No Matter How You Slice it, Carrier Business Models Must Change

By Mika Skarp

Before we get into the first full season of “Telecom 2017” it’s a good idea to review seasons past and familiarize ourselves with the basic story line. The quick synopsis follows the standard "boy meets girl, boy loses girl" formula but as applied to revenues. This is the basic formula:  # of users X subscription price = revenues MINUS the cost of network infrastructure + the cost of operating infrastructure + the cost of customer accusation = bottom line.

Perhaps needless to say this is just a price game since every operator provides exactly the same service within their standardized networks using similar processes. Global standards have been the driving factor in lowering prices of services and devices for consumers because the demand is continuous and theoretically unlimited. Add to that increasing competition for market share and the prices just keep going down. We can observe this in periods where new technology arrives on the scene along with the requisite customer experience and capacity enhancements but the service prices stay the same in order to maintain market share and minimize churn. Customer acquisition is major line item.

On the cost side, while they certainly are significant, the introduction of standardized commercial hardware, high volume purchasing and simplified architectures have drastically reduced capital expenses for carriers. On the operational cost side new, better and more flexible technologies as well as greener industrial practices and reduced energy consumption have all contributed to considerably lower opex Costs.

So while costs are down and revenues are too, the telco business is looking fairly stable if in steep decline. Of course technology marches on and new competitive threats like ubiquitous WiFi are taking a bite, but it's quite clear that the future very much still lies with mobile. That said, there's a lingering sense among carriers that someone is eating their cake, and in some sense they are right. But was it ever really their cake? Facebook and Google are growing fast but they are operating with completely different business models. Just because demand for mobile capacity is growing exponentially while carrier revenues are flat doesn’t mean carriers are being robbed or that OTT providers that leverage operator networks to deliver services to end users are at fault. It’s the carrier business model that needs an upgrade.

There is great promise that 5G will bring a lot of new use cases for mobile operators and there’s good evidence to support that prediction. Both 4G and 3G ushered in wholesale changes to the mobile landscape. But looking at the same generational watersheds purely from the perspective of the carrier’s business, one thing is certain; If mobile operators don’t sell 5G differently than in previous Gs, their revenues won’t increase.

But there are very good indications that they will. With the advent of Network Slicing, 5G will allow operators, service providers and end users to leverage one network for any and all applications under the sun including mission-, and life-critical applications.

To this end, and to make a real and sustainable difference on the top line, mobile operators willneed to sell 'slices' of their network based on the value of those different slices. Arguably one of the greatest and most fundamental flaws in the carrier business model has been the one-size-fits -all approach to capacity and reliability (with an emphasis on the latter). But to sell a network slice operators need to fully understand the customer segment that solution has been built for. And that means not every operator will be equipped to take on every single segment and use case. You have to choose your verticals.

Another Way to Slice it
An alternative to this is go the way that Mexico has. Mexican carrier Altan has signed a deal with its government to build a nationwide 4G network on 90 MHz of bandwidth with the sole purpose of selling its capacity off to MVNOs. This is a concept I like to call the “Smart Pipe”. It is assumed that there will be over 300 MVNOs in Altan’s network. Wow, that’s a lot of smart pipes! And in this scenario an ecosystem begins to take shape in which multiple MVNOs can carve up the market around different verticals and customer segments and actually serve all possible use cases in the process. The only challenge remains a technological one (though already solved) and the vision to implement these necessary technologies to support a full-scale network sliced mobile services ecosystem. 

We’ll be having these discussions and many more at this year’s Mobile World Congress in Barcelona. You can find Cloudstreet in the Finnish Pavilion, Hall 5 at booth 5F31 at MWC17. If you’d like to book time with us in advance, feel free to reach out to me at mika.skarp@cloudstreet.co or brendan.walsh@cloudstreet.co I hope to see you there!