3G Networks: Time to Go Dutch

Despite huge costs, delays and unfavorable market conditions, European
operators are going ahead with 3G investment plans. The lure: the size of data
traffic to be generated in the coming years is going to be enormous. If the
investment in 3G is huge, it is essential too, such are the promised returns.
The Yankee Group estimates that the total expense in the 3G infrastructure is
going to be $274 billion in the next five years, including infrastructure and
license costs. Till date, 56 3G license winners from 13 European countries have
spent over $116 billion on 3G licenses.

The future in 3G is not yet clear. If the market responds in line with the
expectation, then spectrum, infrastructure and technology will be insufficient
and inefficient. On the other hand, if the market doesn’t behave as per
expectations, there will be surplus spectrum. One option before operators is to
be conservative in capital expenses. There is value in owning infrastructure,
but operators concentrated on building infrastructure without a proven business
plan will be in danger of becoming just bit-pipe carriers. To survive in the 3G
business, the three basic strategies that operators need to adopt are: build,
buy and share.

Pressure is growing in Europe to allow 3G mobile infrastructure-sharing among
the financially strapped network operators. The 3G licensing conditions set by
most of the regulators ruled that all license winners must build their own
networks, which need to be completed by a specific date to launch the service.
The regulators are now allowing the operators to share the infrastructure. (In
3G, there is a greater potential for service-level competition rather than
network-level competition, as operators need to focus on three basic factors to
maximize revenues–more users, more number of services to use and more amount
of usage.) Countries like the UK, Italy, Switzerland and Germany have already
accepted the sharing option. Operators without the 2G network can bridge the gap
from 2G to 3G. The new 3G entrants will have an option of partnering with
existing 2G operators.

Offsetting the Cost

The total 3G investment will be under the following heads:

- License cost

- Network cost

• Access cost

• Core network cost

• Backbone cost

- Application cost

- Market development cost

The cost of building infrastructure will vary form country to
country. The approximate cost of building a network will be more for countries
like UK and Germany where the license cost is more. With such high costs, it
makes a financially attractive option to share the network and thus reduce the
investment cost up to 40 percent. Infrastructure sharing will help a healthy and
competitive 3G market. Big multinational operators like Vodafone and NTT DoCoMo
may prefer to have exclusive networks in countries where they are market
leaders, but may go for a sharing mode in other regions. So network sharing can
turn out to be a survival strategy for new 3G operators as well as for older and
more established players. The operators can save up to 50 percent on the capital
expenditure.

What Sharing Is

If operators are saying they no longer have a justifiable business case...
(and) if network infrastructure sharing is a remedy... everyone has to support
it. Infrastructure sharing can have a number of variants but it has its ultimate
objective of reducing the cost associated with setting up a 3G mobile network.
Network sharing can be done in various ways.

In its simplest form, network sharing is sharing of space on masts and in
associated buildings and sites. In this case, however, there will still be two
physical networks.

A variant can be a geographic division of the market coverage. For example,
the operator may leave rural areas to a strategic partner, and roll out its own
network in core areas. This can amount to ‘national roaming’.

Another approach can be to partner to build and run a network in largely
populated areas where multiple networks do not make much economic sense. This is
the option for cash-rich operators who can save their cost in certain areas, but
will grow in other areas, independently taking care of the competition.

What Can Be Shared?

UBS Warburg estimates capital expenditure savings of up to 15 percent for
operators sharing masts, and approximately 30 percent for those who share radio
access–sites, transceivers and controllers, while keeping control of switches.

But while network sharing beyond mast is both technically feasible and a
money-saver, there are advantages of keeping sole control of the network
operation. Examples in the 2G market prove that operating a network well can be
a strong differentiating factor. Operators need to determine the segments that
they need to operate themselves and the ones that they need to outsource.

Network operators who begin by sharing infrastructure, particularly on
geographical bases, may eventually build their own networks, resulting in a
similar level of investment in infrastructure over a longer period of time. Yet,
the sharing of radio access infrastructure raises business issues for operators.
Operators are wary of going too far in network sharing. If operators share Base
Transceiver Station (BTS) equipment, they will also need to share traffic
forecast information, which is a ‘highly-sensitive commercial information’.
Operators, however, can potentially overcome this obstacle by setting up an
independent third party to manage base stations. The third party, an access
management company, though needs to have a very good skill-set in planning,
implementation, optimization and support. Operators are pulling out of shared
Universal Mobile Telecommunications System (UMTS), Terrestrial Radio Access
Network (UTRAN) and BTS, and coming to the idea of regional sharing.

Venders like Lucent, Nokia and Nortel have to understand the future of
infrastructure sharing, clearly looking at their products and services. The
overlapping of infrastructure will be more at the access and backbone level than
at the core level. Operators have to go for a separate investment in billing and
switches. For a complete solution, vendors like Lucent, which are into switches,
access, optical fiber, data networking products and billing, have advantages in
infrastructure sharing. The operators need to plan network sharing with vendors.
The option for vendors is to tighten the relationship with operators, right from
the licensing phase.

Driving Factors

3G operators stand to derive two broad tangible benefits out of network
sharing.

• Decrease in investment: Operators can reduce investment and make 3G
  a feasible business. Infrastructure sharing will play a strategic role for
  the operators.
• Rapid deployment of the network: As operators will work together,
  they will build the infrastructure aggressively. However, the experience of
  3G service will come with time.

The Flip Side

When operators share the network with their competitors, they
definitely enjoy the tangible benefits of reduced cost and rapid deployment, but
at the same time, they also have to bear with a number of hidden disadvantages.

• Blunted competitive skills: Network sharing will
  reduce competition among operators sharing the infrastructure. No operator
  will plan to kill its competitor who is sharing some resource with him.
  However, operators sharing a network may formulate business strategies to
  compete against operators of another network.

• Poorer network quality: As ownership of the
  network will be distributed among the sharing operators, the quality of
  network may come down. In the 2G environment, quality played an important
  role, leading to the satisfaction of customers. The high-quality network
  also reduces churn.

• Lack of service differentiation: With network
  sharing options, operators cannot differentiate their service offerings
  associated with network elements like location-based services, which are
  related to access network.

• A shrinking equipment suppliers market: With more
  and more amount of network sharing, the addressable market for equipment
  suppliers will come down.

Operators’ Food, Vendors’ Poison?

Migration of operators from the existing 2G or 2.5G to the emerging 3G will
bring an unprecedented demand for equipment players. But the new option of
infrastructure sharing will lead to an unpredictable future for them.

In the present scenario of low market growth, operators’ requirement for
finance is a real challenge for vendors. Financially stronger vendors, with
strong product-lines and vendor financing, will concert their relationship with
the dominant players and their infrastructure-sharing partners. They can have a
better share in the 3G market space, and with the revival of the market, they
can maximize their revenues. Others will have a reduced share in the 3G space as
compared to their 2G market share. Operators say that there is no shrink in the
3G infrastructure market, as the capacity of 3G investment is going to be huge.

Survival Mantra or Business Strategy?

Technically, the entire 3G market may be divided into the broad segments of
CDMA and GSM. Geographically, there can be three major markets–Europe, the US
and Asia-Pacific. Infrastructure sharing is going to play a major role in the
European market as compared to the other two markets. In the recent past, the US
and Asia-Pacific operators have learnt from the mistakes of European operators
and are stepping into the 3G business with a strong business case. They will
also learn from the European operators the different 3G services as they will be
the first in the market.

Network sharing has to accept a survival option for operators rather than a
strategic perspective. Operators can go for basic infrastructure sharing like
mast and electricity locations. Frankly speaking, in equipment, operators should
not share anything

apart from the antenna. But as the operators have already committed mistakes in
courting huge license fees, network sharing may be accepted as an option by them
in the beginning, and as the market grows, they can build their own
infrastructure. The operators have to focus more on services; so they should not
go for any kind of sharing which will be a constraint for service offerings. The
Asia-Pacific and the US operators would not support network sharing much.
Operators have to be clear about their bottom line i.e. to give maximum value to
customers.

Kundan K Das, Sr consultant Lucent Worldwide Services