April 2011
New mobile services, devices and higher-bandwidth networks are transforming the way we live and work, and are dramatically altering the competitive landscape in the communications, media and technology industry. Despite the enormous growth potential that mobile services represent, the scale of network investment required to achieve the performance that customers expect—and the increased need to support complex services—can actually threaten the entire business case for a company’s mobile broadband services.
For a typical mobile operator, network costs represent between 20 percent and 30 percent of operating expenses, and between 60 percent and 70 percent of capital expenses. As data volumes increase and the deployment of 4G networks proliferates, so will network costs. Such increases, combined with uncertainties about how to monetize higher levels of data traffic, represent a continuing challenge to operators and could hinder future profitability and cash flow.
One important strategy companies are pursuing to address this challenge is network sharing—a formal arrangement between two or more mobile operators to share various components of their networks.
Historically, networks have been considered areas of competitive differentiation. The marketing messages of operators in both the United States and United Kingdom, for example, frequently emphasize superior network performance and coverage. This point obviously needs to be carefully considered.
However, from another vantage point, many network components today are simply table stakes and may not be true differentiators. Indeed, by focusing on cost-cutting measures such as network sharing, management may be able to reinvest savings into alternative differentiating strategies such as customer service, innovative offerings, and being first-to-market with new devices.
Although network sharing has been a potential opportunity for some time, it has only really taken off in the last few years as operators have been forced to respond creatively to escalating costs. Starting in about 2007, major network sharing deals have been signed across most geographies including Asia, Europe and North America.
Based on Accenture’s experience, a well-executed network sharing venture has the potential to deliver 20 percent to 40 percent reductions in standalone cost run rates. From one-third to two-thirds of those benefits are rooted in cost avoidance, with the balance resulting from actual cost reductions. Equally important, network sharing can help an operator significantly accelerate deployment speed, plug coverage gaps and grow revenues without increases in network costs.
Negotiating, planning and managing a network sharing deal requires executive leadership to overcome multiple complexities that include organizational integration issues and regulatory challenges. Companies must also manage network operations that are both uniform and consistent while still being separate. Operators that are able to tackle these challenges have an opportunity to control costs and achieve market advantage in the years ahead.
The business case
For a typical mobile operator, the majority of network costs come not from the core network—the high-capacity backbone of the system—but from the access network, often called the “edge.” This includes “backhaul”—the microwave, fiber or copper connections between the core network and base stations—and the “radio access network,” the final connection between a base station and a device. A recent Enders Analysis report found that these elements can account for more than 80 percent of incremental network costs. Most network sharing arrangements will therefore cover one or more elements in the edge, while the backbone is rarely shared.
In considering the benefits of network sharing, it’s important to understand the potential results of such a strategy in terms of both cost savings and cost avoidance. That is, will an operator accrue savings now, or will it avoid costs in the future?
Savings are usually realized by consolidating two network infrastructure footprints into one, eliminating redundant sites and connections. Cost avoidance is delivered by using another operator’s network sites or leveraging a joint deployment strategy, thereby reducing start-up and operational costs. The details of the business case need to be clearly articulated at the start of a venture, and reinforced during the lifetime of the deal through clear benefits reporting.
In addition to cost-related benefits, operators often receive a top-line boost from network sharing. By using a partner’s existing sites, operators can accelerate deployment of services and improve customer experience and retention. These have obvious positive impacts on revenues.
Other benefits are more intangible, such as an improved reputation as a “green” company. Network sharing can reduce an operator’s carbon footprint and lessen the impact on local communities by reducing the number of cell sites required.
Three success factors
Successfully capitalizing on a mobile network sharing strategy depends on careful planning in three key areas.
Choosing the right organizational model
A formal network sharing partnership requires a dedicated organization to manage it. These arrangements are generally of three types. An operating joint venture involves both parties contributing financial and human resources to the organization. An asset-owning joint venture involves having the network sharing organization take control of the assets and liabilities related to the network share, with each party having an equity stake in the organization. Another arrangement is one where a neutral third party operates and manages all aspects of the network sharing venture and charges back all relevant costs to the different partners.
If the sharing partners are similar in terms of spectrum position, backhaul strategy and market share, the first model is often the most appropriate. The other two models work better when there is a significant difference between the sharing operators.
Regulation
A number of important regulatory constraints, especially those focused on the impact of network sharing on competition, must be carefully considered and managed. Typically, operators cannot use network sharing to reduce competition or coordinate their market behaviors.
This restriction can hinder rollout synergies because it limits the extent to which the sharing partners can align their plans. Only the joint-venture organization is permitted to view both operators’ intentions, but it cannot share this information with either party. Both operators need to be aware of these constraints and not be tempted to compromise them in a way that would increase regulatory risk.
Integration
Successful network sharing requires meeting several integration challenges across systems, processes and people.
From a technology perspective, the success of a network sharing venture depends on the ability to align the information systems across the different organizations and to keep the information consistent for both. Network processes will also overlap, so it’s important for operators to understand each other’s existing processes, delineate the responsibilities each operator will have, and make any needed changes to either side’s approaches to support the success of the venture.
Because network sharing changes the way people work, effective change management activities are important, including clear communications, team building and support for culture change.
The common thread among these success factors is strong program management. A dedicated program management function—which drives the coordination and integration of the consolidation and rollout—can make the difference between success and failure of a network sharing venture. Some operators are looking to improve speed to value by leveraging a third party to deliver program management—an organization that can bring experience from other similar ventures and that can, by being neutral and not aligned to either side, be in a better position to make difficult decisions.
Conclusion: The case for network sharing
Network sharing is a significant opportunity for network operators to keep costs under control while also improving the customer experience and, therefore, retention. Although the overall business case is compelling, operators need to be aware of the subtleties that underpin it, specifically around cost reduction versus cost avoidance. In addition, benefits will be difficult to achieve without effectively addressing a range of operational and management challenges around the organization, integration and competitive aspects. Getting these right will significantly improve an operator’s chances of driving advantage from a network sharing strategy.
Finally, senior management must consider the impacts on brand positioning. A differentiation strategy based on network quality might no longer be possible—though, with the advent of high-speed 4G networks, using quality as a distinctive capability seems on the decline anyway. Based on current trends, operators focusing on brand, devices and customer service—as well as on cost control—appear poised to move ahead of the pack.
About the authors
Christian Rouffaert is Accenture’s head of network strategy for the United Kingdom and Ireland.
Warren Tucker is Accenture’s network practice lead in the United Kingdom and Ireland.
Paul Bultema is Accenture’s strategy lead for the communications industry in the United Kingdom and Ireland.
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