A Network Operations Center, or NOC, is the primary workspace engineers utilize to monitor, manage and troubleshoot problems on a telecom network. The Network Operations Center offers oversight of problems, configuration and change management, network security, performance and policy monitoring, reporting, quality assurance, scheduling, and documentation by utilizing sophisticated network management, monitoring and analysis tools.

The NOC provides a structured environment that effectively coordinates operational activities with all participants and vendors related to the function of the network. The NOC technicians typically provide support twenty-four hours a day, seven days a week. Typical daily processes include:

• Monitoring operations of all backbone links and network nodes.
• Ensuring continuous operation of servers and services.
• Providing quality support for network users.
• Troubleshooting of all network and system related problems.
• Opening tickets to track and document resolution of problems.
• 24 hours a day, 7 days a week supervised operation by network and system engineers.

There are currently two hot topics related to NOCs where we have been involved: 1) NOC’s O&M efficiency and 2) NOC’s Energy management. As we have recently finished one assignment related to the 1st topic I wanted to share some relevant info for those executives working for telecom operator and willing to improve their O&M NOC processes and procedures.

Most of the CTOs in the telecom industry are under pressure to cut costs while raising network service levels. It is therefore key identify the best strategy towards cost optimization, starting with efforts that will result in returns in six months or less. These returns are then re-invested to drive longer-term, transformational projects. Network automation initiatives are among the projects with the fastest return, often in less than two months.

My first assignment in NOC O&M automation and design started in the Middle East in 2004, when we supported MTC (today’s Zain) in defining the e2e O&M strategy for the NOC. Since then, mmC Group has been supporting different operators across Africa and Latin America in similar exercises.

We therefore built experience in designing, building, and installing Command Centers, Control Centers, Network Operation Centers, Network Management Centers, Network Control Centers, Data Centers, Security Operations Centers, Mock Trading Rooms and various other monitoring intensive control facilities.

After four years of processes and procedures redefinition I wanted to share a brief presentation with mmC Group’s O&M framework for telecom operators, highlighting those processes that, in our opinion, are critical for the operation of the network and could bring a significant upside in efficiency when automated.

Hope it helps. Feel free to contact me for a further level of detail. Enjoy the reading, CVA.

It is coming the day when the Spanish telecom operators will have to disconnect all pre-paid mobile cell phones unless the owners are registered. Just for those that are unaware of this, let’s explain a little bit the policy: In an attempt to prevent terrorists and criminals using anonymous prepaid mobile phones for communication, the Spanish government issued a decree to disconnect any un-registered phones in the operator’s networks.

The campaign was called “Identifícate” and intended to get the country’s estimated 20 million prepaid mobile phone users to register. The deadline is November 7 2009, after which phone operators will be instructed to switch off service to those who have not provided proof of identity.

It’s not clear what will really happen; According to the Spanish publication “El Mundo”, there are still 9 million subscribers pending registration. Let’s make a simple calculation of what does this mean: according to MarketResearch.com the Spanish monthly average ARPUs will continue to decline across operators. The industry average monthly ARPU will fall from €29.62 in 2008 to €20.05 in 2013 so we can roughly assume that the ARPU in 2009 can be positioned in the €25. Considering a total amount of 8 million clients stopping consumption in November, that means that the Spanish operators will stop generating 200 million Euros / month in November and so on…

Will operators accept loosing this relevant amount of money? How are they going to replace this revenues? How will prepaid users coming from other countries to visit Spain be treated? Does this really make business sense?

I had a similar case when we were working in Sudan for one of the mobile players. The government also required the deactivation of the unregistered prepaid clients for security issues. It was clearly stated that this requirement significantly hurt our client that strictly followed the policy affecting to near a 40% of their base. I have to say that we recommended not doing so, as the financial and market-repositioning impact was so big that we would require no less than a year to recover.

Now the personal part. I know that the law is the law, but I guess that no-one in the government level have dedicated one single minute to think seriously about this. This move will doubtless please the authoritarian “nothing to hide, nothing to fear” brigade, however it’s another major blow against the right to privacy and the presumption of innocence. Yes, cellphones can be used by criminals and terrorists. As can the postal service and – for example in London – public buses. Should letters only be delivered if an authorised sender id is attached? Should we have to provide identification every time we board public transport?

Taking out the more-than-relevant financial issues that all players will suffer as a result of such a decree, a move such as this is not only a direct threat to privacy, it reverses any assumption of innocence. If you don’t register your phone you must be up to something so you’ll be cut off. At the moment this is purely a Spanish issue, but how long will it remain so? The British government in particular have a record of justifying attacks on privacy using the fear of terrorism and the argument that “Everybody else is doing it”. Watch out for something similar coming soon in legislation near you…

It’s impressive to see how the Spanish industry has changed in such a short period and, as written before about the net adds battle, it’s amazing to see the huge difficulties that all the operators have to beat the incumbent, Telefónica, and increase their revenues’ share of the market. A market where fixed lines represent the majority of the value although the source of revenue growth lies in broadband. Some interesting figures:

1. Fixed market revenues account for ~3€ Billion, of which Fixed line revenues comprise 55%. Yet the fixed line contribution is declining by -6.7% GAGR from 2007-2009
2. Broadband fuels fixed revenue growth by stimulating line numbers and revenues by over 10% CAGR in the last 3 years
3. Future broadband growth potential remains positive with the possibility of providing BB service to the 3.9 Million PC-equipped Spanish households with only dial-up or no internet access
4. Decreases in Telefónica’s wholesale prices resulting from regulation, has allowed for the faster proliferation of higher speed connections by making them more affordable to end customer. Wholesale price reductions have reached up to 74% in some cases, yet have not fully been translated into customer savings
5. The price decreases have thus allowed operators to capitalize on revenue generation through cheaper offers and better margins from lower costs

We will soon deliver our yearly broker report on the telecommunications situation in Spain, but I wanted to publish an executive summary of it (embed presentation) and highlight some interesting facts and insights with our blog readers so that you can clearly understand the fixed and broadband market situation:

Fact 1. The Spanish fixed market is in decline.  While broadband is the only growth source it still falls behind Fixed-lines as the main contributor of revenues

• The economic downturn appears to have impacted the fixed line market. Previously growing at 10% from ’07-08 then slowing abruptly to 0.2% from `08-´09
• Broadband continues to grow and while the ceiling has not yet been hit, there are initial signs of slowdown
• The Pay TV market has been stagnate for the last 2 years and has suffered a significant revenue erosion of ~30 million € since 2008

Fact 2. Over the last three years, market players have undergone consolidation in an effort to challenge Telefónica’s dominance. Unfortunately for the challengers, Telefónica is far from being even worried.

• Since 2007, Ono acquired Auna, Orange bought Ya.com and Vodafone took over Tele2
• Ono and Jazztel may represent residual opportunities for further buy-outs although current valuations are too high for any player to consider a potential merge or acquisition.

Fact 3. The Spanish market is characterized by an increasing appetite for bundled offers and higher speed Broadband (BB) connections.

• Currently 68% of the BB market includes bundling. While players such as Orange already offer Pay TV in their bundles, others like Vodafone may find it increasingly difficult to compete without a pay TV platform
• The majority of BB connections lie in the 3Mb to 10Mb interval, with the highest concentration of offers at 6Mb. Telefónica consistently has a premium over other competitors offers, Orange has some of the cheapest offers
• The Spanish Telecom Regulator is supporting connection speed increases through wholesale price reductions. Additionally, it is encouraging further price reductions in the market by allowing Telefónica to offer naked DSL

Fact 4. Despite aggressive pricing efforts by competitors Telefónica still enjoys a comfortable leadership position in the fixed-line market

• Orange still holds only a minute market share (1.8%) of active fixed lines. Over the last two years, Orange has  succeeded in growing its share of lines but at the expense of loosing revenue share
• Telefónica has lost more ground in the highly competitive residential than in the business one. Orange has a better position in the residential segment where a strong price war is taking place

Fact 5. Telefónica has managed to hold on to its broadband market share.  Vodafone and Jazztel are capturing market share from Orange and Ono

• Orange´s position may be the weakest of the market, having lost broadband customers (~97,000 in 2008) despite the fact the market is growing.
• Vodafone and Jazztel have been the recent winners in the last years, with increases of a 159% and a 78% (respectively) of net adds as % of their customer base in 2007.

Fact 6. The Pay TV market is stagnate, but Orange has managed to grow its customer base to 2.5% representing a ~155% CAGR from ´07-´09

• Due to the current unavailability of Pay TDT services (e.g., Gol TV  – dedicated football channel), this year may present an opportunity for capturing new Pay TV customers before the Pay TDT threat appears
• Telefonic’a imagenio will end with near 680K subscribers, a number that has been nearly flat in the last 2 years. However, Telefónica reported in its latest investors meeting in October a growth up to 1.2M clients in 2012.

Fact 7. Telefónica’s dominant position has a lot to do with customer satisfaction. Telefónica has the lowest complaint ratios in the fixed market and has managed to remain the leader despite having the most expensive offers.  This is suggests that the quality of its service provisioning is positively valued by customers

• In 2008, Orange and Ya.com had the highest complaint ratios on broadband service provisioning.  Their performance has since worsened during 2009
• Additionally, Orange and Ya.com have the poorest performance rating among competitors for customers service satisfaction
• Vodafone, Jazztel, Ono and rest of regional cable operators have similar customer satisfaction rates, being the first two, the highest rated in terms of incidence calls per 10K customers.

Enjoy the reading. Best, CVA

There was an interesting article yesterday that took my attention in my headlines telecom RSS sources. Reuters, published a short benchmark of three mobile operators that tried to break their respective markets whilst being the last player to penetrate it.

It’s amazing to see how 2010 is expected to be the year of return to profitability for these challengers (considering that their financial results show they were significantly EBITDA negative over the last four years and that countries such as Spain or UK currently hold the toughest recession and economical downturn ever). Having worked as a consultant for one of these players, and being the markets analysed Spain, Poland and the UK, I have my doubts: this turn-around into black numbers can come in 2010, but I would expect some delays, at least for Yoigo and 3. Good luck in any case.

Very interesting article. Very good Reuters. Enjoy, CVA.

FACTBOX-Latecomers to mobile phone markets struggle.

As France prepares to accept bids for a fourth mobile phone licence on Oct. 29, here is a look at operators that have tried to break into European markets long after rivals. These three operators were the last to enter their respective markets and none have yet turned a profit.

SPAIN – YOIGO
Main shareholder: 76 percent owned by TeliaSonera
Price paid for the licence: 136 million euros in 2000
Investment in network and operations: 1 billion euros
Launched first commercial offer: 2006
Current market share: 2.2 percent
Financial results: 117 million euro in losses in 2008, aims for EBITDA profit in 2010

The Spanish private company obtained the licence in 2000. But it struggled to build a network and did not launch commercial services until 2006. As a result, Yoigo’s competitors had already signed up 45 million customers by the time it came to market. Telefonica’s Movistar brand held half the market, while Vodafone and France Telecom’s Orange split the rest. Yoigo, which is 76 percent owned by Norwegian telecom firm TeliaSonera, has spent 1 billion euros on infrastructure, recruiting clients, and building a brand in recent years.

It billed itself as the low-cost alternative to the other players. Yet Yoigo still has only 2.2 percent market share in Spain, or 1.2 million clients. It aims to turn an operating profit by the end of next year but will not have positive free cash flow until 2011. Last year, TeliaSonera said it was considering selling all or part of its stake in Yoigo, but did not get any attractive offers. Now it says it will keep Yoigo and focus on improving its results.

POLAND – P4/PLAY
Shareholders: Tollerton Investment, Novator Telecom Poland
Price paid for the licence: 85 million euros in August 2005
Investment in network and operations: 150 million euros annually, according to company
Launched first commercial offer: March 2007
Current market share: 6 percent
Financial results: Loss-making, EBITDA profit by end-2010

Play entered Poland’s rapidly growing mobile sector almost three years ago as the fourth player. Since then, it has quickly built up almost 6 percent market share by pitching itself as Poland’s 3G leader with a focus on mobile Internet and multimedia. Play also aggressively competes on price with its larger rivals.The rest of the Polish market is split roughly equally between France Telecom’s Orange brand, Polkomtel’s Plus and Deutsche Telekom’s Era.

Play aims to have double-digit market share by 2011 or 2012. Revenue last year was roughly $300 million and is forecast to be $450 million this year. It aims to turn an EBITDA profit by the end of 2010.

UNITED KINGDOM – 3
Shareholders: Hutchinson Whampoa (0013.HK)
Price paid for the licence: 4.4 billion pounds
Investment in network and operations: undisclosed
Launched first commercial offer: March 2003
Current market share: 8 percent
Financial results: Loss-making, analysts say could break even on EBIT this year.

Hutchinson’s 3 brand entered the already crowded U.K. market more than six years ago and has since stuggled to win over customers in the face of larger, more established rivals. 3 remains the smallest operator in England with 8 percent market share. It competes against Vodafone, Telefonica’s O2 (TEF.MC), France Telecom’s Orange and Deutsche Telekom’s T-Mobile (DTEGn.DE).

The group’s strategy was to offer cheaper tariffs and bill itself as a leader in 3G and mobile broadband. As part of its technology focus, 3 allows customers to use on-line free calling service Skype from their mobiles and has its own version of YouTube where people can post, share and watch videos from their mobiles.

Spain’s telecommunications watchdog, Comisión del Mercado de las Telecomunicaciones (CMT), approved in 2008 a first set of proposals to liberalise the country’s fixed telephony traffic market and its prices, in an effort to prevent anti-competitive practices and promote telecom challengers against the incumbent, Telefónica. The fixed telephony regulations put forth by the CMT loosened connection charges and gave the operator freedom to decide on the price. The regulator continued to set the maximum annual increase for subscription fees, but allowed Telefónica to reduce the subscription fee.

For the fixed telephony wholesale market, the CMT proposed regulation for call origination, the service that allows an alternative operator, interconnected to the Telefónica network, to attend calls using the fixed telephone network.  The regulatory body made sure that the Spanish telecoms giant could provide two wholesale offers – the reference interconnection offer and the wholesale access to the telephone line.

What has happened almost two years after? Please take a look at the following slide:

If we see the subscribers vs. net additions per player (defined as the number of new subscribers, or gross adds, minus the number of customers that drop service, or churners) we can take different conclusions:

1. The Spanish market has been a question of one player until end of 2008. The effort to promote alternative players has clearly not worked. It’s not just that Telefónica accounts for more than 55% of total market but also that Telefónica has clearly won the acquisition battle in the market.
2. Telefonica’s acquisition rhythm has been halved in 2009, giving room to Vodafone and Jazztel which net-adds growth went over 150% and 78% each.
3. Vodafone managed to gain one position in 2 years, being the fourth broadband player in the market after buying Tele2 and outperforming in customer acquisition.
4. Orange and ONO need serious help. Having reacted after having negative net adds from Q108 to Q109, Orange didn’t manage to gain more than a 10% of the total net additions. ONO did a little bit better, but for sure bellow shareholders expectations, getting a 14% of the total net adds.

What it’s crystal clear is that it’s difficult to fight against the incumbent giant. Therefore the CMT has recently decided to cut the wholesale prices for unbundled loop access to Telefonica’s ADSL network by 25 percent. Dubbed ADSL-IP (in Spain) and GigADSL (at regional level), these services are essential for alternative operators that plan to offer ADSL services throughout the country and compete with Telefonica. CMT has also adopted a resolution to reduce the wholesale rental price of the shared loop by 31.3 percent, from EUR 3 per month to EUR 2.06. In the shared loop mode, Telefonica continues to provide the voice service, while the alternative operator offers its customers broadband services, renting only the loop segment that uses the non-voice frequency band spectrum.

Will this be enough? No. Or better asked? Will this CMT’s cut change the operator’s current trends? I don’t think so. There are alternative operators that seem to have clear which strategy to follow and that will benefit of it, but there are others that are moving in Zigzags following the competitors’ movements and that require a serious turn-around strategy.

CAPEX optimization and financial performance in addressable markets, regional expansion through indirect ADSL, retention and prevention strategies towards valuable clients and operational excellence to improve customer satisfaction would be the big suggestions that I foresee mandatory for the alternative players.

Is it possible to win the broadband battle in Spain? Some players are clearly showing there’s light at the end of the funnel trying not to wake up the sleeping giant. The future is promising but the threat is big, very big.

Best regards

CVA

I just received Disruptive Analysis’ new report, “Mobile Broadband Computing”. It provides a detailed analysis of the market for fast wireless data connectivity from notebooks, smaller “netbooks”, and the new category of mobile Internet devices (MIDs).

The popularity of flatrate data plans and cheap HSDPA modems has accelerated the market to reach 35 million subscribers worldwide at the end of 2008, more than doubling in a year. New innovations like “free” subsidised netbooks, sold through mobile carriers’ channels are driving expectations of a continued explosion in 2009 and 2010.

There is widespread enthusiasm for notebooks and MID featuring built-in 3G or WiMAX modems. Long-term prospects for the broader market are exceptional, with the global market growing to over 340 million active users by the end of 2014, using a mix of 3G, WiMAX and LTE networks. But despite this, some of the short-term optimism is unjustified.

Above all, the global economy faces a vicious downturn which will impact notebook sales. It will make customers and OEMs cautious. It will focus minds on cashflow and margins. Moreover, some of the mobile broadband business model assumptions have serious flaws.

This is the first thorough report on the sector since the financial crisis of late 2008. It analyses the impact of the recession and “credit crunch” on customers, vendors and operators. It also looks at the risks of a parallel “capacity crunch” as some 3G networks become congested by cheap mobile broadband traffic.

Although the market for datacards and dongles has grown up on long-term, monthly contract subscriptions for data usage, there is a natural limit to this. Many consumers will not want an additional monthly commitment – especially if they use cheap prepaid models for their cellphones. WiFi has gained mass adoption mostly through free use in homes, offices, cafes and elsewhere – not through regular paid subscriptions. Mobile broadband must adopt similarly flexible business models.

At the same time, some operators’ marketing teams have become over-zealous about competing with fixed broadband. In some markets, HSDPA is now cheaper than ADSL. This is unsustainable, as the cost structures differ hugely. There are physical limits to the capacity of mobile data networks, which will be rapidly reached with the explosion of low-cost traffic. It is no coincidence that future wireless technologies like femtocells need fixed broadband.

The report cuts through the rhetoric about this new area of growth for mobile operators. While it is undeniably a welcome source of new revenues, it is not without challenges. One of the key challenges is the adoption of embedded-3G and embedded-WiMAX notebooks. Despite improved hardware and software, along with falling module prices, these will grow slowly alongside the separate dongles. Predictions of 50%+ attach rates in 2-3 years are over-optimistic: there are numerous practical, commercial and economic reasons for delayed adoption.

Really interesting. If you’d like to get a copy, please visit disruptive analysis’ site. Best regards
CVA

As explained in my previous post related to Green Telecom, energy consumption is one of the leading drivers of operating expenses for both fixed and mobile network operators. Reliable access to electricity is limited in many developing countries that are currently the high-growth markets for telecommunications.

It’s been a long time until telecom’s carbon footprint has been a hot topic in the industry. Without preventive measures, it is expected to increase dramatically in the coming years reaching the 179 MtCO2e in Mobile infrastructure related assets, 51 MtCO2e in Telecom devices or 49 MtCO2e in Fixed broadband. However, increasing legislative and market pressure will force telecom operators to rapidly reduce their carbon footprint.

As an example, Vodafone has recently said it will halve its carbon dioxide emissions by 2020, largely by making its networks more energy efficient. Like Vodafone, some other telecom companies and handset manufacturers have already decided to conduct similar exercises (as listed in the European ICT companies’ commitments to targets and deadlines for CO2 and greenhouse gas emissions (GHG) and energy efficiency / consumption) such as Deutsche Telekom (20% reduction of CO2 emission by 2020), France Telecom (20% reduction of CO2 emission by 2020), Telecom Italia (30% increase for eco-efficiency indicator by 2020), British Telecommunication PLC (80% reduction of CO2 emission by 2020) or Nokia (6% reduction of energy consumption of offices and sites by 2012).

Nice promises, right?. The bad news for the operators and network infrastructure vendors come when realizing that corporate social responsibility initiatives (with a goal of reducing their networks’ carbon footprints), can decrease their competitive advantage and financial performance. Therefore, operators have to prevent any potential downside with a clear and straightforward green strategy to comply with regulation at the same time they obtain significant economical benefits.

This is not just a question of reducing the power requirements of their equipments. Some additional factors will converge over the next several years, creating significant market potential for greener telecom networks. These market drivers are manifesting themselves in several ways within the global telecom industry. The large equipment vendors are creating highly efficient network elements that consume far less power than in previous hardware generations.

Operators and vendors alike are exploring innovative network architectures and topologies that will support more capacity with fewer infrastructures. And the entire industry is working to incorporate renewable energy sources such as solar and wind power, particularly for off grid mobile base stations in developing countries where the vast majority of subscriber additions will occur over the next five years.

mmC Group has recently closed a strategic partnership with off7, a specialized carbon emissions consultancy with which we have collaborated in diverse green strategy assignments having done a detailed examination of the opportunities and challenges associated with improving the energy efficiency of fixed and mobile telecom networks, as well as utilizing renewable power sources such as solar photovoltaics, wind energy, and fuel cells.

As a result, we have gained a comprehensive experience in the technologies as well as the key drivers of market development over the next five years and beyond. Detailed business case analyses have been provided to our clients, along with an in-depth examination of industry participants’ motivations for deploying greener networks. Forecasts included energy efficient network infrastructure capex spending and emissions reductions from fixed and mobile networks as well as telecom data centres have been delivered…but what for?

Just for giving the answer to the question: Can a telecom operator become green? And the answer is YES but there’s another question to rise: Which is the potential downside (either operational and financial) of doing things wrong? And the answer is SEVERE.

A carbon reduction commitment does not specifically deal with the scenario where a company outsources parts of its business. Considering that most of the reductions come from the infrastructure and that most of the operators are looking at infrastructure outsourcing agreements, we have some problems to deal with: Who will bear the cost of participation? Who will bear the cost of investing in low carbon technology? Who will be responsible for carbon strategy? Does it make business sense to offshore carbon-heavy activities to a jurisdiction with lower environmental costs? etc.

As usually, I have prepared a case study on how do we approach to Green telecom strategies in the telecom sector. I would really appreciate to get your comments and help me answer to the original question: Can a telecom operator become green?.
Best regards, CVA.

Yesterdays article in the economist describes how mobile operators in developing countries cope with the inherently low ARPU’s of their customer base through creative cost cutting measures, achieving operating margins similar to leading Western operators.

A special report on telecoms in emerging markets.

The mother of invention. Network operators in the poor world are cutting costs and increasing access in innovative ways

PROVIDING mobile services in a developing country is very different from doing the same thing in the developed world. For a start, there may not be a reliable electrical grid, or indeed any grid at all, to power the network’s base stations, which may therefore need to run on diesel for some or all of the time. That in turn means they must be regularly resupplied with fuel, which can be tricky in remote areas. Then there is the challenge of running the network profitably. In Europe mobile subscribers typically spend about $36 a month, a figure known in the industry as the average revenue per user (ARPU). In America that figure is $51 and in Japan $57. But in China it is only around $10, in India less than $7 (see table 5) and in some African countries even lower. As mobile phones get cheaper and more poor people can afford them, ARPUs across the developing world are falling.

Operators in poor countries have responded by finding new ways to reduce the cost of operating mobile networks and serving customers. The country that has gone furthest down this road is India, so the result is sometimes known as the “Indian model”, even though some of its features originated elsewhere, and some low-cost innovations developed elsewhere have not caught on in India. Despite an ARPU of only $6.50 and call charges of $0.02 per minute, Indian operators have operating margins of around 40%, comparable with leading Western operators, according to a study by Capgemini, a consultancy. “On low-cost, innovative models, this is where the centre of gravity is,” says Prashant Gokarn, head of strategy at Reliance Communications, India’s second-biggest operator. Given India’s size, its combination of poverty and rapid growth and its reputation as a centre of technology and outsourcing, it is hardly surprising that it has emerged as the crucible of business-model innovation.

Indian model

Outsourcing is at the heart of the Indian model, which was pioneered and is now embodied by Bharti Airtel, India’s biggest mobile operator. All of Bharti’s information-technology (IT) operations are outsourced to IBM; the running of its mobile network is handled by Ericsson and Nokia Siemens Networks (NSN); and customer care is outsourced to IBM and a group of Indian firms. This passes much of the risk of coping with a rapidly growing subscriber base to other parties and leaves Bharti to concentrate on marketing and strategy. Unusually, it is not just the operation of Bharti’s network that is outsourced but the construction as well, under a scheme known as “managed capacity” that is now used by several Indian operators.

When moving into a new area, Bharti requests a certain amount of calling capacity and pays for it three months later at an agreed price per unit of capacity, says Kunal Bajaj of BDA, a telecoms consultancy. That leaves it up to the vendor to handle the business of designing networks, putting up base stations and so on, giving it an incentive to build the network as frugally as possible. Margaret Rice-Jones of Aircom, a network-planning consultancy, says this cut costs by ensuring that operators do not pay for more capacity than they really need. “The old model was a bit like letting your supermarket plan your shopping list,” she says. The vendors, for their part, gain economies of scale because they build, run and support networks for several Indian operators. Ericsson’s Mr Svanberg says his firm can run a network with 25% fewer staff than an operator would need. Bharti’s operating expenses are around 15% lower than they would be if it were to build and run its network itself, and its IT costs are around 30% lower, according to Capgemini.

Arguably, the Indian model should be called the Ericsson model, says Mr Svanberg, because his firm developed it and first deployed it on a small scale in New Zealand. But, says Mr Bajaj, “Bharti decided to do its entire network like this, and to experiment at that scale is totally different.” There were growing pains to start with as Bharti and its outsourced suppliers searched for the right balance of cost- and risk-sharing. Expanding into rural areas is especially tricky because the capacity needed is initially very low, so Bharti typically agrees to buy a minimum amount.

Equipment vendors make most of their profits when capacity is increased. “You make the land grab in the early phases, and what you’re securing is margins and revenues for the future,” says Ms Rice-Jones. The outsourced-network model is now gaining popularity with other operators in India. Even if they do not go as far as Bharti, they are more likely than operators elsewhere to outsource network design, tuning and management, says Mr Svanberg.

A second plank of the Indian model is infrastructure-sharing, in which several operators share the metal towers on which network antennae are mounted and which house their associated equipment, generators and so forth. In 2007 three Indian operators, Bharti, Vodafone Essar and Idea Cellular, pooled 100,000 of their towers in a single company, Indus Towers. Not all the operators use all the towers (the average is about 1.5 operators per tower), but the arrangement saves the three companies having to find new sites and build their own towers. Indus Towers will also lease tower capacity to other operators.

Similarly, Reliance Communications has spun off its towers into a separate unit that will offer tower capacity to other operators. This turns an operator’s assets into a source of new revenue, says Mr Gokarn, and allows the mobile operator to concentrate on serving customers. Tower-sharing happens in other countries too, including Britain and America, says Greg Jacobsen of Capgemini; and some countries, including China and Bangladesh, have made sharing compulsory. What is unusual about India is the extent of voluntary, market-led sharing as a way to reduce costs.

Other components of the Indian model include “lifetime” prepaid schemes, in which customers pay a one-off fee and can then receive incoming calls indefinitely, even if they do not make outgoing calls; widespread use of paperless top-ups, to reduce the costs of distributing top-up vouchers; and automatically turning off some equipment at night, when traffic volumes fall, to reduce energy usage.

The search for new cost savings continues. Reliance is experimenting with a “micro-call-centre” model, in which large call centres in urban areas are replaced by a smaller number of centres in more rural areas. This means agents can be paid less and are more likely to be able to answer queries. Turnover is high, so the trick, says Mr Gokarn, is to reduce the cost of training new agents. Indian operators are also keen adopters of “green” base-station technologies, such as air cooling, solar and wind power, and hybrid diesel-electric generators, which reduce energy consumption and hence operating costs. “Green technology has become a hot topic in India because it’s cheaper,” says Mr Bajaj.

Dynamic Africa

African operators, which face many of the same difficulties as those in India, have devised some cost-lowering innovations of their own, such as dynamic tariffing, pioneered by MTN. This involves adjusting the cost of calls every hour, in each network cell, depending on the level of usage. Customers can check the discount they are getting on their handsets. At 4am it can be as high as 99%. This generates calls when the network would otherwise be little used, says Themba Khumalo of MTN Uganda. In addition to the peak hour from 8am, he says, there is now a new peak hour from 1am as people take advantage of cheaper calls. Customers in developing countries are far more price-sensitive than people in the rich world, notes Stephan Beckert of TeleGeography, so they are prepared to stay up late to save money. Vodacom has introduced a similar scheme. In Tanzania, says Ms Rice-Jones, it found that call volumes increase by 20-30% in areas where dynamic tariffing is switched on.

Another African innovation is “borderless roaming”, introduced by Celtel (now Zain) in late 2006. This allows customers in Kenya, Tanzania and Uganda to move between these countries without paying roaming charges to make or receive calls. They can also top up their calling credit in any of these countries. The scheme has been extended to other African countries where Celtel operates, and rival operators such as MTN have introduced similar offers. Borderless roaming is possible because many operators have direct fibre-optic connections between their networks in different countries, allowing them to act, in effect, like a single network.

Alessio Ascari, of McKinsey, a consultancy, argues that Africa, rather than India, “is the new battlefield and the new laboratory for development” in telecoms. The difficulties operators face are even greater than in India, given the huge diversity and political instability in many countries, as well as widespread poverty and fierce competition. Africa is also interesting because local operators and regional champions are competing with Middle Eastern operators, such as Zain and Etisalat, and those from Europe, such as Vodafone and Orange. All of them, Mr Ascari points out, “bring different strengths to the market”.

The wealth of innovation in India and Africa demonstrates that the Western operators are not always best at running networks. “Each of us is learning different pieces of the puzzle from the others,” says Mr Álvarez-Pallete of Spain’s Telefónica. His company is transferring expertise, and indeed managers, between its operations in Europe and Latin America. Much the same is done at Vodafone, which has separate divisions for the developed and the developing world. Vittorio Colao, its chief executive, says his company is applying its European expertise in customer-profiling and segmentation in India, for example, as customer loyalty becomes more important. But there is also a flow of expertise in the opposite direction, in particular in network operations. “There are a lot of operational ideas from a cash-constrained, poor and very entrepreneurial environment that you can immediately bring back to the developed world,” he notes.

Perhaps the most striking example is the agreement struck between Vodafone and Telefónica in March 2009 to share towers and other network infrastructure in four European countries. Network-sharing is not new, says Mr Colao, “but the confidence to do it at scale, and with a fierce competitor, came from India. Once you see how it works in that kind of environment, you become much more confident that you can do it in Barcelona or Venice.” The savings are much bigger in Europe because the cost of leasing tower sites is higher, which adds to the attraction of the deal. An agreement reached in July by Sprint, an American operator, to outsource the day-to-day running of its network to Ericsson can also be seen as an example of the spread of the Indian model, argues Capgemini’s Mr Jacobsen. Ericsson is betting that it will be able to sign similar deals with other American operators in order to gain economies of scale.

Vodafone has outsourced more of its IT, again inspired by the Indian example, and it is using the Indian “managed capacity” model at one of its rapidly growing subsidiaries in Turkey. But according to Mr Colao this model, which he likens to leasing rather than buying a car, does not work everywhere. “In markets where you are not sure about speed and shape of growth, the model makes sense,” he says. But in mature markets where demand is easier to predict it can be better for operators to build new capacity themselves. Vodafone is also taking a leaf out of the Indian marketing book, moving its marketing chief from India, Harit Nagpal, into a global marketing role. (Google “Zoo zoo” to see Vodafone’s popular series of Indian television advertisements.)

The challenge now is to apply all these cost-saving lessons to connecting the world’s remaining 3 billion people and achieving universal mobile coverage. Within India, even the most remote areas are now judged to be on the verge of commercial viability, judging by the results of two auctions held in 2007. In each case bidders had to say how much government subsidy they would require to expand into rural areas, with the contract going to the lowest bidder.

In the first auction, for the right to build shared towers in 8,000 rural locations, the average subsidy requested was 35%, much less than expected. In the second auction, for the right to offer mobile services, many operators submitted zero bids or even negative ones—in effect offering to pay for the right to set up in rural areas. “The subsidies required are not as big as everyone thought, because the companies believe there’s a business case in being present in rural areas first,” says Mr Bajaj. In part this reflects the cut-throat competition in the Indian market. But it also shows that mandated tower-sharing can make the economics far more attractive for operators in rural areas, which could be a valuable lesson for other countries. A second round of rural expansion, with another 12,000 shared towers, has been announced.

In China tower-sharing is mandatory, which has helped reduce the cost of expanding into rural areas. But since the three mobile operators are state-owned, the extension of coverage is co-ordinated from the centre. China Mobile, the largest operator, has signed an agreement with the agriculture ministry to cover 98% of rural areas by 2012, in part to compensate for its relative weakness in third-generation (3G) networks, where it is being forced to adopt the home-grown and relatively immature Chinese standard. And just as India, renowned for its technology-services industry, has pioneered clever business models and outsourcing to get prices down and extend access, China has used its own particular strength as a low-cost manufacturer (see article).

Rural access elsewhere in the developing world is also likely to improve. One hopeful sign is the merger being negotiated between Bharti and MTN, which should accelerate the transfer of low-cost operating expertise between India and Africa. Greater scale will also increase the combined firm’s clout with suppliers. The deal is driven by Bharti’s and MTN’s desire for long-term growth potential outside their existing markets, rather than by hopes of cost savings, says Mr Bajaj. But it could promote greater use of network outsourcing in Africa, and new techniques such as dynamic tariffing in India.

Spreading the word

This is unlikely to be the end of Indian operators’ international ambitions, which could spread the Indian model to other parts of the world. So far moves into Africa by Middle Eastern operators have not been conspicuously successful. Nick Jotischky of Informa Telecoms & Media, a consultancy, notes that Middle Eastern operators often lack the Indian operators’ experience with low-cost business models. Zain, for example, was said to be looking for a buyer for its operations in sub-Saharan Africa, many of which are making losses, to concentrate on wealthier customers in North Africa and the Middle East. But in recent weeks it has been negotiating to sell a 46% stake to a consortium of Indian and Malaysian buyers. Reliance, India’s number two, held merger talks with MTN last year.

In recent years Indian firms have made a series of bold foreign acquisitions in industries such as steel and cars. If its telecoms giants follow suit, their low-cost model could give them a clear competitive advantage—and help bring mobile phones within reach of even more people.

Sep 24th 2009
From The Economist print edition

Interesting article coming from SeekingAlpha, an american publication where we are active contributors. As I’ve recently seen different asian readers in the blog, I thought the article might be interesting for those, like us, that look at the emerging markets in East Asia.
Enjoy the reading, CVA

Millicom Should Benefit from International Bidding War.

Millicom International Cellular (MICC) could shortly be on the end of a nice windfall as three major emerging market telcos line up in a bidding war for MICCs Tigo network in Sri Lanka. Millicom has been making concerted efforts to divest its Asian operations as it realigns its strategy to concentrate on key markets in Latin America and Africa.

In August Millicom offloaded its Cambodian operations to local partner The Royal Group in a cash deal that saw Millicom receiving $346m in return for its 58.4% holdings in CamGSM, a premium that valued the operator at 7 x times 2009 EBITDA. The deal is expected to close before the end of 2009. This followed the company’s statement in July that it wanted to exit the Asian market.

With CamGSM gone, Millicom continues to hold interest in Sri Lanka & Laos. Tigo Sri Lanka, a 100% owned entity, is now on the auction block, with India’s Bharti Airtel and state controlled BSNL having expressed interest, as both operators are looking to expand into new markets and Sri Lankan operations could create some nice synergies with Indian activities. Now that UAE based Etisalat has thrown its hat into the ring, we could see a bidding ward erupt, as three majors go after the prize.

Cash rich Etisalat has had a terrible 2009, as it desperately seeks to expand out of its domestic market, recently failing to secure the purchase of Morroco’s number two operator MediTel, as Telefonica and Portugal Telecom offloaded the unit to local private investors. Etisalat has been on the hunt for the last 18 months or so and has made bids to operate networks in Iran, Morroco, India and Libya. Currently the country is also on the prowl in Nigeria, where it is looking to add to its existing operations. The company bought a 40% stake in Emerging Markets Telecommunication Services (EMTS) for $400 million last year, and it is now looking at acquiring incumbent operator Nitel.

Analysts said the move fit in with Etisalat’s strategic push to operate mobile networks in complementary markets that share commercial or social ties. It already offers some integrated services between networks in the UAE, Saudi Arabia and Egypt, and has said that building on such synergies across its 18-country global network is a priority.

Etisalat announced the Millicom bid in a stock market statement, but did not disclose the price it is offering to pay for Tigo Sri Lanka, which has more than 2.2 million customers. A report in The Wall Street Journal recently said Bharti Airtel [BOM:532454] would be willing to pay up to US$120 million (Dh440.7m) for the company as it seeks to combine Tigo’s 2.2 million subscribers with its existing local operator.

The telecom rumor mill also has Russia’s Vimpelcom (VIP) involved in the bid, however nothing is yet firm on this. It would seem more likely for Vimpelcom to look at Millicom’s Laos operator, as the Russian carrier has launched services in Vietnam and Cambodia this year.

For me the most likely candidate is EtiSalat, as Bharti is tied down in lengthy negotiations with MTN over its $25Bn merger and this would seem to be a side show. BSNL is also rumored to be looking at acquiring a stake in Kuwaiti telco giant Zain at present, whilst Etsisalat has the appetite, the money and the credit rating to make the deal. MICC’s management are shrewd operators and will squeeze every last dollar out of this, so if Etisalat want into the Sri Lanka market, it is my opinion that they will pay a premium.

The German mobile telecommunications services market declined to EUR 4.8 billion in revenues in Q1 2009, down 0.5 percent compared to the same period last year and down 3.7 percent from Q4 2008, according to independent market research firm Telecompaper. The increase in non-voice (messaging and data) revenues of EUR 141 million in the last 12 months was not able to fully compensate for the continued pressure on voice service revenues from cuts to mobile termination fees and fierce competition.

Vodafone and T-Mobile held on to their combined 70 percent share of service revenues in Q1, despite considerable efforts by E-Plus and O2 to win market share. E-Plus was again the one to show the strongest annual growth, mainly in the prepaid segment, helping to increase its share of service revenues by 0.7 percent point to 15.3 percent in Q1. T-Mobile’s market share increased 0.4 percent point to 35.8 percent, while Vodafone lost 1.2 points to 34.5 percent. O2 showed a small increase of 0.2 percent point, good for 14.5 percent of services revenues in the quarter.

In terms of mobile subscribers, the German market lost around 0.3 million in the last quarter, mainly due to Vodafone’s restatement of its prepaid base. Compared to the same period last year, the market added more than 7 million subscribers, for a total of 107 million customers at the end of March 2009. Market penetration rose to 130 percent, from 122 percent a year earlier.

Estimates for 2009’s service revenues for the German market will come in slightly lower than in 2008, forecasting a decline of around 1-2 percent. The short-term negative outlook for the overall economy is not expected to have a large impact on mobile adoption, as mobile is more and more seen as a commodity product. Nevertheless, people will be more careful when prolonging their subscription and may opt for a cheaper package. Also, SIM-only and MVNO sales could see an increase as consumers seek low-cost options.

Having said this, the German mobile data market has enormous potential for growth following massive investments by the four network operators in upgrading networks to support mobile data services. The regulator has anticipated future growth by preparing for fresh UMTS licences in 2009 in the 1.8GHz and 2.6GHz bands, as well as refarming spectrum below 1GHz for use by mobile broadband.

Operators have fast-tracked the development of data-rich applications to improve profit margins as voice ARPU continues to fall in response to competition from resellers and regulatory measures on roaming and termination rates. Mobile TV has not yet caught the public imagination: the national DVB-H licence holder Mobile 3.0 withdrew services soon after launch, partly sabotaged by network operators having introduced handsets allowing users to access free-to-air DVB-T channels.

The following presentation provides key statistics and analysis on the mobile market in Germany in 2009. Enjoy it.

(NOTE 05/10/09: Updates on the 2Q2009 have been included in the comments)

Best regards, CVA