Evolving Service Provider Business Models

Evolving Service Provider Business Models Camille Mendler May 25, 2010

Agenda Structural Choices Partnering to Transform The Role of Wholesale Q&A

Telecom: An Industry in Decay - or Transition? Picture source: Tantrum_dan/Flickr

Post-Enron: Telecom Atones and Regroups
The Noughties
Drive to improve the bottom line
Divestment of underperforming assets
Competitive disintermediation
The Teens
New business models
Pursuit of third-party ecosystems
Wholesale becomes strategic
The “irrational exuberance” of the late 20th century -- culminating in the dot-com crash -- has had long-lasting effects on surviving 21st-century service providers. Global expenditure on telecom managed services and outsourcing Source: Yankee Group, 2009

Competition Grows on Multiple Fronts Wishful thinking: The telco is no longer the center of the universe. Media & broadcast BBC, Bertelsmann, Disney, Sony Music ICT equipment, software & services Cisco, Ericsson, HP, IBM, Microsoft, NSN Consumer electronics Apple, HTC, Nokia, Samsung, Sony Cloud Amazon, Google, Facebook, YouTube, Salesforce.com Source: Yankee Group & Telecom Italia, 2009 Telecom operators

Service Providers Are Rethinking What’s Core n=53 Source: Yankee Group / TEN2009 Telecoms Barometer Survey (of European telecom executives)

When Capex Remains Tight, Pragmatism Emerges Source: Yankee Group / TEN2009 Telecoms Barometer Survey (of European telecom executives) n=53 Will network infrastructure sharing become the norm?

New Business Models Become Visible Direct Indirect High Low Focus on network plant & operations Focus on customer intimacy Regulated Openreach, Chorus Independent GTL Infra Joint Venture Net4Mobility Digital Distributor Qwest Trusted Intermediary BT Virtual Telco Aircel Media Maven Orange OpCo ServCo Status quo Status quo Source: Yankee Group, 2010 Profound structural and strategic realignment is underway globally.

Understanding the OpCo OpCos have no direct relationship with the final consumer. Examples Definition Model GTL Infra (India), TowerCo (U.S.) Specialist firm managing physical network plant assets (towers, fiber) for shared use. Often offers sale/leaseback deal to telcos. Independent Net4Mobility (Sweden), MBNL (U.K.) Infrastructure sharing joint venture pooling passive and/or active network assets for cost-efficient network reach, expansion and build. Joint Venture Openreach (U.K.), Chorus (NZ), OpenNet (Singapore) Functionally or structurally separated incumbent operator division managing access network (copper, fiber) for shared use on equal access terms. Regulated

Understanding the ServCo Many telcos currently operate as digital distributors by default. Examples Definition Model Qwest, Neutral Tandem (U.S.) Provider of connectivity-centric services to one or multiple client segments (e.g., service providers, enterprises, consumers). Digital Distributor Orange, SK Telecom (Korea), MTN (Africa), Telefónica Consumer-focused telco (typically 100 million-plus subscribers) aiming to be primary lifestyle services (entertainment & content) as well as connectivity provider to clients; dependent on holistic view of end customer. Media Maven BT Global Services, T-Systems, Orange Business Services Enterprise-focused telco asserting prime contractor role for multi-sourced service delivery and assurance across IT and telecom domains. Trusted Intermediary Aircel, Bharti Airtel (India) Telco externalizing all functions non-core to service differentiation, customer acquisition and retention activities. Virtual Telco

Telcos Need Help To Become OpCos or ServCos Telco functions Source: Yankee Group, 2010 Integrators & BPOs Accenture, Atos Origin, IBM BSS & OSS specialists Amdocs, Convergys, Comverse, Telcordia Digital transactions & interconnect Intec, Neustar, Syniverse, Telarix, TNS CDN providers Akamai, Edgecast, Limelight Ethernet exchanges CENX, Equinix, Neutral Tandem Wholesale operators Belgacom ICS, BT Wholesale, Tata Equipment vendors ALU, Cisco, Huawei, Ericsson, NSN Construction, engineering & logistics firms Bechtel, Relacom, Service Stream Partner examples

OpCo Examples and Activities T-Mobile and 3 (and now Orange UK) joint venture is pooling 3G access networks Various functions outsourced to Ericsson and NSN Western Europe (U.K.) Joint Venture (3G) MBNL OpenReach is the functionally separated and regulated access division of BT Group, controlling its copper and fiber access Copper infrastructure support services outsourced to Carillion Telent Western Europe (U.K.) Regulated Openreach Tower portfolio acquired from operators and own build N/A Southeast Asia (India) Independent GTL Infra Telenor and Tele2 joint venture is building LTE network with shared infrastructure and spectrum Western Europe (Sweden) Joint Venture (4G) Net4Mobility Type Geography Physical plant Network operations

ServCo Examples and Activities
Sale and leaseback of towers to TowerCo
Amdocs for customer care and billing
IBM for CRM, IT ops and app development
Outsourced to Ericsson
North America (U.S.) Digital Distributor (in transition) Sprint
Functionally separated, various third-party maintenance deals
Various IT, BPO deals with Tech Mahindra, HP, Accenture
21CN upgrade and international network outsourced to ALU
Global Trusted Intermediary BT
Pursuing infrastructure sharing deals in several geographies (e.g., U.K.)
Various national deals for IT and apps outsourcing with EDS, ATOS Origin
Various maintenance deals with ALU, NSN
In U.K., outsourcing of broadband network to BT Wholesale, white label voice/broadband deals
Global Media Maven Orange
Towers sold to GTL Infra
Wipro for IT ops, billing, revenue assurance and white labeled app store
Outsourced to NSN
Southeast Asia (India) Virtual Telco Aircel Type Geography Physical plant IT & OSS Network operations

Wholesale Becomes Strategic
Traditional definitions of wholesale
Sale of a communication service to a licensed service provider, where an enterprise or consumer is not directly billable
Re/sale of “excess” capacity (e.g., minutes, bandwidth, colo space)
Sale of a communication service at a regulated price (domestically)
Traditional perceptions of
wholesale
Non-strategic activity, limited profitability/regulated rate of return
Transactional, undifferentiated, price-driven product sales
Polarizing wholesale market:
“ Dumb” wholesale: Traditional volume-based transport services, where profitability is dependent on global scale and large volumes
“ Smart” wholesale: Value-added services that extract better quality, performance, intelligence and analytics from network and IT assets
Smart wholesale offers untapped and uncapped revenue opportunities; dumb wholesale’s profit margins are constrained.

Wholesalers Are Partnering With Other Service Providers -- and in the Wider Economy Network operations Billing & OSS IT infrastructure management Application management General administration Interconnect & settlement Business transformation services Hosted content & apps Voice & capacity Business process outsourcing IT outsourcing Wholesale Physical plant & field maintenance Network outsourcing Telco functions Housing Wider-economy services Traditional service cluster 21 st -century wholesale Digital infrastructure & delivery services + + + Source: Yankee Group, 2010

Redefined ‘Wholesale’ Could Grow the Top Line Smart grid, international remittances, remote home control, M2M, health care White label SaaS, UC, contact center, app store, mobile TV & IPTV, digital advertising and ad insertion CDN and P4P mgmt, media transcoding, IPX, ENUM, app store management, IaaS, PaaS, APIs, mobile payments, analytics, device and CPE management, Ethernet exchange, cloud federation, compliance management, security and fraud mgmt, content partner management, broadcast distribution, M2M MVNE, presence and identity management Infrastructure build-operate-manage, process design and optimization, service design and launch, marketing, sales support Portfolio additions Business transformation services Hosted content & apps Wider-economy services 21 st -century wholesale Digital infrastructure & delivery services AT&T BT Wholesale BT Wholesale Global Crossing KPN/iBasis Tata Communications Innovators AT&T BICs Verizon BT Wholesale DTAG ICSS Level 3 TeliaSonera Intl Carrier

Smart Wholesale Is About Reselling Intelligence, Not Capacity Source: Yankee Group, 2010

Conclusions & Recommendations
Splendid isolation is unsustainable
To survive and grow, service providers must embrace partnership
Proactive choice of business model is required
Sitting on the fence will only speed competitive disintermediation
Helping others deliver compelling services isn’t failure
Wholesale is not a legacy activity, but a key to future revenue growth

Q&A
Further Reading
“ What if Google Paid?,” April 2010
“ Rethinking Telcos' Role in Third-Party Ecosystems,” February 2010
“ Redefining the Core: Outsourcing and the Virtual Telco,” March 2009
“ Transforming Service Providers into Anywhere Providers,” February 2009
“ Teaching an Old Dog New Tricks: Wholesale Transforms,” January 2008
This research is available for purchase at shop.yankeegroup.com. Current Yankee Group Link Research subscribers can find these reports on the Yankee Group Web site client portal.

Thank You www.yankeegroup.com Camille Mendler VP, Global Service Strategies [email_address] Twitter: @cmendler Read analyst blogs at blogs.yankeegroup.com Watch analyst videos at youtube.com/yankeegroup Follow us on Twitter: @YankeeGroup Fan Yankee Group at facebook.com Upcoming Yankee Group webinar: Preparing for 4G Video Services Tuesday, June 29, 2010 | 11 a.m. ET Register at www.yankeegroup.com

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Evolving Service Provider Business Models

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