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Tue 15 Sep 2009 04:00 AM

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Broad horizons

Next generation broadband networks offer huge potential for diverse telecom services, but traditional operators could face significant challenges in profiting from these networks. Bahjat El Darwiche, principal at Booz & Co, tells CommsMEA about the main challenges and how incumbent operators can work to overcome them.

Broad horizons
El Darwiche says that operators must embrace broadband and explore new revenue streams to ensure NGN investments pay off.
Broad horizons

Next generation broadband networks offer huge potential for diverse telecom services, but traditional operators could face significant challenges in profiting from these networks. Bahjat El Darwiche, principal at Booz & Co, tells
CommsMEAabout the main challenges and how incumbent operators can work to overcome them.

Are traditional telecom operators such as incumbents well placed to benefit from NGNs at present?

Today the telecom industry is moving onto what I call the broadband age. After a number of years where the industry was mainly busy with going mobile, mobile growth is now reaching saturation in many markets. In addition to this, additional fixed line services have already reached saturation and revenues from traditional fixed line services have been decreasing for many operators.

And so after a period where mobile mainly drove growth for telecom operators, we are reaching a stage where there is a need for a new driver for growth, and broadband - whether it is mobile or fixed - is emerging as the factor that will fuel growth going forward.

Many operators have invested in broadband through investments in growing their DSL customer base and ensuring wide DSL coverage. At the same time they have introduced mobile broadband offerings, initially with GPRS, Edge and more recently 3G. But still the broadband potential market is far from being fulfilled. There is a lot of demand in this area so we are entering into the age of broadband.

What is the main challenge for operators today, as traffic increasingly moves to broadband networks?

A big part of the challenge comes down to supply and demand. The easiest thing an operator can do is go and deploy networks. This is something that they have been doing for years. They are familiar with how to do it and they have good relationships with their suppliers. So they can go and deploy networks, and if they have good financials they can invest in aggressive network deployments. But the question is how they can make sure that the demand for these services will grow in line with their operations.

Demand is not just about the connection. There are also applications at the end that the end user is looking for. Operators that go to the end user with just a connection will not be able to pursue the full demand. This is where we get into the topic of telecom operators going beyond just selling connectivity and extending their value chain into applications and content.

So the first challenge for operators is to see how they can develop the comprehensive strategies for their broadband business so that they can complement their investment in infrastructure by developing compelling applications and content. Or by entering partnerships around applications and content in order to stimulate demand and in order to accelerate uptake.

The second challenge is related to technology. When we talk about broadband networks the main question is the access of these networks - the part that links to the end user. Currently, most operators have deployed high speed fibre networks at the backbone level. Their switches are connected with high speed fibre, but really the challenge is how to provide high speed connectivity to the end user, and there are multiple technologies to do this. For example, there is mobile technology that is evolving beyond 3G such as LTE, while on the fixed side there is FTTH and the ADSL suite of technologies.

So the second challenge for operators is what technology to deploy where, and for what applications, because the choice of technology will have a significant impact on the investment, as well as the sustainability of the infrastructure they are investing in.

How should operators handle these investments when it is likely to be a challenge to monetise the investment?

This is definitely a challenge: how to secure the required funding to deploy these networks. Much depends on the coverage, targets and obligations the operator has, and also whether they can leverage potential government support in order to deploy these networks.

There is also a regulatory challenge in terms of coverage, infrastructure sharing and pricing. In many cases there are pricing obligations that enforce certain constraints on how much profits operators can generate from these investments.

NGNs are ideally suited to applications such as VoIP, which some incumbents view as destructive. Do you see this being a problem?

Many operators see the current business model as a way for them to continue benefiting from significant power in the industry, so many operators still see having control of their networks as a competitive advantage. If we think about where the industry is going in terms of applications, this is an area where operators are not yet comfortable with in terms of how to compete, so it is normal to see that in many cases, operators are trying to stick to the status quo, even if these new models could bring significant benefits in the future.

But because still there is a high level of risk in these opportunities you see them preferring not to do anything and just wait and see rather than getting into these investments.

Obviously the regulatory environment around this has not helped because in many cases, regulators did not introduce a steady measure with frameworks to ensure a fair return on these networks. You see IT players and media players getting into telecom industry and competing with telecom operators with a fraction of the operators' investment, and the best example is Skype, where the capex per user for Skype is 2c whereas the capex per user for network operators is far higher.

These advantages or disadvantages add to the tension and sometimes push telecom operators to say: "look we're not going to move to make the life of these new players easier and we are going to adopt a reactive approach." This might protect telecom operators but if you think about industry development and advancement, it might not be the best thing for the industry.

So the revenue models are still a challenge when it comes to NGN. If you look at operators such as Verizon over the past few years, they have been increasing the average bandwidth for subscribers while prices have been decreasing, so they are selling more for less.

How can operators secure a share of revenues and leverage their investment in NGNs?

The first question is to what extent could operators play in this area, because there will be hundreds of applications that could be offered by hundreds of service providers. Operators have to decide on what application segments they want to compete in and look at how they can recapture a share of the revenues of the applications.

One option is to look at revenue sharing with the service providers, for example by offering software as a service. Through their broadband connection, the operator could offer end users HR management or accounting software, or a strategic planning software. The operator will charge a fee and the end user won't have to worry about any hardware issues or getting licences, doing upgrades and so on.

The telecom and IT partners will do all this for the end user. The telecom operator and the software provider will have to share the revenue from the service, ensuring returns for the operators who are investing in infrastructure while incentivising software developers and service providers to get into this type of partnership.

Adapting to change

Traditional telecom operators face business model shifts to capture the new potential from online and data services. According to Booz & Co, operators must now compete with media players, internet players, Web2.0 developers, and device manufacturers for customer ownership and control of the value chain.

For example, the emergence of "Cloud Computing" is allowing ubiquitous access to services, as computing and storage activities move online. This online revolution means telecom operators must also compete with non-telco players for a share of the digital content pie.

Several battles are being fought along the services and applications layers. And the access layer, once a key control point for incumbent telcos is being contested by new entrants.

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