TechZine – Alcatel-Lucent

Business

A Changing Market Environment Demands a High Leverage Network

Highlights

  • Network traffic could grow up to 85 times in a 5-year period while average revenue per user declines.
  • Service providers will need a comprehensive, customer-focused strategy that delivers immediate and long-term business impact.
  • The right network investments will deliver net gain, net value and net worth.

Smartphones and mobile devices are driving major changes worldwide in the telecommunications market. They are boosting traffic growth and transforming how services are used — and how they can be developed and sold. But their use has had a negative impact on average revenue per user (ARPU).

In this time of profound change, how can service providers get the best return on their network investments? They need a comprehensive strategy that addresses significant market trends, with a network that can promote success today and for years ahead. The right network investments will offer the following business benefits and capabilities:

  • Net gain – To provide immediate business benefits, the network must do more with less, delivering services at the lowest cost per bit.
  • Net value – To forge stronger customer relationships, the network must deliver the ultimate end-user experience.
  • Net worth – For longer-term business value, the network must have the flexibility to support new business models and partnerships that help monetize network resources.

MAJOR CHANGES AHEAD

Industry analysts foresee major market growth worldwide. By 2016, total consumer fixed broadband connections are expected to reach approximately 743 million[1], while worldwide mobile connections grow to 7.7 billion[2].  The total number of mobile video users is estimated to grow exponentially to 2.4 billion users by 2016[3].  The number of smartphones is expected to reach 1.15 billion[4],  while the total number of application downloads will total 45.2 billion[5].  The following sections outline what these new numbers mean for service providers.

USERS TAKE COMMAND

Smartphones, tablet devices and applications have given subscribers greater control over the services they use. Perhaps that’s why users have grown highly dependent on them. For example, two-thirds of users sleep with their phones, over half check their phones every 5 to 30 minutes, and 63 percent could not go more than several hours without it[6].

What are the consequences of this trend for service providers?  A dramatic shift is taking place in which the customer experience really matters.  And service providers can no longer base their business models solely on the number of subscribers, broadband packages or minutes they sell. Nor can they simply offer services and expect users to buy them.

TRAFFIC GROWS, ARPU DECLINES

Millions of devices concurrently accessing content and applications in the cloud will place far greater demands on the network. Alcatel-Lucent Bell Labs modeling predicts that traffic could grow between 45 times and 85 times in a 5-year period, based on an unconstrained demand-side model as illustrated in Figure 1. Typical supply-side models show similar results, predicting traffic growth between 10 times and 30 times.

Bell Labs model of future traffic demand

Figure 1. Bell Labs model of future traffic demand

To cope with the dramatic growth in data traffic, service providers are already investing in their networks.  However, they are not yet capturing the full value of their investments. As Figure 2 shows, ARPU has not increased commensurate with the increase in data traffic on the network. In fact, overall worldwide revenues have increased slightly simply because the number of subscribers has increased. But the average revenue per user has declined. In addition, operating expenditures (OPEX) have gone up, placing greater pressure on capital expenditures (CAPEX) to control operating profits.

Service provider revenues, costs and profits

Figure 2. Service provider revenues, costs and profits

In addition, voice revenues are forecast to fall below 60 percent of total revenue globally for the first time in 2013, and some service providers are also starting to see declines in messaging revenues[7].  The decrease will be partially offset by a rise in data revenues. However, some disturbing patterns are emerging in voice, messaging and data revenue when correlated against subscriber growth for leading service providers in major global markets. In the majority of cases, net revenue hits a peak, stagnates and then drops off, as subscriber penetration approaches 70 percent to 90 percent.

For now, data revenues are still growing and are likely to continue growing for the next few years. However, margins will come under increasing pressure, as service providers address the predicted increase in data traffic. When data revenues eventually start to peak, all three revenue streams will be in decline for some service providers in developed markets such as the US, Japan, and Western Europe.

To address these challenges, service providers need to unlock more value and monetize the network; for example, by recognizing that the network is the essential bridge between mobile devices and the cloud. That is, smartphones and tablets have limited processing power and storage capacity, so they require a connection to the cloud for additional processing and storage. As a result, users need easy, anytime connections to all their applications and content stored in the cloud. And they expect a great customer experience.

This gives service providers an opportunity to benefit from the network’s strategic position. They can work cooperatively with user devices and the cloud to build a more satisfying user experience which can also generate new revenue streams.

THE RIGHT NETWORK FOR SUCCESS

Service providers understand the critical need to cut costs, develop new sources of revenue and devise ways to maintain existing revenue streams.  However, to make the right network investment decisions, they need a comprehensive strategy that delivers business impact now while ensuring maximum long-term benefit.

This strategy starts with a focus on customer experience, which applies appropriate treatment for different user applications and content. Storage and streaming can be delivered just by using more bandwidth and allocating it intelligently. On the other hand, computing, gaming and communicating all have latency and quality of service (QoS) requirements that cannot be solved with bandwidth alone. For these services the network must leverage additional application-level intelligence and capabilities, such as traffic management, analytics, policy control and session management, to enhance the customer experience.

In addition to providing a high quality of experience (QoE), the network must also become a platform for delivering personalized services, and developing new business models. In effect, it needs to become the platform that drives new revenue streams.

This is what a High Leverage NetworkTM can do for service providers. It helps realize the potential of their networks and delivers business benefits in the following three ways:

  • Net gain – A High Leverage Network helps service providers achieve immediate business benefits by doing more with less so they can maximize return on investment (ROI).  In particular, they can invest wisely to cope with increasing data traffic growth.  This cost-effective, customer-centric network continuously scales bandwidth—and extends reach and coverage—all at the lowest cost per bit delivered. For example, Alcatel-Lucent lightRadioTM solutions increase mobile broadband capacity and coverage using small cells while reducing total cost of ownership (TCO) by up to 50 percent. Deploying the Alcatel-Lucent 7950 Extensible Routing System (XRS) core router increases the capacity and performance of IP core networks using less space while reducing power consumption by up to 66 percent.
  • Net value – A High Leverage Network can also deliver more value with differentiated and personalized services and offers. Service providers can forge stronger and more valuable customer relationships by delivering high-quality customer experiences across all devices. As an example, the Alcatel-Lucent Advanced Communications solutions enable subscribers to connect, share and organize their communications in an easy and compelling way while increasing ROI by up to 60 percent. Motive Customer Experience solutions can increase customer lifetime value by 10 percent or more.
  • Net worth – To enhance long-term business value, a High Leverage Network provides the capabilities needed to support commercial success. Service providers can develop innovative business models and partnerships that enable new revenue streams, because they can leverage network capabilities and customize offerings based on customers’ needs and preferences. For example, OptismTM  mobile advertising delivers enhanced results by turning subscribers into 100 percent opted-in and profiled audiences using permission-based advertising.

In today’s new world of smart devices connected to the cloud, the network is critical to delivering personalized services and achieving the ultimate customer experience.

To contact the author or request additional information, please send an e-mail to techzine.editor@alcatel-lucent.com.

  1. [1] Gartner, “Forecast Analysis: Consumer Fixed Voice, Internet and Broadband Services, Worldwide, 2009-2016, 2Q12 Update“, May 31, 2012.
  2. [2] Gartner, “Mobile Services, Worldwide, 2008-2016, 2Q12 Update,” June 15, 2012.
  3. [3] Gartner, “Market Trends: Worldwide, the State of Mobile Video,” February 10, 2012.
  4. [4] Pyramid Research, “Smartphone Forecast,” April 2012.
  5. [5] Ovum, “Mobile Application Download and Revenue Forecast: 2011–16,” August 2011.
  6. [6] TIME Mobility Poll, in cooperation with Qualcomm, August 2012.
  7. [7] Chetan Sharma Consulting: Operator’s Dilemma (and Opportunity): The 4th Wave, September 2012