|Issue:||North America 2006|
|Topic:||The future of the network – IMS and Next Generation Networks|
Camilla Dahlen is the President of Highdeal Inc, responsible for Highdeal’s strategy and operations in the Americas region. Previously, Ms Dahlen had global account management responsibilities for EHPT, a joint venture between Ericsson and Hewlett-Packard, where she served customers throughout Europe, South America and North America. She helped build EHPT’s South American operations. Prior to EHPT, Ms Dahlen led strategic marketing and competitive analysis initiatives at Telia, the telecommunications leader in Scandinavia and northern Europe. A frequent speaker at leading industry events, Camilla Dahlen holds a B.Sc. in Business Administration from Boston College and a bilingual MBA in Spanish/English from Instituto de Empresa in Madrid, Spain.
Networks are not what they used to be. New technologies and new services threaten to turn many of the incumbent network operators into mere bit-pipes, carriers of services that others provide. Content, new applications and new services are driving the industry; traditional voice services are losing ground and no longer drive growth. IMS (IP Multimedia Subsystem) based systems give operators powerful tools to implement new services and re-establish themselves as key players in the changing telecommunications value chain.
Western Union, the venerable company synonymous with the telegram, the company that grew to become one of the largest and most successful corporations in America, recently faded into the sunset. They went quietly, they shut their doors with little fanfare and little notice from the media. The battle was lost long ago, yet the closing stands as a stark reminder that those who fail to change with the times are destined to go the way of the dinosaur. And remember, Western Union was one of the first network operators. Network operators do understand the threat to their traditional markets – hence the excitement about IMS (IP Multimedia Subsystem) and NGN (next generation network) products. These new architectures provide hope for the future. Listen to CEOs from companies like Verizon and the challenge is crystal clear: find a future. Now fast forward for a moment. You have successfully implemented your IMS network, and your transport layer can deliver virtually unlimited network traffic with five 9s reliability. Further still, you’ve implemented feature-rich technology at the application layer. So what? How are you making money? More importantly, are you generating enough revenue from the new network to be a viable, ongoing concern in the long run? The excitement surrounding IMS – sometimes unbridled – is due in part to network operators’ desire to replace traditional revenue streams like voice, which are steadily declining as a percentage of total revenue. The problem with network operators is that, well… they’re network operators. Wireline operators, wireless operators and cable MSOs have built their companies on the premise that operating a reliable network provides significant value to the marketplace. The world, however, is changing rapidly and networks, like engines in a car, are increasingly just components of broader next-generation services. Customers are shopping for automobiles. Further, incumbent operators have built their operations around a legacy business model, and these operations are rapidly becoming a limiting factor. The typical operator’s billing system, for example, delivers high-volume transaction throughput for well-defined services and large subscriber numbers. In the new world, services, transaction volumes and subscriber numbers are dynamic at best. Early IMS experience Push-to-talk (PTT), the first widely deployed IMS-based service, provides an excellent case study of the challenges associated with transition to an NGN. Mobile operators had long envied the industry-leading ARPU that Nextel had long maintained. Their US$70+ ARPU was due in large part to their well-known PTT service – widely used by businesses ranging from construction firms to maintenance crews. Never shy about copying successful services, mobile operators eagerly pursued PTT launch plans, leveraging the new IMS-based PTT over cellular, or PoC, standard. However, operators quickly saw that PTT would cannibalize their existing voice and SMS revenues. This conflict is particularly acute with the large, publicly-traded mobile operators that face quarterly earnings reports for Wall Street. The pressure to grow revenues from quarter to quarter while being predictable can effectively quash service innovations like PoC. Recent moves by executives and shareholders, aimed at taking network operators like Cablevision and Time Warner private, illustrate this ‘innovation vs. Wall Street’ challenge. In a recent Business Week interview, Lou Gerstner, the former CEO of IBM and current chairman of the privately-held Carlyle Group said, “In a private setting, you eliminate the dysfunctional short-term focus on quarterly results that dominates the market today”. In the end, will it be possible for a publicly-traded network operator to assume the risk of reinventing itself? Another key issue for new, NGN-based services like PoC is the pricing and packaging of the service. New services do not have well-established methods of charging, like time and distance in telephony, which customers have come to understand. Customers typically do not want to subscribe to a service they are not sure they will use. Similarly, they dread pay-per-use models that often result in a huge invoice at month end. The model emerging for PoC, after significant research and experimentation, is an on-demand subscription, like US$2 for an unlimited 12-hour period. As a result of these many challenges, service innovations are more likely to come from outsiders. New entrants like Vonage have raised the bar in the telecom market. MVNOs (Mobile Virtual Network Operators) are performing a similar function in the mobile marketplace, as are services like Tivo and Movielink in the video space. Following in the aftermath of Napster, Apple has now sold over one billion iTunes. By acquiring Skype, eBay demonstrated that voice is a valuable tool, not only to facilitate communication between buyers and sellers, but also as a rich source of pay-per-call advertising revenues. New multiservice world Network operators are increasingly aware that while battling their nearest competitors (e.g., telco vs. cableco), the real competitors are out there creating the future. ‘Quadruple play’ is already replacing the term triple-play. Market leaders are already packaging quad-play services with others, such as online gaming, streaming radio, music downloads, security and even traditional utilities (e.g., electric, gas). We now refer to the delivery of an array of IP-based services as the Multiservice World. IMS provides an exciting platform to compete in the Multiservice World, on which a virtually unlimited range of applications and services can be delivered. Lucent uses the term ‘blended multimedia lifestyle services’. Consumer-oriented services include on demand entertainment for the digital lifestyle, while business services include on demand applications for the digital workplace. Transport is only a component of these offerings – the customers are buying the video, the game, the music. The possibility of network operators becoming mere ‘bit-pipes’ is very real. Interested in trying your hand as a service provider in the Multiservice World? It’s not as unrealistic as you might think; the barriers to entry are exceptionally low. Most network operators are accustomed to an array of formidable barriers. Regulatory requirements imposed by state, local and federal agencies place heavy demands upon telco network operators. Cable MSOs, multiple system operators, require franchise agreements with the municipalities they serve. Then, too, the capital required to build and operate a network of any quality and scale is daunting. In the Multiservice World, however, virtually anyone can setup shop. The formula to become a successful service provider in the Multiservice World is reasonably clear: 1) Establish a community of interest or social network • eBay did this by introducing buyers to sellers; Myspace now has a network of millions of teenagers; Disney has a network of young children around the world who, by the way, have parents with disposable income; Salesforce.com has a formidable community of SMBs – small and medium businesses; • The use of discreet communities targeting lifestyles, ethnicities, hobbies, etc. is known as demographic micro-targeting. 2) Create an extended package of services that resonates with this community • Services may start with a core service but can quickly expand to include the quad play, etc; • Since few companies have the resources to deliver a multitude of services, at some point this package will likely contain third-party content and services. 3) Connect advertisers with your community • Google did not earn a US$400+B market capitalization by charging Internet surfers; • If there is a ‘killer app’ in the Multiservice World, it is connecting advertisers with specific demographic targets at the right time. Roadmap for incumbents The truth is no one is exactly sure where their future revenue streams will come from. Ringtones quickly became a billion dollar business. Apple struck gold with music downloads. The likelihood is there will not be a single service to replace basic voice and broadcast video. There will be an array of services packaged to suite the interests of micro-segments. As a result, it will be necessary to proactively prepare for the new, Multiservice World – one in which service experimentation is the key. ‘Transformation’ and ‘reinvention’ are terms associated with high-priced consultants, but the imperative has never been clearer. To prevent becoming marginalized as a bit-pipe or, worse, being taken altogether out of the chain, network operators must examine their role in the value chain and reinvent themselves. New entrants, without a ‘network operator’ mindset or a legacy infrastructure, may find it easier to succeed in the Multiservice World than incumbents. While the telcos and cablecos do battle, the outsiders like portals, media companies and software vendors, may ultimately win the war. We suggest incumbents keep these enablers in mind: • Prepare yourself not only to deliver NGN services, but to earn from them. Let your marketing and product development groups experiment with services and their pricing and packaging. Experiment with business models. Experiment with third-party partner terms and conditions and get back to the basic four ‘P’s of marketing: product, price, place and promotion. • Replace the ‘network operator’ mindset with a new one that rewards innovation. In the old world, the network was the service. In the new world, few people care about the network – people care about the entertainment, the application, etc. Companies like Google, Apple, Vonage and Tivo have been rewarded handsomely for their innovations. • Solidify your place in the value chain. The most obvious advantage that network operators possess today is the billing relationship and their ability to price and package services creatively. Rather than getting charged by an endless list of content providers, network operators could tie the IP-based services together and let their subscribers charge content and other purchases via their phone bill, performing a role much like a credit card. IMS and other NGN based services provide a future for network operators. The ultimate challenge is not to deploy the networks, but rather how to generate revenues from the services these networks enable. Instead of focusing upon their traditional strengths, network operators need to focus on what the customers want. NGNs present an exciting, although unproven, opportunity by opening the door to a world of innovative services and business models. For many network operators, their long-term survival will depend on their ability to reinvent themselves sufficiently to compete with new service providers, such as Google, eBay, Microsoft and Disney. Without a radical reevaluation of their business value and the role they play in the value chain, traditional network operators might, like Western Union, be facing extinction.