So called “happy pipe” companies can generate 7.4% returns,
but smart services can push the figure to 13.3% 
                         
                         
Back in February 2011 Tellabs commissioned some research designed to scare the CEOs, CTOs and especially the CFOs of mobile operators worldwide, especially in developed markets.
Mobile networks in many of the developed regions of the world will be making a loss within the next three years without major redesign, said the study, which used data from market analysts Analysys Mason.
It showed the demands of carrying data over mobile networks will push operators into loss as early as the first quarter of 2013. North America would be affected first, said the study, followed about six months later by the developed nations of the Asia Pacific, and then after a further few months by western Europe.
Now Tellabs has come back with a further report, designed to identify the major trends towards what the vendor sees as the answer — something it calls “smart networks”, designed to deliver the greatest cost efficiency.
“What is it that the service provider can do?” asks Pankaj Shroff, director of strategy at Tellabs. “Smarter networks are an imperative.”
The new report has been produced by STL Partners, a consultancy that is largely responsible for the Telco 2.0 idea — a name, incidentally, that it claims as a trademark. “They surveyed 100+ operators around the globe,” says Shroff. Then STL looked in detail at 12 operators to carry out case studies.
“The results are outstanding,” he says. “We have a metric to measure success: how well a company is doing in terms of cash returns.”
Service providers have had a relatively comfortable life for some time. “They have put money into dividends, and dividend yields have risen significantly — so now they look like utility companies,” says Shroff.
“A typical utility has a return on capital of 5.8%,” he says. That’s what STL gauges as the typical return for a current “telco 1.0” operator. STL has split the future telecoms industry into two categories — “happy pipe” companies which produce a return of 7.4%, with a smart network; and “full service telco 2.0” companies delivering smart services and generating 13.3%. “Google’s cash return is 16%,” says Shroff.
“The term ‘dumb pipes’ is thrown around a bit. We wanted to look past the rhetoric.” Some companies say that they will be pipes companies. “But there is a second step: larger companies can build and roll out smarter services, and extract more from under-used assets.”
Vikram Saksena, CTO of Tellabs, added: “In the face of stagnant share prices, investors now demand higher dividend yields, limiting mobile operators’ ability to fund growth. It is vital that operators increase return on invested capital to boost their stock performance. The Tellabs-STL report demonstrates the real value that mobile operators could return with a strategy that focuses on leveraging smart networks to deliver smart services.”
While mobile network operator stocks demonstrated huge growth over the last 10 to 20 years, now that growth has slowed or stopped. Operator stocks have become utility stocks, says Tellabs, causing investors to demand higher dividend returns, in turn reducing stock value and limiting funds available for new investment.
The report says that, in order to boost performance, operators need to move from current practices — such as relatively dumb networks and one-sided business models — to full service offerings with smart services enabled by smart networks. This transformation requires infrastructure changes to increase the awareness and intelligence of networks, as well as using these new capabilities to develop smart services.
Chris Barraclough, managing director of STL, said: “Make no mistake, these are not easy moves for mobile operators to make. There is a great deal of work that needs to be done to move towards smart services, including many business models, technological and cultural shifts. If operators can successfully implement a Telco 2.0 smart services strategy, they can really boost financial performance. But the analysis in the report reveals that many in the industry feel such a full-service offering is beyond most operators.”
Shroff added: “Scale matters. Scale is a big factor, no doubt about it.” A large operator has the resources to gain more subscribers and to invest more in technology. “They can offer better costs and a better experience. That is what smart networks are.” GTB
                                 
Further reading from Global Telecoms Business:
LTE will be the unifying technology for the world's mobile ... 16 Dec 2011
Africa and Middle East to reach 18m LTE users by end of 2015 13 Dec 2011
Mobile industry is running out of room for expansion 14 Nov 2011
India's broadband plans hit by lack of spectrum, says MTS's ... 10 Nov 2011