The Era of Next-generation Access
The coming era of next-generation broadband networks is bringing about the end of telecommunications operators’ traditional deployment model. Operators are being forced to make tough choices, with consumers demanding ever-greater bandwidth to support new applications and services and a larger variety of access network technology and roll-out options, meaning substantial deployment costs. In addition, regulators and public policymakers are becoming more involved in setting expectations for broadband deployment, which calls on operators to take an active role in shaping regulatory policy.
Operators’ strategies for building next-generation broadband networks will have to be carefully tailored. Ultimately, operators will need to develop a plan with the right targets, matching their strengths to their long-term ambitions, building partnerships to roll out infrastructure efficiently and de-emphasising or exiting areas where infrastructure operations are not likely to remain profitable. The transformation promises to be challenging, but inaction in the face of the industry’s major trends is not an option.
A New Strategy for a New Era
Today’s telecom operators are facing a critical moment in their development. The deployment of next-generation broadband networks has moved to the top of the agenda for countries around the world, as leaders recognise that next-generation access (NGA) is crucial to their economic and social development. Consumers, too, are demanding NGA to support a new wave of applications and services.
“To succeed in this environment, operators need to rethink which technologies they will use to compete, how those choices may differ by region and over time, and whether their chosen strategies will require new NGA deployment models,” commented Bahjat El-Darwiche, a partner at Booz & Company.
Operators need to realise that they will be able to compete in some areas and not others, and determine where to invest heavily and where to withdraw, when to outsource, when to partner and when to build from within.
The Context for Change
Consumers: Rising Expectations
Already, an increasing number of households and businesses require applications that demand greater amounts of bandwidth from their broadband connections, such as IPTV, Web conferencing and cloud computing. Currently, many of these next-generation applications and services are being offered by players other than telecom operators, such as Google, YouTube, and Facebook. “Although operators are not likely to match all of the innovations of these application developers, they will need to build enabling services for such applications and coordinate closely with developers, as this will not only drive demand for NGA but also create new revenue streams that can support NGA deployments,” commented Chady Smayra, senior associate at Booz & Company.
Technology: A Fracturing Environment
In making decisions about technology, operators have two critical dimensions to consider. The first is the array of technology choices for NGA, each of which comes with advantages and disadvantages. The competition between greenfield fibre—which offers long-term reliability, latency and bandwidth capacity—and upgrades of existing cable and DSL—which offer significant cost advantages—dominates the debate over technological choices.
The second dimension for operators to consider in terms of technology is the population density and building structures of the area where they plan to build networks, as well as the customer penetration they are likely to achieve in that area. Successful operators will increasingly explore wholesale strategies and cooperative agreements to manage the risks associated with high up-front costs and uncertain returns.
Public Policy: Support, but with Conditions
National governments are taking a more active role in shaping the new broadband frameworks, due to NGA’s power to transform national economies by improving productivity, innovation, and economic competitiveness. Broadband is viewed as essential public infrastructure and can deliver advanced and interactive government services. Greater policy activity could take several forms, for example, stronger regulation or direct investment in the broadband roll-out. It is therefore critical for operators to engage with regulators and policymakers in shaping the government intervention and regulatory framework that emerge.
Three Steps Toward an NGA Strategy
As operators develop an NGA strategy, they must sequence their decision-making into a three-part process: role definition, target setting, and management and execution.
Defining the Right Role
The initial stage in defining an NGA strategy is for operators to be aware of their current market position and where they can realistically aim to be in the future. All operators must determine whether it makes sense to strengthen their position, by building infrastructure on their own or with partners, or whether to exit the market.
“It is essential for all operators to determine on a case-by-case basis where they have the scale to compete and thus where they should invest. Of course, this step in strategy setting may reveal that certain network assets are unlikely to be worth retaining or improving. In those situations, operators will want to prepare for an outright sale of assets,” said El-Darwiche.
Setting Targets Appropriately
After determining which markets are worthy of additional investment, each operator must judge what technological mix will be the best fit for a given market. This requires an assessment of what national governments are focused on, what competitors are doing, and what technologies are in play. Operators will need to analyse household density, building density, competitive pressures, bandwidth demand, consumer purchasing power, the costs attached to various technologies and the reusability of existing infrastructure.
Of course, each government will take a position with regard to the choice of technology, which will have no small impact on operators’ targets. “Because the overriding goal of national broadband plans is to facilitate future economic growth, governments will tend to favour technologies with a greater likelihood of long-term success. It is critical, therefore, that operators and governments work collectively on target setting to ensure a technology mix that is best suited to meeting capability as well as profitability requirements,” commented Smayra.
Managing and Executing the Approach
Because of the large costs involved in a build-out over several years, operators can ill afford delays and mistakes. Operators can use partnerships to increase speed, reach a greater number of customers or lower actual deployment costs. They can also take advantage of government investment and subsidies.
Partnerships, such as with other operators, cable providers, municipalities or utilities, are one source of efficiencies and synergies. However, the relationship has to be managed carefully in order to meet the original targets while safeguarding all parties’ interests. Once a partner is selected, the operator needs to follow a clear negotiation strategy that recognises potential synergies as well as “dis-synergies” in any cooperative agreement.
Synergies in any agreement will likely be found in four broad categories: infrastructure, deployment process, rollout speed, and access to customers. Partnerships must be built with a recognition of “dis-synergies” as well, including complexity, margin loss, profit sharing, and higher expectations.
“Flexibility is critical in adapting to rapidly changing market realities. For instance, former competitors might be potential partners in a roll-out. Operators will need to assess the impact of new developments, such as institutional, policy, and regulatory shifts, on their business,” said Smayra.
The NGA era promises to challenge operators that view the emerging range of broadband technologies and services as an extension of prior market offerings. Customers expect a richer range of offerings in applications and services, as well as the networks to support them. Public policymakers increasingly demand a wider range of high-speed broadband coverage, especially in rural areas. Investors still expect reliable payback performance on infrastructure build-outs, even in a highly deregulated and competitive marketplace.
Operators will have to abandon their resistance to accommodating competitors in infrastructure access, as an effective NGA strategy will require operators to interact with the market on a wholesale and retail level at the same time. Business models will vary in different layers of the value chain, and operators’ current vertical integration of these layers will diminish significantly, creating completely new business models, such as brokers of passive infrastructure. This period of change, while challenging, promises significant rewards to those operators that react strategically, quickly, and with enough force to create a lasting advantage.