Way back in 1996, at the dawn of the digital revolution, Microsoft founder Bill Gates declared in an article that “Content is King.” Gates drew a parallel to television, saying that “The television revolution that began half a century ago spawned a number of industries, including the manufacturing of TV sets, but the long-term winners were those who used the medium to deliver information and entertainment.” This statement has proved prophetic. However the ensuing evolution of content – or more specifically content quality –is also proving to be one of the greatest challenges to the digital future. Without an adequate medium of delivery, there is no message.
The iPhone, the iPad, the Android platform, the Kindle, the ultrabook – new mobile devices have transformed the world in which we live and work. But this transformation has come at an increasingly high financial cost. The scale of network investment required to achieve the performance that customers expect – and the increased need to support complex services and content – is threatening the business case for mobile broadband services.
Typical mobile operators spend between 20 percent and 30 percent of operating expenses and 50-70 percent of capital expenses on network cost. As data volumes increase and the deployments of 4G networks proliferate, so will network costs. Such increases, combined with uncertainties about how to monetize higher levels of data traffic, represent a continuing challenge to operators that could hinder future profitability and cash flow.
One of the solutions to this problem is to limit network costs through network sharing, a formal arrangement between two or more mobile operators to share various components of their networks.
Historically, networks have been considered areas of competitive differentiation. Superior network performance and coverage have been the slogans of providers for years. However, many network components today are simply table stakes and may not be true differentiators. Indeed, by focusing on cost-reduction measures such as network sharing, management may be able to reinvest savings into alternative differentiating strategies such as customer service, innovative offerings and being first-to-market with new devices.
A well-executed network sharing venture has the potential to deliver a 20 to 40 percent reduction against standalone cost run rates . From one-third to two-thirds of those benefits are rooted in cost avoidance, with the balance resulting from actual cost reductions. Equally important, network sharing can help an operator significantly accelerate deployment speed, plug coverage gaps and grow revenues without increases in network costs.
Negotiating, planning and managing a network sharing deal requires executive leadership to overcome multiple complexities, including organizational integration issues and regulatory challenges. The prize for overcoming these challenges is the opportunity to control costs and achieve market advantage in the years ahead.
For a typical mobile operator, the majority of network costs don’t come from the core network. They come from the access network, often called the “edge.” This includes “backhaul” – the microwave, fiber or copper connections between the core network and base stations – and the “radio access network,” the final connection to the device. A recent industry analyst report found that these elements can account for more than 80 percent of incremental network costs. Most network sharing arrangements will therefore cover one or more elements in the edge, while the backbone is rarely shared. Which elements exactly are shared or kept separate will depend on the tradeoff between cost control and differentiation that the sharing partners are willing to make. The financial business case is one that is clearly measurable, while differentiation is much more difficult to quantify. Interestingly enough, it is the differentiation agenda that will stir up the most emotions.
Savings are usually realized by consolidating two network infrastructure footprints into one, eliminating redundant sites and connections. Cost avoidance is delivered by using another operator’s network sites or leveraging a joint deployment strategy, thereby reducing deployment and operating costs. In addition, operators often receive a top-line boost from network sharing. By using a partner’s existing sites, operators can accelerate deployment of services and improve customer experience and retention. These have obvious positive impacts on revenues.
Choosing the right organizational model
A formal network sharing partnership requires a dedicated organization to manage it. These arrangements are generally of three types. An operating joint venture involves both parties contributing financial and human resources to the organization. An asset-owning joint venture involves having the network sharing organization take control of the assets and liabilities related to the network share, with each party having an equity stake in the organization. The third arrangement is one where a neutral third-party operates and manages all aspects of the network sharing venture and charges back all relevant costs to the different partners.
If the sharing partners are similar in terms of spectrum position, backhaul strategy and market share, the first model is often the most appropriate. The other two models work better when there is a significant difference between the sharing operators.
A number of important regulatory constraints, especially those focused on the impact of network sharing on competition, must be carefully considered and managed. Typically, operators cannot use network sharing to reduce competition or coordinate their market behaviors.
This restriction can hinder rollout synergies because it limits the extent to which the sharing partners can align their plans. Only the joint-venture organization is permitted to view both operators’ intentions, but it cannot share this information with either party. Both operators need to be aware of these constraints and not be tempted to compromise them in a way that would increase regulatory risk.
Successful network sharing requires meeting several integration challenges across systems, processes and people. From a technology perspective, the success of a network-sharing venture depends on the ability to align the information systems across the different organizations and to keep the information consistent for both. Network processes will also overlap, so it’s important for operators to understand each other’s existing processes, delineate the responsibilities each operator will have, and make any needed changes to either side’s approaches to support the success of the venture, as well as prevent any leakage of competitively sensitive information
Because network sharing changes the way people work, effective change management activities are important, including clear communications, team building and support for cultural change.
The common thread among these success factors is strong program management. A dedicated program management function – which drives the coordination and integration of the consolidation and rollout –can make the difference between success and failure of a network sharing venture. Some operators are looking to improve speed to value by leveraging a third party to deliver program management – an organization that can bring experience from other similar ventures and that can, by being neutral and not aligned to either side, be in a better position to make difficult decisions.
Network sharing is a significant opportunity for network operators to keep costs under control while also improving the customer experience and retention. However, operators need to be aware of the subtleties that underpin this strategy, specifically around cost reduction versus cost avoidance. In addition, benefits will be difficult to achieve without effectively addressing a range of operational and management challenges around the organization, integration and competitive aspects. Getting this right will significantly improve an operator’s chances of driving advantage from a network sharing strategy.
Paul Bultema is Executive Director, UK and Ireland Strategy Lead, Communications, Media and Technology operating group, at Accenture. Read his comments on Customer Experience Management in a forthcoming feature due in February.