies and services in place to meet mobile operators’ outsourcing needs. The multi-trillion dollar wireless industry has been feeling a little chilly during 2009 and its problems are set to continue into 2010. As former gatekeepers to all mobile services, including the mobile web, mobile operators have seen their garden walls scaled in the past year by hordes of subscribers armed with smartphones, demanding the right to download any web-based application, whether developed and controlled by mobile operators or not.