Trust games
Over the last several years, the vendor landscape has changed dramatically. Once familiar silhouettes of large corporate towers on the North American and European continents have crumbled completely, while others have seen their bricks used to fortify one-time rivals in the face of gathering momentum from Far Eastern players. Stability seems to be a long time coming.
Against this backdrop, an operator’s stance with regard to vendor selection can start to look a little precarious. A network should last for decades, after all, and will require many revisions and upgrades in its lifetime. Right now there are several generations of technology in play, and this will likely be the case for many years to come. Any operator looking at network investment must weigh the current benefits offered by every supplier against the future they perceive that supplier to have. And it’s not just about evolution of the product. As networks become increasingly complicated, many operators have sought to offload the daily management of the infrastructure and focus instead on the consumerfacing elements of their business.
Typically, managed services deals will be struck for periods of between five and ten years. Guarantees of continued existence—never mind performance—are essential. Yves Bellego, head of network strategy at Orange Group sums up the operator predicament: “Traffic is doubling almost every year and revenues are not on the same trend,” he says. “We absolutely need to have a long term view; when we build a pylon or dig a trench, it will need to last for years. But we cannot really predict the market and we also have to manage the needs for day-to-day investment.” While vendors are no more skilled at predicting the movements of the market than the operator community, they do—because of the traditional division of responsibility— have greater control over the technological roadmap of the mobile industry. And this can only be strengthened by the trend towards managed services arrangements. Operators need to assess the control that their vendor has over the roadmap relative to its competitors.
“Our previous experience of the vendor as well as its technology roadmap and its strategic vision all form part of the complex criteria for tenders,” says Andrei Ushatskiy, vice president and CTO for MTS, which operates networks in Russia, Armenia, Turkmenistan, Uzbekistan, Ukraine and Belarus. Nokia Siemens Networks, Ericsson and Huawei are the principle equipment vendors across the MTS portfolio.
The opportunities for smaller, specialist suppliers to function as going concerns rather than attractive acquisition targets might become more limited.
Fortunately for operators, with standards for legacy technologies robust and mature and those for the next generation well specified, there shouldn’t be a great deal of difference between different vendors’ offerings in terms of performance. This works in operators’ favour; exclusivity is frowned upon by operators with an eye on the future and support for multi-vendor environments is essential. “There are some differences between providers but they are not very significant,” Ushatskiy continues. “It may depend on a particular technology or piece of equipment, but this changes very fast. One year a vendor may have issues with a particular technology but, a year later, this could have changed.” For a number of operators, expertise in fixed as well as mobile technology is essential, and here again the vendors can vary in strength. Australian incumbent Telstra is one such operator and CTO Hugh Bradlow says that some of his vendors “have stumbled on certain deployments but been very good in others.”
Stephen Bye, CTO at US operator Sprint Nextel, sounds a similar note. Sprint uses network equipment from Samsung, Alcatel Lucent and Ericsson. “We’ve divided up the market geographically and I think performance in each region varies day to day,” says Bye. “But all three suppliers are very good partners. They’re different companies, so obviously they approach things in different ways. But from a technology perspective I wouldn’t say that there’s a very big difference between the three of them.” In the interview feature on page ten, Ed Candy, chief technology strategist for Hutchison’s 3 Group, explains that the arrival of ZTE and Huawei did bring some technological differentiation. The Chinese vendors had developed far denser network equipment, he says, able to support much greater functionality in a far smaller footprint, and at a lower cost. Candy says of the Chinese vendors—both of which, along with NSN, are in 3’s networks: “In terms of capacity and efficiency on kilograms of kit, they are well advanced.”
Overall, though, Candy’s views chime with his peers’—there are finer points of difference between the vendors but these tend to even out when the sector is viewed as a whole. Unable to effectively differentiate on technical performance—although they still pour huge effort into communication strategies designed to convince operators that this is not the case—the vendors have to find other means of winning their customers over. Cost is the most obvious point of positioning and will always play a part. Legacy relationships are also vitally important, and we’ll come to both shortly. But the word that seems to spring first to the lips of most CTOs is “support”. CTOs don’t want suppliers, they want partners; doubtless in recognition of the balance of power in terms of that all-important technical roadmap. “Things like the position of the vendor in the industry make a big difference. But our criteria are mostly around partnerships,” says Hugh Bradlow at Telstra. “We tend to work best with vendors that are very closely involved with us. We want to work in more of a partnership, rather than purely on a transactional basis.”
And just as vendors can vary in quality across products and solutions, so the levels of support they offer can differ. But disparities here are more usually geographical, says Dan Iordanescu, a network engineer at Austrian optimisation specialist Kapsch CarrierCom. Iordanescu works on networks around the world, with every combination of supplier’s equipment, and has a first hand view of the services those vendors provide. “Depending on which country you’re in, the level of support the vendors offer can be better or worse,” he says. “Also, some are better than others in terms of interoperability, and some combinations of vendor equipment are not as good as others. But the network grows so fast and is so dynamic that it is changing all the time.”
Broadly speaking, CTOs don’t want to be seen to criticise their vendor partners on any level. But there is a consensus that Huawei and ZTE were previously off the pace in terms of the support piece of their offering, and have had to work hard to establish more than just the transactional kind of relationship that Hugh Bradlow says he is keen to avoid. Even at the point of transaction, evidence of a wider offering is key, says Ed Candy at 3. “Generally what happens is that, when you decide on a vendor, you’re really looking for support for the implementation phase to start with. You need to know you’re going to get that so you can be sure you’ve made a sound selection.”
The history of an operator’s relationship with a vendor is also a significant factor in tender processes, as Mock Pak Lum, CTO at Singapore’s StarHub, explains. Even if a vendor is in a trough rather than a peak, history can make a persuasive argument, he says. Starhub moved away from its 2G supplier Nokia—now Nokia Siemens—and chose Huawei for its 3G deployment, Mock says. But for LTE it has returned to NSN.
“Maybe ten years ago Starhub bought a Nokia switch and [subsequently] Nokia decided to end the product line. So going with NSN more recently was a difficult decision to make as the company was going through all sorts of bad news,” he says. “But we figured that, because they were our current 2G vendor then that was the best decision to make. We figured that if all the vendors followed the 3GPP standard then interoperability would be less of an issue.”
Indeed Mock acknowledges that NSN won out over Chinese vendors, even though the firm is “less willing” to offer vendor financing than its Chinese peers.
Pricing is a delicate issue in the infrastructure market. Chinese vendors Huawei and ZTE have done much to try and dispel the notion—which has endured to a degree ever since they first made an appearance on the global stage—that price is their only advantage. Certainly they used price as a key differentiator when they first bid for overseas business, and their client portfolio reflected this for some time. But most top tier operators now have some equipment from one, other or both of the big Chinese infrastructure players and they appear to be satisfying their customers.
CTOs don’t want suppliers, they want partners; doubtless in recognition of the balance of power in terms of that all-important technical roadmap.
Just as this issue was going to press, however, it emerged that the European Commission was planning an investigation into the two firms’ alleged use of subsidy from the Chinese state to undercut Western competitors. And they have both been dogged by objections to their presence in tenders ostensibly based on national security concerns across a range of markets.
There can be little doubt that they have contributed to a far greater degree of price competitiveness across the infrastructure market. But how important to CTOs is the continued availability of vendor finance; something that, in rosier times gone by, was the rule rather than the exception. The consensus from the CTOs who spoke to MCI is that vendor finance is a nice option to have, but not a necessity.
Andrei Ushatskiy of MTS says that vendor finance is available and included in his company’s contracts with vendors, but that: “It is only there if we need to use it and we don’t use it very often—only in specific circumstances. Typically we have the opportunity to invest our own money.” Telstra’s Hugh Bradlow offers a similar response: “We haven’t tended to use vendor finance because we have strong cash flow,” he says. “Sometimes we do revenue sharing arrangements with vendors; it depends on the nature of the market.”
Stephen Bye says that vendor finance is an important element of Sprint’s approach. “We’ve been very public about the fact that we’re working with our vendors on financing,” he says, offering no further detail. The most significant by-product of the increased price competition that has affected the infrastructure supply market over the last decade has been the growth in managed services as a revenue stream for vendors. Leading vendors are making anywhere between one third and one half of their revenues from services today—and the deepening of their relationships with operators that has inevitably resulted from this has added a new layer of complexity to the CTO’s decision making.
The structuring of Service Level Agreements around network management and outsourcing deals is one of the key skills for today’s operator CTO. Sprint has a “very extensive” managed services deal with Ericsson for its 3G network portfolio and the LTE network that it is currently deploying, says Stephen Bye. “They are essentially our operational force, supporting our current infrastructure as well as the infrastructure we are deploying today. We’re probably a little different to most other North American operators in the extent to which we’ve outsourced,” he says.
And structuring the deal was far from straightforward. “It’s never as simple as an à la carte menu, it’s really an extensive negotiation,” Bye says. “There are certain objectives that we need to have satisfied and we clearly wouldn’t have gone down that path if we weren’t satisfied. Vendor management becomes a necessary core competence and you have to be very clear about the roles and responsibilities. You need to maintain the necessary level of control because, at the end of the day, we are the ones that are responsible for the customer experience.”
Ed Candy backs Bye on the fundamental importance of the SLA and the continued control. “You know what your capital commitments are and you have a view as to what you should be able to achieve. So you set the specification and you ask for conformity. You don’t give the outsourcing guy the opportunity to give you something inferior,” he says.
“Then you tell the partner that if they get it right, you’ll make it more interesting for them. If they meet a certain level of performance for a certain period of time, you’ll extend the deal for another five years. There are lots of ways to write in incentives and, by definition, the supplier will suffer if the requirements are not met,” he says. Popular though outsourcing is, not all operators are keen on the idea. Concerns over a lack of control—and a fear that reversing outsourcing arrangements could be extremely difficult—has kept some from taking this course. Starhub is one such operator and Mock Pak Lum says the operator is “not in any position to outsource given the competitive nature of the market.”
MTS’ Ushatskiy acknowledges the concerns that dissuade operators from outsourcing, but argues that control can be maintained: “Of course outsourcing does have risks but we can manage these through SLAs and contracts. With operations and maintenance outsourcing we still continue to monitor our own networks and get all the alarms and information about outages. We have no intention of just focusing on sales and forgetting about networks. We have strong and flexible SLAs in place and we control all KPIs,” he says.
In fact, MTS was the first operator to outsource network operation functions in Russia. The biggest problem at the time, Ushatskiy says, is that there was a lack of momentum in the region for outsourcing in the mobile sector. Once the MTS pilot had proven successful, he says, it opened the door for partnerships between competitors—crucially important in a market the sixe of Russia. MTS collaborated with VimpelCom to offer a joint tender for managed services, won by NSN.
In the UK, 3 shares a network with Everything Everywhere and the whole piece is managed by Ericsson, via the MBNL joint venture established by 3 and T-Mobile in 2007. This is part of a move towards wider network sharing, Ed Candy believes. “For many years we’ve had a complete vertical integration of the network and the route to market. From provision, engineering, transmission, handset procurement, distribution and retail—the whole lot,” he says. “What you see now are steps towards an integrated network, where capacity is brought by a number of key commercial enterprises.” There can be little doubt that these kind of arrangements will grow in number, particularly in the current financial climate.
The report from Informa’s LTE World Summit in May, on page 18, illustrates just how important the associated cost savings are to operator business models.
Less networks will inevitably mean less vendors, though. Most CTOs expect further consolidation within the vendor community, even as the likes of Samsung and NEC look to make plays outside of their core domestic markets like Huawei and ZTE before them. For Hugh Bradlow, the vendor market is reminiscent of George Orwell’s classic dystopia, 1984: “We’re getting a North American power block, a European power block and an Asian power block,” he says. The likes of Nortel and Motorola, meanwhile have disappeared down the memory holes.
Meanwhile, leading vendors like Ericsson have long been focussed on filling out their own portfolios to create as broad an offering as possible, and this suggests that the opportunities for smaller, specialist suppliers to function as going concerns rather than attractive acquisition targets might become more limited.
Bradlow says that, while he has worked with many small, niche companies over his years at Telstra, they will increasingly be challenged by the cost of selling to large telcos. It will be difficult for smaller companies to meet operators’ stringent supportability and maintenance requirements, he said, which favour the larger vendors far more.
The relationships between operators and vendors are unlikely to become less intimate but the risk from the operators’ perspective is that natural attrition in the vendor community will eventually choke competition out of the market. Vendors face a tougher fight for a smaller pool of business, but there is a more secure positon, higher up the value chain for those that are successful.
Perhaps what will emerge in the longer term are separate tiers of vendors, with lowest-cost supplier/manufacturers at one end, a second tier of players that implement, integrate and manage networks in the middle and operators at the front, facing the customer. Whatever happens, it is clear that, as time goes on, every relationship between an operator and a vendor is increasingly important to the future of both parties.
