Time for a Mobile NetCo?
With voice revenue growth stalled, and with extra costs inherent in providing emerging data services, the mobile industry is facing unprecedented pressure on profitability.
In response, operators are engaged in cost-reduction initiatives targeting every part of their technical operations, with radio access network (RAN) sharing emerging as the single most significant opportunity to restructure wireless industry economics, according to the latest Unstrung Insider report, RAN Sharing: Cutting the Cost of Mobile Broadband.
RAN sharing is about taking the most expensive pieces of an operator's network – the cell sites and towers, base station equipment, and the transmission network – and sharing this infrastructure with competitors. The idea is that, by reducing duplication of network assets, operators can deliver better services for less money.
Underlying this renewed wave of interest in network sharing is the realization that most mobile networks offer about the same quality of service as one another. The argument was made by Vodafone UK CEO Nick Read, speaking at a recent investor event about his firm's agreement with Orange UK to consolidate and share RANs. "Five, six years from now, it is our belief that coverage will not be a differentiator," noted Read.
He has a point, even if carrier personnel aren't supposed to talk like that. It makes the news these days when people can't get a signal. You can even make calls from the top of Mount Everest. (See Mobile Bench Mark and Success for Everest mobile effort).
For mobile carriers that have for years sold subscribers on the "unique" coverage and reliability attributes of their networks, this is a hard concept to come to terms with. But potential savings of up to 30 percent available on combined capex/opex make it hard to ignore the allure of RAN sharing, forcing carriers around the world to assess how it could work for them.
Other multinational carriers either involved in, or potentially evaluating, RAN sharing include Telefónica Móviles SA , Telecom Italia Mobile SpA (Milan: TIM), T-Mobile International AG , and Telefónica Europe plc (O2) . And it's not just Western European 3G operators in on the act: "Extensive network sharing will become the norm," said Sunil Mittal, chairman and managing director of India's largest carrier, Bharti Airtel Ltd. (Mumbai: BHARTIARTL), following a huge network sharing agreement with Vodafone Essar announced earlier this year.
From most perspectives, this is a logical way for the industry to evolve. After all, it doesn't pay to build two competing railways or highways along the same route, and "build it and they will come" has long been discredited as a sensible philosophy for investing in wireline network capacity. So why build and maintain two RANs to cover exactly the same area?
Instead, says Read, who used to run Vodafone's portal business, the focus should be on seeking competitive advantage in services: "We believe it is in the core network that we will drive long-term sustainable differentiation, and so we need to make sure that as [coverage] becomes less important, we have corrected our cost base and got the lowest unit cost possible to be successful."
Where RAN equipment and sites are shared, the next logical step is to consolidate these assets under a single management structure, perhaps set up as an independent network operating company, or "NetCo," that would provide access to higher-layer services companies, or "ServCos." Such a model would make at least theoretical sense. After all, selecting which ringtone to advertise on a mobile portal is a million miles from installing and maintaining coaxial feeder cable to a cell-site antenna.
Vendors, of course, have mixed feelings about the consolidation of customer networks. One example of positive thinking comes from Simon Beresford-Wylie, CEO of Nokia Solutions and Networks , who has explicitly identified the likelihood of increasing separation between service provision and "bit pipe" provision, suggesting that operators would increasingly adopt the NetCo/ServCo business model.
"If you're an operator in Europe at the moment, starting to think about Long Term Evolution, and you think, 'Boy, there are four or five physical wideband CDMA operators in a given country,' how on Earth can [you] build a business case that justifies [being] one of five [LTE operators]?" Beresford-Wylie asked at Nokia's last capital markets day. "The question is whether there are going to be two or three [operators], and then behind that are some very strategic questions for the operator: 'What is my business? Is it brand? Is it channel? Is it service provision? Is it providing the plumbing?' Very big questions are coming."
– Gabriel Brown, Chief Analyst, Unstrung Insider
The report, RAN Sharing: Cutting the Cost of Mobile Broadband, is available as part of an annual subscription (12 monthly issues) to Unstrung Insider, priced at $1,595. Individual reports are available for $900. To subscribe, please visit: www.unstrung.com/insider.