Prepaid OCS Convergence Model

© 2012 Karthik Ethirajan, all rights reserved
Business Case for Prepaid OCS
Convergence
Karthik Ethirajan
March 2012

2
Agenda
Prepaid Market Overview
 Prepaid Market in North America
 Tier 1 Carriers and New Entrants
Prepaid OCS Upgrade Question
 Current Situation Analysis
 Industry View on Convergent Charging
 OCS Upgrade: Issue & Analysis
 Net Savings Analysis Framework
Cost Analysis of OCS Convergence
 OCS Cost Model Structure
 Cumulative Cost Savings
 PMO and FMO Cost Comparison
 Cost Comparison of Major OCS Components
 CAPEX Breakdown
 Impact of Changes in Prepaid Business
 Impact of Project Delay
Summary of Findings
 Cost Analysis Summary
 Recommendation

3
Prepaid Market in North America
Mobile prepaid market growth has been stagnant in Canada, while US shows some
progression
 Mobile prepaid market has shown zero growth in Canada, while postpaid market
experiences small increase to population penetration
 In 2013, Canada can expect a 1% increase in prepaid subscriptions
Implications
Source: Pyramid, 2011
Stagnant CDN
Growth
Expected US
Growth

4
Tier 1 Carriers and New Entrants
Tier 1 carriers have had a steady hold on the prepaid market share
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
BCE 26.8% 26.3% 26.0% 26.2% 25.6% 25.2% 24.4% 23.5% 22.4% 21.5% 20.7%
Rogers 18.2% 17.8% 17.9% 17.8% 17.4% 17.4% 17.9% 18.4% 18.2% 18.3% 18.9%
TELUS 19.5% 19.3% 19.1% 18.7% 18.8% 18.2% 18.0% 18.0% 18.1% 17.6% 17.3%
Prepaid Share of Subscriptions- Tier 1 Carriers
Stagnant/
Declining
Incumbents face
decreasing market share
and ARPU with prepaid,
primarily due to stiff
competition from new
entrants who are
aggressively targeting this
segment
Heightened
Competition
Source: Strategy Analytics , BMI 2011
 In order to stay competitive, MNO may need to upgrade its OSS/BSS to reduce
cost and to offer new products bundles and service plansImplications
Competitors Monthly Prepaid vs. Postpaid ARPU
CAD

5
Agenda
 Industry View on Convergent Charging and Ericsson Experience
 CAPEX Breakdown
Summary of Findings
 Recommendation

6
Current Situation Analysis
Key Questions
The overall objective of the project is to determine the most cost effective way to upgrade
OCS platforms to support present and future Prepaid and other business needs
 Should MNO upgrade to a converged OCS or
maintain two OCS platforms ?
 Does the CAPEX for the impending SurePay
upgrade sufficiently offset the CAPEX required
for consolidating the two OCS platforms ?
 What is the payback period for the initial
investments from the cost efficiencies realized
through a converged OCS platform ?
 How does changes in Prepaid business climate
impact our project cost/plans ?
 What are the implications of delaying the
project by one or more years ?
Possible Outcomes
Maintain PMO by upgrading
SurePay and keeping both OCS
platforms operational
Option1
Transform to FMO by retiring
SurePay, upgrading SAP-CC and
adding SCP using Ericsson / BT
Option2
Transform to FMO by retiring
SurePay, upgrading SAP-CC and
adding SCP using MNO IT
Option3

7
Industry View on Convergent Charging
Support marketing initiatives such as
cross-selling and upselling of service
bundles
Key Findings
Infonetics Global Research Report, Sep 2011
Business
Drivers
Supplier
Selection
Criteria
System
Integration
Product reliability (most important),
service and support, vendor reputation
and customer references
Subscriber data management, customer
relationship management systems and
policy management systems
0% 20% 40% 60% 80% 100%
Integration Effort
Software development
(or CR) often needed
Testing
Complexity of configuration
Multiple platforms needed
to be updated
Billing Challenges CSPs Face in Meeting Time-to-
Market for Launching New Products and Services
Billing operations are increasingly an
obstacle to responding to industry
changes
Key Findings
How CSP can Transform Telecom Billing Operations
to Support a New Convergent, Digital Business
Business
Drivers
Transforming billing capabilities is key to
the success of CSP’s new business
strategies
OCS upgrade requires careful cost/benefit
analysis, detailed project plan and
implementation by an experienced provider

8
OCS Upgrade: Issue & Analysis
• Call control
• Rating
OCS Platform
SurePay SAP-CC
Vendor
Market Prepaid Prepaid
Network
Support
CDMA: Voice, Data
HSPA: Voice
CDMA: SMS
HSPA: Data, SMS
Client
Satisfaction
Low TBD
Revenue
Opportunity
Supports legacy
revenue streams only
Enables new revenue
streams
Operating two OCS platforms is NOT cost effective
Issue Analysis
Technical
Analysis
Business
Case
• Solutions Architecture
Recommendations
• Solution Integration Impacts
• Data Migration Impacts
• Operations Impacts
• Managed services
• Develop an operational
model to quantify cost
savings
• Estimate CAPEX
requirements
• Prepaid market research
• Estimate incremental
revenue from new voice and
data bundles
• Subscriber
charging & billing
Explore converging OCS to a single platform

9
Net Savings Analysis Framework
SurePay + SAP-CC
CAPEX
SAP-CC
0
OPEX
Operational
Cost Savings
Incremental
CAPEX
Net Savings
Cost savings from upgrading to SAP-CC OCS is the net of operational cost savings from
a converged OCS platform with initial incremental CAPEX requirement
• SurePay is a legacy OCS that
has a higher operating cost
• However, SurePay needs to be
upgrade in the near term
• SAP-CC is a new converged
OCS with a lower operating cost
• However, retiring SurePay
requires high CAPEX
0
Fixed
Cost
Variable
Cost
Platform
Growth &
Sustainment
Variable
Cost
Fixed
Cost
Platform
Growth &
Sustainment
PMO
FMO

10
Agenda
 CAPEX Breakdown
Summary of Findings
 Recommendation

11
OCS Cost Model Structure
Model Inputs General Notes / Model
Assumptions
Model Outputs
Present Mode of Operation (PMO)
• Both SurePay and SAP-CC
OCS are operational
• SurePay handles voice
• SAP-CC handles HSPA data
and SMS
• SurePay needs upgrade
Future Mode of Operation (FMO)
• PMO OCS platforms converges
to SAP-CC and SCP
• SAP-CC handles voice, data
and SMS
• SurePay is retired
NPV Analysis
– Net cost savings after 1
year / 3 year / 5 years
Cost Analysis
– PMO vs. FMO costs
– CAPEX breakdown
– Compare OCS platforms
OCS COST (2012-18)
• Fixed Costs
• Data Center
• Personnel
• Variable Costs
• Utilities
• Data Storage
• Hardware AMC
• Software AMC
• Care
• CAPEX
• Platform
• Growth & Sustainment
PMO – SAP-CC
PMO – SurePay
PMO – Transformation
FMO – SAP-CC
FMO – SCP
FMO – Transformation
Prepaid Subs (2012-18)
• CDMA subs
• UMTS subs
Breakeven Analysis
– Cumulative cost savings of
PMO vs. FMO
Sensitivity Analysis
– Prepaid growth
– Delaying FMO
OCS Cost Model

12
Cumulative Cost Savings
-$12
-$10
-$8
-$6
-$4
-$2
$0
$2
2H12 2013 2014 2015 2016 2017 2018 2019
Higher initial CAPEX resulted in a negative NPV. However, YoY cost savings from
OPEX improved NPV and cost breakeven is achieved during 2Q 2019
-$8
-$7
-$6
-$5
-$4
-$3
-$2
-$1
$0
NPV Cost Savings
• The initial CAPEX is offset by OPEX
savings YoY
• Cost breakeven is achieved during 2Q
2019
• Large CAPEX resulted in negative NPV
during the initial years
• 5 Year NPV is -$2.7 million
1 Yr
NPV
3 Yr
NPV
5 Yr
NPV
Breakeven
Point
($ millions)($ millions)

13
PMO and FMO Cost Comparison
The CAPEX delta between PMO and FMO peaked at $7.2 million in 2012 and OPEX
delta is $1.79 million per year after the transformation
OPEX Cost Comparison
• FMO costs are higher initially due to large
CAPEX compared to PMO
• FMO costs are lower than PMO in the
subsequent years of operation
• FMO OPEX costs for SAP-CC is close to
PMO levels even after taking on new
functionalities
• SurePay of PMO has the highest OPEX
• SCP of FMO has the lowest OPEX
PMO vs. FMO Costs
1 Yr
NPV
3 Yr
NPV
5 Yr
NPV
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
SAP-CC SurePay / SCP Total
PMO Opex
FMO Opex
-$16
-$14
-$12
-$10
-$8
-$6
-$4
-$2
$0
2H12 2013 2014 2015 2016 2017 2018
PMO Costs
FMO Costs
($ millions)
($ millions)
$1.79M YoY
OPEX Savings
$7.2M Peak
CAPEX

14
Cost Comparison of Major OCS Components
Costs of SurePay (PMO), SAP-CC (PMO & FMO) and SCP (FMO) are compared below
Cost Categorization
• SCP carries the lowest Fixed Cost of all components
• SurePay operational costs are bundled as the
maintenance cost essentially charging no additional
license fees
• SAP-CC and SCP operational costs are split
between low annual maintenance costs and
moderate license costs
• SurePay upgrade (PMO transformation) and
SurePay retirement / SAP-CC upgrade (FMO
transformation) requires high investment
• Fixed Cost includes development and operational
personnel
• Variable Cost includes maintenance costs
• License Cost includes licensing for capacity
expansion and feature enhancements
• Transformation Cost includes system integration cost
SAP-CC, SurePay, SCP Cost Comparison
$0 $5,000,000 $10,000,000 $15,000,000
Fixed Costs
Variable Cossts
License Costs
Transformation Costs
SCP
SurePay
SAP-CC
Key Differences
CAPEX

15
CAPEX Breakdown
Total CAPEX spend for FMO is more than twice that of PMO. Platform and G&S CAPEX
for FMO exceeds PMO by $5.60 million and $4.56 million respectively
FMO CAPEX
• PMO CAPEX is spread over 3 years
• Total CAPEX spend in PMO is $6.87
million
• Platform CAPEX is 21% of Total CAPEX
• G&S CAPEX is 79% of Total CAPEX
• FMO CAPEX is spread over 3 years
• Total CAPEX spend in PMO is $17.04
million
• Platform CAPEX is 41% of Total CAPEX
• G&S CAPEX is 59% of Total CAPEX
PMO CAPEX
($ millions) ($ millions)
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2012 2013 2014 Total
Growth & Sustainment
Platform
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2012 2013 2014 Total

16
Impact of Changes in Prepaid Business
Growth in Prepaid business has an incremental effect on overall costs. Decline in
Prepaid has no effect on cost.
Key Insights
• FMO OPEX is twice as sensitive as PMO OPEX to
Prepaid growth
 PMO OPEX cost increased by 7% and 13% when
Prepaid growth was 10% and 20% respectively
 FMO OPEX cost increased by 14% and 28%
when Prepaid growth was 10% and 20%
respectively
• NPV Cost Savings (difference between PMO and
FMO costs) is much less sensitive to Prepaid growth
 PMO OPEX cost increased by 7% and 13% when
Prepaid growth was 10% and 20% respectively
• Decline in Prepaid has no effect on PMO or FMO
OPEX and NPV Cost Savings
 Costs built in based on peak subscriber demand
stays permanently
Prepaid Growth Sensitivity on Costs
($4)
($3)
($2)
($1)
$0
$1
$2
$3
$4
$5
NPV Cost Savings PMO Opex FMO Opex
20% Prepaid Growth
10% Prepaid Growth
0% Prepaid Growth
-10% Prepaid Growth
-20% Prepaid Growth
($ millions)

17
Impact of Project Delay
Any delay in implementation of FMO will reduce the cost benefits and increase the time
to achieve breakeven. Analysis assumes that no PMO transformation costs are incurred
because of the delay.
5-Yr NPV Cost Savings
• If FMO is delayed by 1 year, cost
breakeven period moves by 1.3 years
• If FMO is delayed by 3 years, cost
breakeven period moves by 3.3 years
• If FMO is delayed by 1 year, 5-yr NPV Cost
Savings is reduced by $0.8 million
• If FMO is delayed by 3 years, 5-yr NPV
Cost Savings is reduced by $2.9 million
($ millions)
($ millions)
-$12
-$10
-$8
-$6
-$4
-$2
$0
$2
$4
$6
$8
2H12 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
FMO No Delay FMO 1 Year Delay FMO 3 Year Delay
-$6
-$5
-$4
-$3
-$2
-$1
$0
No
Delay
1 Yr
Delay
3 Yr
Delay
Breakeven
Point 1.3 Yrs 3.3 Yrs
$0.8M
$2.1M

18
-$12
-$10
-$8
-$6
-$4
-$2
$0
Impact of Project Delay
Any delay in implementation of FMO will reduce the cost benefits and increase the time
to achieve breakeven. Analysis assumes that both FMO and PMO transformation costs
are incurred because of the delay.
5-Yr NPV Cost Savings
• If FMO is delayed by even 1 year, cost
breakeven will not be achieved for over 10
years
• If FMO is delayed by 1 year, 5-yr NPV Cost
Savings is reduced by $4.9 million
• If FMO is delayed by 3 years, 5-yr NPV
Cost Savings is reduced by $7 million
($ millions)
($ millions)
No
Delay
1 Yr
Delay
3 Yr
Delay$4.9M
$2.1M
-20
-15
-10
-5
0
5
10
2H12 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
FMO No Delay FMO 1 Year Delay FMO 3 Year Delay
Breakeven
Point

19
Agenda
 CAPEX Breakdown
Summary of Findings
 Recommendation

20
OCS Platform Cost Analysis Summary
Summary of Findings
 Implementation of FMO will result in a 5 year NPV of -$2.7 million
 Cost breakeven will be achieved in 2Q 2019 following FMO
transformation
 Total CAPEX spend for FMO is more than twice that of PMO.
CAPEX delta is $10.17 million. CAPEX spend is spread over 3
years.
 FMO operation will result in a cost saving of $1.79M each year after
transformation compared to PMO operational costs
 SurePay has high annual cost ($1.6M AMC) and it includes license
cost for Prepaid subscribers
 SAP-CC and SCP has lower annual cost ($1.1M AMC) but charge a
license fee for capacity
 Growth in Prepaid business has an incremental effect on overall
costs. Decline in Prepaid has no effect on cost as once costs are
built in (based on peak subs) it cannot be taken out
 Any delay in implementation of FMO will reduce the cost benefits
and increase the time to achieve breakeven
Baseline Assumptions
• All costs are adjusted to a PV of June
30, 2012
• 2012 costs are accounted for the 2nd
half of the year only where applicable
• PMO and FMO transformation is
expected to take 18 months
• No project delay means the
transformation will be complete by
end of 2013
• Prepaid market forecasts a decline of
10% in subscriber growth
• Some costs (e.g., customer care) that
are not expected to change between
PMO and FMO are not accounted for
Model Risks
Model output is sensitive to a few inputs
that are being refined. They are:
• Personnel cost data
• BT cost for SurePay retirement
• Ericsson SI cost

21
Recommendation
Summary of Findings
 Initiate FMO as the first step towards realizing a converged OCS platform
across MNO business groups
 Choose <XYZ> based on pricing, initiative and industry standing
Recommended
Approach
Option 1:
Keep PMO
“Status Quo”
Option 2:
FMO with Ericsson
“OCS on Steroids”
Option 3:
FMO with BT
“OCS D-I-Y”
Pros
Cons
• CAPEX is lower than that of
FMO transformation
• Prepaid may not be a growth
market
• No scope for adding service
bundles or other new products
• SurePay still requires upgrade
• High OPEX cost
• Upkeep and maintenance of
two OCS platforms
• SAP-CC/SCP is a flexible OCS
platform that can handle new
Prepaid and other products
• OPEX cost savings of
$1.79M/Year
• High CAPEX, exceeds PMO
by $10.17 million
• Limited experience working
with Ericsson
• Same benefits as Option 2
• Higher cost than Option 2
CAPEX: $17.04 million
OPEX: $1.78 million
NPV: -$2.7 million
OPEX: $3.57 million
NPV: N/A
OPEX: $1.78 million
NPV: -$7.1 million
Strategic
Alignment

Prepaid OCS Convergence Model

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