McKinsey Telecoms. RECALL No. 08, 2009 - High Growth

Telecommunications
RECALL No8
Networks
RECALL No 8 Networks
Welcome ...
to the 8th issue of Recall, a publication for leaders in the telecommunications industry. Within the overall operations and technology (O&T) arena, this issue focuses on networks and extends the McKinsey publication series on marketing and sales themes, launched successfully last year. There is a strong, growing management interest in O&T topics in the telecommunications industry. Besides the challenges of stagnating growth and declining margins in many parts of the world, it has been undergoing major technological changes some marking progress while others have been disruptive. New entrants and alternative, innovative business models present ongoing hurdles to established structures. This has led to a greater focus on managements part in delivering services not only efficiently and effectively but also with maximum service quality in mind thus seeking competitive advantages from operations and technology. Successful operations in this environment require close senior management involvement in identifying opportunities and options, to devise optimal solutions, and to drive mindset changes across the whole organization. This publication aims at providing a comprehensive view of priority operations and technology issues, covering the range from new network technologies to IT and from service operations to procurement, discussing both innovative technical solutions as well as challenges arising from operational transformations. In this series, well recall how successful companies manage their operations and technology base but also offer our emerging perspectives and outlooks for the future. Networks are the backbone of the industry, as they are one of the main cost elements of telecommunications operations. Networks are also the primary arena for ongoing technology innovations. We begin this issue with an introduction to network operations and technologies, exploring the ways to do more with networks with less money. In the next article, we discuss the value of fiber networks and follow that with a look at the challenges of consolidating and offshoring certain functions within network operations. An overview of network outsourcing is next on the agenda and leads to a discussion of wireless business models, a look at the exciting new technologies of femtocells and 4G, and the case for alternate spectrum use. We round out this issue with an interview with Mads Middelboe. We were very excited to sit down with the CEO of TDC Mobile and get a firsthand account of operations and technology issues in telecommunications. Over the past several years, McKinseys Global Telecommunications Practice a group of more than 380 dedicated practitioners and over 60 research analysts has built extensive capabilities in telecoms operations and technology. Through our global practitioner base, we now bring these capabilities to the service of our clients. The authors of Recall are all members of this practice, and each of us hopes that you find this series useful and that it provides insights that trigger ideas or discussions around the challenges and opportunities you face. We look forward to your feedback on the articles in this issue and to your thoughts on topics you would like to see covered in future issues.
Jrgen Meffert EMEA Leader of McKinseys Telecommunications Practice
Tomas Calleja Co-leader of McKinseys Operations and Technology in Telecommunications Practice
Klemens Hjartar Co-leader of McKinseys Operations and Technology in Telecommunications Practice
Fabian Blank Leader of the EMEA Mobile Operations Service Line and Editor of this RECALL issue
RECALL No 8 Networks
Contents
01 02 03 04 05 Introduction to Network Operations and Technologies High Fiber Diet: The Value of Next-Generation Access Networks Over the Seas of Complexity: Consolidating Mobile Network Functions Offshore Offloading the Core: Exploring Network Outsourcing Mobile Networks of the Future Building a Sustainable Wireless Carrier Business Model The Value of Femtocells The Rocky Road to 4G The Alternate Spectrum Opportunity 06 The Power of Letting Go 9 15 21 27 35 35 41 45 49 53 59
Appendix
RECALL No 8 Networks Introduction to Network Operations and Technologies
01 Introduction to Network Operations

and Technologies
With change quickly becoming an industry watchword, network operations represent a key telco priority. Understanding which technologies will transform the network operating model and their operator-specific challenges is fundamental to success. In a rapidly changing industry where players must deal with fading top-line results and shrinking bottom-line predictions, fixed-line and mobile operators face the twin tasks of exploring new business models while becoming significantly more efficient. Telcos must also confront the reality that the introduction of new services will do relatively little to reverse the deceleration in revenue growth or the outright sales declines. These new services, such as IPTV for fixed carriers or mobile TV for wireless operators, will instead bring additional costs, thus placing more pressure on already stretched margins. Operationally complex services will lead to increased call center volumes, for example, while new services will generate higher sales and marketing costs and probably additional investments in network capacity. Compared to voice, the average provisioning cost per gross add for IPTV is two to three times as great. Convergence and increased competition will just make this picture more complex.
understanding the commercial possibilities these new technologies bring, their potential impact on business models, and the changes they could effect in the competitive and regulatory landscape. On the other hand, network operations represent a critical area in which telco managers must improve in order to compete successfully in the industrys likely less profitable future environment. By optimizing current network operations and leveraging new technological possibilities, telcos can work to keep pace with the increasing demand for products and services while maintaining or improving margin levels. In a nutshell, operators need to find ways to reduce cost in order to finance the new investments. To this end, operators must ensure transparency of the cost structure across their operating model. The current telco operating model incorporates four major dimensions (Exhibit 1): customer service (sell), product innovation (innovate and develop), the network itself (access), and support services (support). Differences arise in terms of where costs occur for fixed and mobile players. For example, for fixed operators the network itself, with its hardwired tentacles reaching out across the market, represents about 60 percent of a companys total spend (i.e., operating expenses opex and capital expenditures capex). Customer service represents about 20 percent, support services account for 15 percent, and product innovation holds the smallest share at 5 percent. Mobile operators, on the other hand, find most of their costs (50 percent) in customer service, while the network with its wireless efficiency consumes only 25 percent, support services represent about 20 percent, and 5 percent is spent on product innovation.
The networks growing role

McKinseys research in this context of change indicates that the network will play an increasingly important role among both fixed-line and mobile telcos. On the one hand, new network technologies will enable new services (e.g., IPTV, mobile broadband, femtocell-based services, and others). A key telco challenge involves
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Telecoms operators costs comprise 4 domains
Analyzing costs, capex accounts for about a quarter of a typical fixed-line incumbents total cost in Western Europe, with much of this (about 95 percent) focused on the network itself. Operating costs make up the remaining three quarters of a fixed operators total cost, with the network requiring about 45 percent. For a mobile operator in Western Europe, capex makes up about 15 percent of total costs, with much of this (about 80 percent) concentrated on the network. Opex accounts for the remaining 85 percent of total costs, with customer service accounting for about 60 percent followed by the network at about 20 percent.
tenance, and basic infrastructure. Combining these two mapping approaches allows managers to create a cost matrix that can serve as the basis upon which they define and prioritize cost reduction levers. From a network domain perspective, most costs arise in the customer access domain while, from the viewpoint of the high-level processes, most of the costs originate in the supervision and maintenance areas. For the integrated player in Exhibit 2, the key element of the cost structure involves supervision and maintenance of the customer access domain. This matrix will present different cost structures depending on the type of operations (e.g., fixed, mobile, integrated) and the level of maturity. For example, mature operators with no major network rollout investments should focus on optimizing the supervision and maintenance processes, whereas growing operators (e.g., mobile operators in emerging markets) must work to reduce implementation and deployment costs, especially regarding capex optimization. This transparency should allow operators to evaluate different operational efficiency levers that, for an integrated operator, can yield cost reductions in the order of 35 to 40 percent of the total network cost base:
Highlighting network costs and leverage points

Given the central role network improvement plays in their value propositions, successful telcos will make this work a priority. Overall, managers can map out a networks cost structure based on seven key areas known as domains: the networks IT system and operational support systems (OSS), customer access, aggregation, transport, platforms, the core IP network and, for wireless players, the mobile network core. They can also map costs across five main, high-level processes: design and planning, implementation/ deployment, provisioning, supervision and main-
RECALL No 8 Networks Introduction to Network Operations and Technologies
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The matrix gives the integrated operator perspective on the various elements of overall network costs
1. Efficiency levers that are independent of a telcos business model, such as the adoption of lean network operations, network outsourcing, and wireless network consolidation 2. Levers that depend on a telcos specific assets, such as fixed/mobile integration and cross-border synergies 3. Radical moves that represent major business model shifts, such as network sharing, structural network separation, and significant complexity reduction (e.g., no frills) 4. Technological transformations that can have a potential impact on the telcos business model.
One example of such a transformation is the rollout of a Next Generation Access Network, both for fixed and for mobile operators. Fixed operators are exploring or already rolling out alternatives to the traditional copper access network. The debate over FTTH vs. FTTC developments is not new, but it has intensified of late as the cost and performance gaps between the two network alternatives have narrowed. Most fixed operators in Western Europe have already made a decision based on commercial business cases and on the hope that the endgame will be a network with a lower opex. Yet the question for network operations managers remains to what extent are fiber developments really reducing opex, and what is the best way for operators to capture these potential savings? In the mobile arena, wireless broadband access networks open the door to the next big thing in terms of applications and services, as consumer and business adoption of mobile broadband services starts becoming a major growth engine for wireless operators. In this context, several technological options are emerging for operators to satisfy the increasing bandwidth demands. Beyond current 3G/WCDMA networks, the 4G race has already started between technologies such as LTE, Mobile WiMAX, and UMB, and operators will start
Charting a technological network transformation

New network technologies can enable telcos to take advantage of the commercial migration toward new, high-capacity access approaches. They promote technological renovation, make new, more efficient operations possible, and simplify and rationalize the network, eliminating obsolete elements and avoiding duplications.
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making their decisions on their migration paths in the coming years. Finally, some hybrid (fixed/wireless) access network alternatives are receiving increasing interest from operators globally. With major infrastructure players such as Motorola and Ericsson already investing in this technology, femtocells i.e., indoor base stations are set to cause fundamental changes in the industry if key uncertainties are resolved. On the backbone side, the main technological transformation ahead for operators is the switch to an all-IP operation along the aggregation and switching domains. This would allow a radical reduction in switching/ aggregation equipment and eliminate service-edge hardware, generating savings in the order of about 70 percent. It would also result in reduced network management costs for load optimization and replace the public switched telephone network (PSTN) with IMS (IP Multimedia Subsystem) or soft switches. The newly converged POTS/data access infrastructure will reduce the amount of time and effort needed for installations,
and the all-IP approach would eliminate traditional ATM and SDH transmission approaches in favor of Gigabit Ethernet aggregation. In the core network, the shift to all-IP would result in significant reductions in backbone switching and core equipment, producing savings in the 40 to 60 percent range, depending on the specific situation. It would allow network management centralization and process simplification, reduce maintenance costs by 40 percent, and cut space, power, and HVAC costs approximately in half. *** As the traditional industry gives way to new competitors and new ways of doing business, telecoms players need to find ways to deliver the profitable growth that investors require and the products and services that subscribers demand. Given the central role the network plays in deliver ing customer value, incumbents can ex plore a multitude of cost-saving technologies and techniques that will allow them to do a lot more with their networks with a lot less money.
Duarte Begonha is a Principal in McKinseys Lisbon office. duarte_begonha@mckinsey.com
Hugo del Campo is a Principal in McKinseys Madrid office. hugo_del_campo@mckinsey.com
Javier Gil Gomez is an Engagement Manager in McKinseys Madrid office. francisco_javier_gil_gomez@mckinsey.com
RECALL No 8 Networks High Fiber Diet: The Value of Next-Generation Access Networks
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02 High Fiber Diet: The Value of
Next-Generation Access Networks
With few applications requiring its blazing access speeds, many telcos are still aggressively pursuing fiber. Holistic modeling ensures the right rollout strategy and a prof itable investment. Internet usage continues to expand at phenomenal speed. Demand for bandwidth has kept pace, creating a completely new playing field for service and applications providers in terms of what kinds of services can be offered through Internet/DSL connections. YouTube and Akimbo are examples of service providers with business models that rely on high-speed access. Despite the fact that from an application point of view no real demand exists for access speeds beyond those that ADSL2+ can deliver (i.e., 20 to 25 Mbps), most operators worldwide are mobilizing to transform their access networks in order to accommodate the ever-increasing demand for bandwidth (Exhibit 1). From among a number of different technology solutions, deploying pure fiber close to end customers has emerged as the potential silver bullet for telecoms operators one that could suddenly transform 30 Mbps into a mass-market product. High-speed applications are seeking new, faster avenues into the home. For example, standard-definition TV requires only 3 to 4 Mbps per channel, while high-definition TV calls for speeds in the 8 to 10 Mbps range, and multi-feed HDTV streams would need even higher speeds. Major telecoms operators have already announced more than EUR 100 billion in fiber investments, accounting for more than 90 rollouts worldwide a fair amount of money considering that current applications dont even need the speed. So, what is really driving this investment frenzy? McKinsey
research reveals three goals that have whetted the industrys appetite for fibers high speed. Defend market share. Competitive pressure continues to grow as telcos aggressively push triple-play offerings (i.e., TV, telephony, and high-speed Internet access) and as cable operators eat into the margins of incumbent telecoms operators around the world. Cable operators enjoy an existing network infrastructure that supports much higher speeds than a telecoms operators legacy access network, which is limited by the last mile connection to the typical customers home or business, usually consist ing of lower-speed copper. Furthermore, upgrading to fiber speed (i.e., 100 Mbps+) could also be done more quickly and at a lesser relative cost by a cable operator, should the demand arise. Many cable operators worldwide already provide 20 Mbps+ Internet access services to their high-end customers. More than a few telcos, however, face a structural impediment that prevents them from being able to offer similar speeds. Due to existing local loop lengths in Europe, for example, without fiber only 30 percent of EU consumers could be reached with a 15 Mbps product and only 12 percent would have access to 30 Mbps. The figure is even lower in the US. Protect the industry structure. Another reason for the industrys switch to fiber has emerged from an unusual corner. In some markets, government initiatives to fund fiber rollouts have become serious threats to incumbents. In Switzerland, for example, local municipalities decided to fund a fiber rollout across Zurich, with other large European cities such as Amsterdam and
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The trend of increasing bandwith will enter the fiber zone in the next few years
Stockholm following suit. These governments decided to leapfrog the incumbents investment decision because providing high-speed broadband access to businesses and consumers has become an increasingly crucial success factor for regions and cities. In the long term, reshaping the industry in this way could have disastrous consequences for the future revenue streams of existing network providers. Proactively managing the home market industry structure by launching the rollout of a fiber network could help incumbent operators counteract possible future moves by governments or municipalities. Attract consumers seeking high-speed access. Despite the small number of speed-needy applications, the appetite for high-speed Internet access among consumers appears to be growing quickly. In Japan, for instance, demand for ADSL has virtually disappeared since NTT introduced a 100 Mbps FTTH (fiber to the home) solution. While cable maintained its market share, NTTs 100 Mbps fiber offering quickly captured virtually the entire ADSL market. A surge in demand for cutting-edge access services could help operators not only attract new customers
but also migrate existing customers from old legacy networks more quickly. Furthermore, speeding up the shutdown process of old networks helps operators reduce costs. In the long term, fiber can certainly be considered the most viable solution for meeting the growing demand for fast access because the operator will be able to accommodate bandwidth demand beyond 100 Mbps and provide equal speeds for uploads and downloads. In the short term, however, an investment in a fiber access network is a huge challenge both operationally and in financial terms. Given the current lack of applications demanding fiber-optic speeds to secure future revenue, the business case for fiber deployment needs to be carefully considered.
Modeling fibers future

Because the impact of competitors, regulations, and government interaction is far too important to be neglected, no silver bullet exists for a fiber strategy that can be applied in every market. Additionally, since a fiber rollout represents a huge capex (capital expenditure) investment in many cases as much as 30 percent of total capex spend with little (or no) short-term return in sight, getting it right the first time becomes critical. For this reason, a telecoms operator must develop its
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Our model builds on 3 main input parameters and determines the case for fiber on micro-market level
fiber strategy with micro-markets in mind, taking into consideration all aspects of the specific regional market conditions the company faces. McKinseys approach to making the telecoms operators business case for the optimal next-generation access strategy takes a holistic view of the operators current situation (Exhibit 2). It builds on a detailed neighborhood analysis of the local conditions for each central office that the operator runs within its home market. The modelis built on the following three drivers: Market drivers include demand, competition, and technology. In terms of demand, operators need to determine the areas current broadband penetration and whether it is expected to grow over the next five years or has already reached saturation. The competitive assessment should include a detailed understanding of the operators current market share in the area, the status of cable operator and/or telecoms attacker positions, and a clear perspective on whether a more or less aggressive environment can be expected in the future. Technology issues include understanding the operators current coverage in terms of ADSL technology and the status of the equipment used.
Capex drivers comprise the cost to rollout fiber in the specific area, the cost to upgrade and extend the number of street cabinets, and the installation costs, including customer premises equipment (CPE). Opex drivers are the set of issues that relate to the degree to which operations and maintenance costs would increase as a result of a fiber rollout. Answers to a key set of questions will determine the drivers of an operators opex: To what degree would a fiber rollout increase operations and maintenance costs? By how much could smarter services processes (pre-provisioning or an automated distribution frame) reduce costs? Would a fiber rollout impact power costs? Are there savings to be found by freeing up space (real estate) from legacy network equipment and shutting down central offices in a given area? By analyzing the above-mentioned factors and weighing them against each other, an operator can gain a true perspective on how the rollout plan should be developed local area by local area in order to make the investment profitable. The result would look very different from a traditional incumbent operator rollout plan, since the focus would not be nationwide, applying the same technology universally to all customers. Instead,
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The regulatory framework can significantly reduce the profitability of a fiber investment
area-specific approaches would be chosen, all depending on the above-mentioned factors. For example, FTTH could be the best alternative for densely populated areas with high broadband penetration rates and high market shares, while FTTC (fiber to the curb) or DSL may work best in less densely populated areas that still have a high demand for broadband. Areas already heavily penetrated by cable and/or those with very low broadband penetration might not even justify an investment at all at this point. In other words, an incumbent must undergo a complete change in mindset to make a multibillion dollar fiber investment successful, abandoning the old belief that one service fits all and, instead, incorporating a carefully planned mix of technologies and implementation strategies for each local market in which the company is active.
or both) will be an addition al component that managers must control and maintain within the network, alongside DSL and other legacy networks. NTT decided to undertake a complete migration to FTTx (i.e., FTTH or FTTC) in a single process by leveraging existing network assets. The company faced specific challenges, including the need to convince customers of the value of FTTx, to design a completely new process to reduce opex, to put operations skills training in place, and to migrate to a brand-new system while reshaping the existing one. Verizon, by contrast, chose to split the value chain (i.e., FTTx versus non-FTTx), managing both operations separately. In doing so, Verizon had to contend with several hurdles, including complexity management issues in terms of operations and systems as well as an increase in opex, the duplication of some systems, and operations skills training. Operators must also carefully consider the regulatory framework within their home markets because these frameworks can significantly reduce the profitability of a fiber investment (Exhibit 3). Thus far, three different rollout models have emerged globally. Protectionist model. Adopted in the US, this model favors incumbent operators because it does not require
Several specific challenges ahead

We note a number of operator hurdles to a successful fiber rollout in the areas of fiber strategy and regulatory frameworks. An operators chosen fiber strategy can have a far-reaching impact on its operating model. Since telcos cannot fully reduce complexity until all legacy networks have been shut down completely, deploying fiber will more likely increase complexity in the short to medium term. Fiber access (i.e., FTTH, FTTC,
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network unbundling. It provides the telco with a competitive advantage against attackers that cannot provide TV/high speed outside the direct coverage of the central office area. Open model. Adopted by many European countries, this approach obligates operators to unbundle and offer wholesale services to attackers. This model will likely result in telco market share erosion, although improved TV content quality and service/customer experience performance may change this result. Subsidy model. Some Asian countries (e.g., South Korea and Singapore) have chosen this model, whose main goal is broadband for everyone. Under the model,
governments closely involve themselves in the fiber rollout, either by subsidizing existing players that are investing in fiber or by driving the rollout process themselves. *** Incumbents have been compelled to pursue high fiber diets in order to defend their market shares, protect the industry structure, or attract consumers seeking highspeed access. Our fiber model provides critical insights regarding the challenges incumbents face in rolling out these networks. Successful operators will carefully choose from among several possible fiber rollout strategies and closely consider the regulatory frameworks under which the rollout will take place.
Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com
Eric Grob is a Principal in McKinseys Zurich office. eric_grob@mckinsey.com
Luis Miguel Santos is an Associate Principal in McKinseys Madrid office. luis_miguel_santos@mckinsey.com
Achim Wrner is an Associate Principal in McKinseys Munich office. achim_woerner@mckinsey.com
RECALL No 8 Networks Over the Seas of Complexity: Consolidating Mobile Network Functions Offshore
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03 Over the Seas of Complexity:
Consolidating Mobile Network Functions Offshore
Mobile players can reduce certain network costs by up to 30 percent by consolidating and offshoring key network functions. Assessing the potential and evaluating management commitment are essential to mak ing the right choice and ensuring successful relocation. With profits wilting beneath a one-two combination of competitive intensity and regulatory pressure, network-related costs can weigh heavily on a mobile network operators (MNOs) bottom line. As a result, most operators are considering their network cost reduction options, which include applying lean principles to network operations, signing managed services deals with equipment manufacturers or agreeing to network sharing arrangements with other operators. The most common cost reduction options share one characteristic: they focus on local costs and activities, and rightly so, since network maintenance and operations comprise up to 85 percent of non-people-related operating expenditure (opex) or two thirds of the total network opex. If considering people costs, however, the picture changes: up to 75 percent of these costs are incurred by functions that dont necessarily require a presence in the field, such as network planning. Attempts to regionalize network functions in order to cut costs tend to concentrate primarily on workforce consolidation and offshoring opportunities. Key opportunities for consolidating jobs lie in network design, planning and engineering, and network monitoring and support. As the only sizeable remote network functions, these three represent the primary areas suitable for regionalization. Offshoring possibilities also include network design and remote support for maintenance.
Within network functions, desk-based activities offer the greatest potential for relocation and consolidation (Exhibit 1). Operators interested in capturing regionalization value should build two business cases: one for planning and engineering and the other for network monitoring and support. Planning and engineering. Areas of interest exist through-out the network, including transmission, the network core, the intelligent network layer, valueadded services such as SMS and MMS, and operations support systems (OSS). In these cases, regionalized functions dont require direct access to live infrastructure, and because theyre primarily office-based, the need for specialized equipment beyond software is minimal. Planning and engineering functions that demand significant access to live infrastructure, such as radio access planning and optimization, should remain local. MNOs can regionalize or offshore all of the other functions, including the remaining radio planning and engineering, core architecture/capacity design, and OSS. Network monitoring and support. Network monitoring and support activities can be performed from remote locations (i.e., other countries) using appropriate network management systems. In addition, it is possible to redesign processes in order to maintain direct interfaces with local maintenance suppliers, thus removing the need to locate a network management center (NMC) in the country of origin. In many instances, however, regulatory and security concerns restrict operators from taking full advantage of these opportunities, since they are required to retain monitoring capabilities in the country of origin.
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Relocation and consolidation potential is highest for desk-based activities
Making the case for regionalization

The resulting business cases show that the combination of regionalization and workforce consolidation can generate significant run-rate wage savings, albeit from a small base. One company operating in many European countries identified savings of about 30 percent of the addressable cost base, corresponding to a reduction of about 1 to 2 percent of the operators total annual network costs (i.e., capex plus opex). The operator identified economies of scale and scope that brought the potential for efficiency gains to at least 20 percent of all addressable FTEs (full-time equivalents) in the network planning, engineering and monitoring, and support functions. Managers discovered that labor cost arbitrage would deliver between 70 and 80 percent of the savings, while staff consolidation would contribute the remaining 20 to 30 percent. The comparatively low savings seen in staff consolidation result from the tendency of operators to scale up most capacityplanning functions (e.g., site selection, transmission planning) based on the amount of network change taking place, so these actions couldnt simply be taken just once across all operating countries. Likewise, while design functions such as new technology assessment or systems integration could, in principle,
be addressed once, compared to capacity planning this phenomenon is less common. Another impediment involves processes and IT systems, which tend to differ across operating countries. They often rely on different vendors and have separate systems architectures and products/services, thus inhibiting the potential consolidation of design or monitoring functions. The significant role of labor cost arbitrage has valuable implications beyond the multinational realm: mobile operators active in only one country could match 80 percent of the savings available to multinational operators by relocating their remote network functions to low-cost countries without the need to involve an outsourcer. In terms of timing, operators should be aware that differences in local processes can complicate implementation. In fact, parallel implementation of the regionalization and consolidation programs could take several years in order to minimize service level disruptions. As a result, payback can take three to four years, and recruitment, restructuring, and knowledge transfer will require significant management commitment. Operators must put a number of prerequisites in place to ensure a successful regionalization effort. They need
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Potential operating frameworks consider a geographic spread of responsibilities
to establish the right governance model before regionalization can start and cultivate sufficient focus and support from both top- and middle-level management that doesnt distract from their other local initiatives. MNOs should make sure that the host country can step up the pace of recruitment without triggering significant wage inflation and also determine whether a timeline of two to three years to complete the full transition is acceptable.
regional functions could be consolidated across the group (with or without the help of an outsourcer), and the local functions could be optimized independently on a per-country basis. 3. All functions coordinated. A single group network function would drive the consolidation of regional functions and a single, cross-group strategy to optimize local functions. Outsourcing arrangements could also be negotiated for regional and local functions on a cross-group basis. The model that an operator chooses will depend on its key beliefs and the opportunities in the local markets in which it operates. MNOs pursuing the stand-alone model likely assume that the best way to capture labor arbitrage savings is for each country to act alone (i.e., creating independent near- or offshore centers). They probably also believe that consolidation savings from regionalization will be too small to be worth the cost in terms of increased management complexity. These beliefs may be compounded by the need to act in widely varying markets possibly in emerging economies or from incumbent or attacker positions in different countries. Companies pursuing the coordinated remote functions model will consider the group to be sufficiently stable
Choosing from among three network operating frameworks

For a multinational group, the divide between remote/ regional and local functions implies a choice of three natural network operating frameworks (Exhibit 2). 1. Stand-alone. Independent operating companies could deliver up to 80 percent of total identified savings through the independent offshoring of remote functions (or more than 80 percent if a network outsourcer of the right profile and with sufficient scale is used, so that economies of scale and scope can be achieved as well). 2. Remote functions coordinated. This model divides network functions between one regional and several local units. All report primarily to a group network unit and only secondarily to their country businesses. The
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Consolidation around the Globe

Examples from emerging markets Its not surprising that a growing number of operators are looking at relocating some activities off- or nearshore or at cross-border consolidation of network functions in the case of multinationals. But to date, such plans have seen varying degrees of success. Making the grade One emerging market operator benefited by establishing regionally shared services among up to six national operators, gaining economies of scale, scope, and expertise. It solidified these gains by creating a number of global best-practice sharing centers, enabling the pooling of expertise for each topic area and providing hands-on coaching for national operators. Likewise, another emerging market operator grouped the businesses of its network operations for 15 countries into regions. By dividing functions and operations between developed and developing markets, it rationalized its approach as cost-efficiently as possible. For example, it retained its chief technology officer and its data centers in Europe and North America, while centrally locating remote engineering operations in the emerging market region. The operator maintained only the radio network and field maintenance functions in-country. As a result, it captured substantial overall savings, including those gained through the creation of common processes and standardized technical specifications. Falling short Conversely, an MNO consolidated its network functions from more than 20 countries down to 3, but, in this case, didnt capture the expected synergies due to a lack of coordinated governance and an over-reliance on the remaining local teams. Consequently, most of the regionalized functions were gradually returned to local operating unit control.
and similar in priorities. They will probably also view regionalization savings as being incremental to those gained on local equipment and functions, consider a coordinated low-cost hub preferable to individual initiatives, and believe that regional management can work due to the flexibility of their management culture. If they are active in emerging markets, they will probably favor this option, since talent shortages may not allow them to replicate network functions in each country. In addition, these players might view single-vendor outsourcing as unacceptable due to vendor risk and varying local conditions. Finally, groups choosing the all functions coordinated model will likely align with the coordinated remote functions model in terms of beliefs, except regarding how to outsource. They will presumably deem single-vendor outsourcing for multiple countries acceptable and consider it less expensive than usingmultiple suppliers. Operators can implement any of these three models with outsourcing in mind. Outsourcing can enable network shar ing among competitors, accelerate savings
through vendor financing, lower the level of management focus needed, and reduce severance costs if the outsourcer is able to reallocate dismissed staff. It may also lead to increased savings if lower-cost countries host the outsourced regional functions and due to the outsourcers potentially greater scale. Additionally, a growing body of reference cases exists for outsourcing some or all network functions, so operators need not fear they are pioneering some new and untried experiment. That said, a number of drawbacks could also arise, including the risk of relying on a third party for key network functions, the probable need for an extra management layer to interface with the outsourcer, and the risk that the operator wont achieve expected service levels and cost savings.
Extending the benefits of regionalization

Operators may find that while regionalizing and consolidating network functions provides a positive business case in terms of opex savings, it addresses a small por tion of overall network costs and requires
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5 key practices ensure an accurate assessment of regionalization potential
a significant multi-year effort that poses implementation risks. When deciding whether to proceed, a multinational operator should also consider more strategic implications brought on by the needs to rationalize architectures, processes, and systems, such as capex sav ings, asset efficiency gains, and quick network/ systems rollout across countries. In the long run, such benefits will extend to the entire network capex base and could enable operators to optimize network investments significantly across countries. This is especially the case in markets with high growth potential where the network buildup remains to be completed.
to the project. The head of each network function in every country represented should conduct workshops to allot FTEs against a common internal process map and gain consensus on expert estimates of the projects overall consolidation and offshoring potential (Exhibit 3). *** Mobile operators seeking new ways to save can jointly consolidate and regionalize a range of related network functions, reducing addressable costs and capturing broader benefits in the long term. Whether this strategy is worth undertaking depends on the operators beliefs, on its market position and prospects in each country, and on its overall management culture. If under taken, making such a play successful requires that operators choose which one of the three models best fits their groups needs and competitive positioning and devote sufficient management focus over many years.
Making it all work

To evaluate a regionalization projects potential, groupand country-level chief technology officers must be open to radically reorganizing their departments and willing to commit their functional organization managers
Giorgio Migliarina is a Principal in McKinseys Beijing office. giorgio_migliarina@mckinsey.com
RECALL No 8 Networks Offloading the Core: Exploring Network Outsourcing
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04 Offloading the Core:
Exploring Network Outsourcing
Vise-like market pressure and a growing network services industry are compelling operators to significantly reduce their costs. A new approach to outsourcing is placing many on the path to achieving the savings that the market demands. Should established telecoms operators follow the attackers lead and outsource their net works? Facing top-line challenges, eroding margins, and declining incumbent market shares, industry veterans continue to seek new revenue streams and fresh opportunities to drive far-reaching operational improvements. In a recent McKinsey study (Future Telecoms Operating Model), we concluded that incumbent telecoms operators in mature markets, such as Western Europe, need to reduce their total opex + capex (operating expenses + capital expenditures) cost base by 20 to 40 percent. In addition to this focus on costs, they need to simultaneously invest in new services and technologies (e.g., the full-scale deployment of 3/3.5G access or IPTV) to remain competitive and meet capital market expectations. The network domain constitutes a significant share of total operator opex + capex (up to 30 percent for mobile players and up to 60 percent for fixed players) and is an inevitable target for achieving the next wave of performance improvement. However, the experience of most established telecoms operators is that making network performance improvements and rolling out new services at the same time is a challenge. Attacking operators have already signed large outsourcing deals that are having significant impact. Players in the United Kingdom, Germany, Scandinavia, Brazil and
elsewhere already have multi-billion dollar agreements with Ericsson, Nokia Siemens Networks, AlcatelLucent, Huawei and others to deploy, operate, and maintain fixed and mobile networks.
Operators outsourcing options

From an industry point of view, network outsourcing is still embryonic compared to IT outsourcing, and most current arrangements focus only on the out-tasking of operations such as network construction and field workforce maintenance. We observe three levels of network outsourcing, beginning with the basic out-tasking of stable operations, which can deliver savings of 10 to 15 percent through the consolidation of maintenance contracts and the capture of scale advantages (Exhibit 1). The second level often involves single-vendor end-to-end outsourcing and focuses on low-level design, rollout, and operations, delivering savings in the 30 to 40 percent range. Finally, operators can choose the extreme of sharing and outsourcing the entire network. While the benefits of this approach for established operators remain to be seen, they will likely be significant. Attacking mobile network operators have already embarked on all three levels of outsourcing, but there is an increasing number of examples of established operators pursuing full network outsourcing. One mobile incumbent transferred the full responsibility of rollout and operations to a single vendor realizing more than 30 percent savings over the lifetime of the deal while at the same time accelerating the completion of the 3G rollout.
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Operators have 3 basic network outsourcing options
A new approach to outsourcing

As observed in the market, successful network outsourcing arrangements can bring significant cost savings and accelerate new service deployment if executed well. The evidence also reveals that successful operators are adopting and adapting the best practices developed over the last decade of large-scale transformational IT outsourcing, given that functions longer experience curve and demonstrable performance regarding outsourcing. McKinsey has developed a collaborative approach to network outsourcing based on four cornerstones, which we have successfully applied to help telcos achieve significant savings while accelerating service rollout (see text box). In summary, the approach builds on the fundamental belief that outsourcing should be assessed and executed as a vehicle to achieve transformational change rather than a transformational lever in itself. If the value at stake and the activities required to capture it are unclear, it will be challenging to manage a vendor relationship. The above-mentioned four cornerstones are: 1. Create full transparency around business objectives. Operators should define clear strategic decision criteria that align with the companys overall business objectives and use them to guide trade-off discussions
and decisions. These criteria can be summarized as rapid and sustainable operating profit improvements, sustained service quality, and retained operational and strategic flexibility in order of importance. This will allow executives to assess the trade-offs between available operating model options, e.g., an inhouse executed improvement program, a partial scope multi-vendor technology outsourcing deal, or a full-scale single-vendor outsourcing arrangement. 2. Jointly exploit all improvement levers and reduce ambiguity. Operators need to think in terms of the entire business system, from customer segments to field workforce operat ions, in order to capture the most value possible and exploit all possible improvement levers to achieve the greatest benefits, including demand side levers such as product complexity reduction or increasing service deployment discipline. They also need to minimize uncertainties by collaborating with the short list of vendors early on to specify who will be responsible for what actions and decisions. The first, crucial step is to create a comprehensive picture of current and projected capacity and activity volumes as well as underlying cost drivers for each technology platform. Since the value levers will be very different, e.g., for a wireless 3G platform compared to fixed voice TDM platform, so will the sources of vendor-added value in an outsourced
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Jointly negotiating value add minimizes ambiguity of operator-vendor relationship
arrangement. As a result, the prerequisites for jointly capturing that value will be varied as well. As an example, the biggest source of value in outsourcing a 3G access network typically lies in single-vendor optimized planning and the rollout of managed capacity (primarily capex), whereas for a TDM network, increasing utilization of field workforce and accelerating the closedown of redundant sites is often valuable. Exhibit 2 illustrates the logic (wireless access platform example) for why operators should establish clarity concerning their internal ability to improve and the vendors ability to incrementally add value. In our experience, up to half of the value creation in an outsourced arrangement is subject to the ongoing participation of the operator. At the very least, the operator will be involved in the decision making. In wireless, we have seen as much as 15 to 20 percent in incremental savings plus accelerated rollout of new capacities captured via single-vendor outsourcing models using this approach (Exhibit 3). A typical value creation assessment should in the end also include a view on internal management capacity and experience to run an in-house, large-scale operational transformation program on top of the business as usual. A common conclusion is that many of the identified performance improvement initiatives that could be pursued in-house are more likely to succeed using an outsourced model.
3. Craft a deal that accelerates value capture. Telcos need to ensure the alignment of key deal mechanisms and the companys overall business objectives. Among these are commercial mechanisms as well as deal terms. The purpose of the former is to translate the value realization plan into services, prices, and volumes and incentivize both the operator and vendor to act in accordance with the agreed-upon objectives of the deal. These mechanisms include clear services definitions, standardized SLAs, capacity-based pricing models, volume forecast models, and carefully deployed penalty/ reward regimes. Given the industrys relative lack of standard definitions of services and SLAs in a managed service context, it is particularly important that telcos invest in getting this right. The purpose of the deal terms is to minimize the risk of operational disruption or even dispute should either party divert from the agreement (with or without proper cause). Operators and vendors achieve the latter by jointly defining and agreeing on business principles for how to deal with potential future issues. Such principles can include HR policies, deal termination clauses (full and partial), confidentiality issues, major scope changes, and innovation. 4. Roll out world-class service management and governance practices. Lastly, operators need to make sure they have established clear interfaces, roles, and
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Four Cornerstones of a Collaborative Approach to Outsourcing

1. Create full transparency around business objectives Define clear strategic decision criteria that are aligned with overall business objectives Define and detail operating mode options Evaluate options against business objectives 2. Jointly exploit all improvement levers and reduce ambiguity Establish full transparency around prerequisites of value capture up-front Understand both parties economic models to define the win-win point Focus on business impact, not technology, through negotiations of business principles and services 4. Roll out world-class service management and governance practices Ensure clear interfaces, roles, and responsibilities for operational, tactical, and strategic issues Include mechanisms to manage internal demand, e.g., capacity planning, clear order points, project prioritization 3. Craft a deal that accelerates value capture Include clearly defined mechanisms that ensure realization of strategic objectives, e.g., competitive pricing, SLAs, continuous improvement
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Vendor value add can be as much as 20% on top of internal case
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Service management and governance model embodies the joint objectives, incentives, and value realization plan
responsibilities for the operational, tactical, and strategic issues that will arise among the provider, customer, and other (sub-)providers (often referred to as the operational model). Simply put, a comprehensive operational model translates the commercial and deal terms into a set of well-defined day-to-day processes working endto-end from business users all the way to the vendor delivery staff. Operators must also invest in upgrading the internal skills necessary to transform from a delivery organization into a vendor management organization. Exhibit 4 illustrates how the deal mechanisms and operational models come together.
*** There are good reasons to suggest that as the first incumbent operators now outsource their network operations, the market will follow. Adding further volumes and sharing network operations through a third-party provider gives operators access to far better scale effects than what is possible through a solely internal focus. There is also evidence that the capital markets favor higher capex efficiency and that network assets are operated by a specialist. Furthermore, regulators have so far been lenient towards outsourcing of deployment and operations as long as the customer service quality responsibility remains with the license-holding operator, although this varies by market. The already fast-growing, network-managed services market may provide early evidence of a chain reaction towards a new era in the telecoms industry.
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Andr Christensen is a Principal in McKinseys Toronto office. andre_christensen@mckinsey.com
Martin Lundqvist is an Associate Principal in McKinseys Stockholm office. martin_lundqvist@mckinsey.com
Tor Jakob Ramsy is a Principal in McKinseys Oslo office. tor_jakob_ramsoy@mckinsey.com
Susanne Suhonen is a Practice Manager in McKinseys London office. susanne_suhonen@mckinsey.com
RECALL No 8 Networks Mobile Networks of the Future: Building a Sustainable Wireless Carrier Business Model
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05 Mobile Networks of the Future:
Building a Sustainable Wireless Carrier Business Model
Driven by lower pricing, higher speeds, and better form factors, wireless data traffic has finally taken off. To cope with this exhilarating demand, mobile operators must plan significant build-outs of their networks, in many cases within the next three to five years. McKinseys analysis of wireless trends suggests that operators will face business model challenges in the coming years. Competitive pressures have already led the industry to adopt flat-rate pricing plans that might starve players of adequate margins.Operators must now develop innovative approaches to pricing, revenue generation, and network evolution that result in cost-effective ways to meet their customers growing need for high-speed mobile broadband.
and 2007 (Exhibit 2). The same has been seen in Scandinavia and other European markets. 3. Improved form factors of new handsets lead to increased data usage exemplified by Apples iPhone that, when introduced in the US, tripled the carriers mobile data traffic in many major cities. 4. Plummeting prices of UMTS cards make it attractive for a larger section of society to plug into their laptops, creat ing a wireless DSL experience. While backhaul issues are now well researched, we predict that this seemingly insatiable demand for mobile broadband will lead to the bottlenecking of access networks in the next three to five years in highly populated cities such as Amsterdam, London, and Singapore. The access network problem could accelerate if current spectral efficiency promises are not kept historical wireless performance has, in some cases, undershot promises by a factor of four. Resulting from fierce competition, mobile operators may be losing the means to pay for their broadband networks even as they push to build them out. Research shows that mobile data premiums over the fixed line continue to erode as many operators adopt flat-rate fees. In countries such as the United Kingdom and Austria, operators have currently priced their broadband mobile plans below fixed-line DSL alternatives. Our analysis shows that in cases in which mobile subscribers exceed usage levels of 1 gigabyte per month which appears to be quite possible the incremental network cost of building capacity alone could exceed the
Questioning mobile datas profitability

Demand for high-speed mobile data has seen meteoric growth since early 2007 (Exhibit 1). Four factors have ignited this worldwide boom: 1. The introduction of High-Speed Downlink Packet Access (HSDPA) has led to improved wireless speed and access time, finally delivering what users expected nearly a decade ago. 2. New competitors are offering flat rates as a strategy to put pressure on mobile data pricing. This, in turn, is driving down prices across the market. In the UK, for example, mobile attackers, who use flat-rate plans to lure customers, drove incremental broadband price plans down by nearly 90 percent between 2005
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Wireless data growth is exploding globally
emerging European flat-rate price (Exhibit 3). In fact, a significant number of heavy mobile data users may already be unprofitable an unsettling notion, given that these subscribers have traditionally been the most profitable for mobile operators. This seems to be a significant medium-term risk for the industry. Mobile companies can learn from fixed-lined telcos, for which the exponential growth of data, driven by flatrate pricing, has already squeezed their economics. For example, the introduction of BBCs iPlayer has placed the economics of smaller UK-based ISPs under pressure, with backhaul cost doubling and resulting in no ARPU (average revenue per user) increase. This type of growth can pose an even greater problem for wireless networks because the radio access network is a far more shared and limited resource than the copper lines for wired networks, with a much higher capex cost for incremental capacity.
view of various customer segments, understanding their profitability across the portfolio (e.g., in some Asian markets, data has been a loss leader for many years). We believe that operators need to take three specifications: 1. Consider recasting pricing models to ensure profitability in what is rapidly becoming a data-heavy world, especially on the access type UMTS card offerings. Operators could, for example, better differentiate their high-value customers by offering pricing plans that provide priority access during peak hours. They could also tighten up and enforce fair-use policies by reducing traffic allowances or limit/disallow certain data-heavy applications during peak periods. Other options include pricing beyond-limit minutes at higher rates or promoting cache and carry options, with which the user downloads fixed-line content onto a mobile device to use when on the move. 2. MNOs should also invest in exploring the business model implications of potential shifts in revenue and profitability towards content and devices, specifically on applications linked to the mobile phone. This could include actively shaping traffic, brokering revenuesharing content deals with video sites, or opening ones own site. Operators can also actively push additional
Operator actions
Operators need to start shaping mobile data usage immediately to avoid significant profitability issues in the future. Achieving this change will be difficult, given the internal and market pressure to grow data penetration. It will require operators to take a holistic
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Intense competition has resulted in flat-rate plans ...
03
... leading to the real risk that margins will come under pressure
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Migration options depend on spectrum availability and the urgency of operators capacity needs
low-volume applications that carry big margins (e.g., machine-to-machine applications, location-based services, low-bandwidth games) or time shift downloads (e.g., pushing music overnight or offering overnight phone updates). 3. Operators should also look into building additional network capacity more cheaply. In principle, the network solution an operator chooses should depend largely on spectrum availability and the urgency of the capacity need (Exhibit 4), in combination with operator- and country-specific characteristics, such as topography, existing spectrum, existing network investments, and the wireless/wireline regulations. *** While all three of the elements above are critical to a sustainable business strategy, the following chapters will delve more deeply into the third element, network capacity given the focus of this publication on technology. In this area, operators typically have three options when seeking to cost-effectively boost wireless capacity:
Use smaller cells and/or more sectors. There is an economic limit to how small a cell can be and also a significant cost to taking this approach. The most interesting recent development is that of femtocells and the complementary use of wireless LANs (e.g., WiFi), which will off-load traffic from macrocells. Gain spectral efficiency through 4G. In light of the current expectations from 4G and their current 3G networks, operators will want to carefully consider their next generation deployment strategy and all respective trade-offs. Explore new spectrum. Network, chipset, and CPE vendors, whose innovations enable network extensions to multiple spectra and standards, are helping operators exploit new spectrum. Network vendors, for example, are providing base stations that offer flexible frequency and standard support. Chipset makers continue to move towards multi-mode, multi-band chipsets, while CPE suppliers offer high-end phones that combine HSPA, WiMAX, and WiFi in different bands. The availability of the current analog TV spectrum within the next two to three years presents brand-new capacity options.
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Bart Delmulle is an Associate Principal in McKinseys Brussels office. bart_delmulle@mckinsey.com
Suraj Moraje is a Principal in McKinseys Johannesburg office. suraj_moraje@mckinsey.com
Stagg Newman is an Advisor to the Global Telecoms Practices in McKinseys Boston office. stagg_newman@mckinsey.com
Tanja Vaheri-Delmulle is a Senior Research Analyst in McKinseys Brussels office. tanja_vaheri-delmulle@mckinsey.com
RECALL No 8 Networks Mobile Networks of the Future The Value of Femtocells
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05 Mobile Networks of the Future

The Value of Femtocells
Femtocells have continually grabbed the mobile worlds headlines for over a year and for good reason. They could become the go-to technology for quick and economical network expansion. Femtocells, now in advanced field trials and early commercial deployment, are low-power 2G and 3G home base-station transceivers (analogous to WiFi hot spots, but working on licensed spectrum) for consumers, with a target cost of EUR 70 to 100 (Exhibit 1). They connect a limited number of pre-defined users as determined by the operator, using a homes existing broadband connection as backhaul to provide a 2G/3G mobile connectivity directly inside the premises. Femtocells offer a coverage range of 50 to 200 meters, provide up to 7 Mbps of bandwidth, and feature plug-and-play installation and remote troubleshooting access. In the ideal world, they would be self-configuring within an operators 3G network and capable of operating under a range of standards. Therefore, femtocells could feature lower costs and better coverage than most other home-based technologies and improve the data usage experience at home. Furthermore, they can be used with the customers current mobile handset and, therefore, avoid network handover issues. However, femtocells do require additional customer premises equipment (CPE), a broadband subscription, and only offer voice over IP protocol (VoIP) quality of service (QoS). With the growing presence of mobile usage in the home (e.g., almost 50 percent of usage in the US is either at
home or in the office, more than 75 percent of mobile video usage in Japan is at home), the increased focus on fixed-mobile convergence, and indoor coverage still remaining a tough problem to solve, femtocells increasingly appear to be a potential way forward for the industry.
Operator implications
We believe that from an operator standpoint, femtocells could significantly improve customer value through lower churn and higher ARPU, while providing new fixedmobile convergence possibilities. Femtocells could also enable mobile network operators to reduce long-term capacity issues by lowering macrocell loading and hence reducing pressure on some of the most loaded urban cells. Furthermore, the technology will help limit the impact of WiFi (and potentially VoIP) in the home by reducing the use of dual-mode phones and by capturing set-top box opportunities. Finally, it would allow operators to reduce backhaul costs, using the subscribers existing paid-for broadband line for backhaul. McKinsey has compared the economics of femtocells to dual-mode phones and homezones, and we believe femtocells to be superior for three reasons. Significant churn reduction. As a for the household solution, the operator would establish its own network in the subscribers home, leading to a reduction in churn clearly not the case with WiFi homezones, for example, which do not reduce switching costs. This benefit in itself could well increase customer value by more than 20 percent.
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Femtocells offer wireless access through a homes existing broadband connection
One household, one operator. A home-installed femtocell would create a reason for the entire family to switch to one operator. This, again, would not be the case with a homezone and would be more expensive with dual-mode solutions. Lower subsidies. The subsidy required for femtocells is less than that for dual-mode phones (although more than for homezones), since the subscriber can use his or her existing handset. Over time, femtocells could give rise to a string of new, longer-term business opportunities, ranging from new possibilities for creating fixed-mobile bundles with real customer benefits to merging with other boxes and becoming a home media storage device. The value creation for integrated players is even higher, as they may benefit from higher speeds and lower churn on the DSL line, while creating effective bundles that span the fixed and mobile worlds. Only one player, Sprint, has launched a femtocell offering to date, with a commercial pilot on its CDMA network in Denver and Indianapolis (US) in September 2007. The operator sells the CPE for USD 49 with unlimited airtime, while selling the femtocell for USD 15 per month for an individual or USD 30 per month for the entire
family. Results are not publicly available, but indications are that the user experience has been positive, with the devices being reasonably self-installing and user-friendly. And other players are likely to follow suit. Vodafone announced it could launch commercial services by the end of 2008; Telefnica/O2, TeliaSonera, and SoftBank have ongoing trials; and AT&T, Verizon, and T-Mobile have announced that consumer trials will start in the near future.
Operator actions
We believe that all operators in countries with developed fixed-line broadband systems should act quickly to test this opportunity both technically and from a business case standpoint while considering potential disruptive moves. Integrated operators, specifically, should bring together both networks to understand how to truly exploit this technology in order to drive the next wave of fixed-mobile convergence. The question remains whether the benefits of femtocells will be sufficient to lure customers into widespread adoption. We believe that, by 2011, three sizable customer segments could show interest in femtocells:
RECALL No 8 Networks Mobile Networks of the Future The Value of Femtocells
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Price-sensitive homezone customers, who will constitute 10 to 25 percent of all end users in the US and the UK Customers experiencing poor indoor coverage, estimated at 5 percent of all US end users and 15 percent of all UK end users Heavy data service users seeking an improved at-home experience potentially 5 to 25 percent of all end users. The appeal would be even greater if operators aggressively push the technology (as they seem willing to do) through CPE subsidies and attractive on-femto tariffs. In a recent McKinsey proprietary survey conducted in Germany, approximately 50 percent of respondents said they would be willing to pay a EUR 25 premium to have a femtocell installed in their home. The top three drivers for their decision were savings (by far the most important), connection quality, and faster mobile data capture. The acceptance rate goes up to 75 percent if the femtocell is fully subsidized. Given the consumer interest, industry analysts expect to see 80 to 120 million femtocell users worldwide by 2011. Most industry observers agree that femtocells could become an integral part of the expected
mobile operator push into converged fixed-mobile services. It is interesting to note that more than 50 percent of installed femtocells are expected to also include embedded DSL and WiFi modems, with some operators already working on installing other set-top-box-like features. While the discussion here paints a fairly rosy picture for femtocells, operators should keep in mind that widescale deployment is likely to be at least two to three years away, with a number of technical and operational details still needing to be resolved. On the technical side, operators will need to ensure adequate backhaul capacity (especially in a multi-user scenario) and guarantee smooth network integration and RF performance (especially at higher volumes). Operationally, they will need to manage forward and (especially) reverse CPE logistics and keep track of CPEs in the field from a regulatory perspective. *** While several pre-deployment matters must still be worked out, none will block the road to femtocells and the expansion opportunities that it presents. It would be a very good idea for operators to closely study this new technology from a commercial and technological standpoint you can love them or hate them, but femtocells shouldnt be ignored.
Bart Delmulle is an Associate Principal in McKinseys Brussels office. bart_delmulle@mckinsey.com
Ken Serdons is a Business Analyst in McKinseys Brussels office. ken_serdons@mckinsey.com
Peter Verboven is an Engagement Manager in McKinseys Brussels office. peter_verboven@mckinsey.com
RECALL No 8 Networks Mobile Networks of the Future The Rocky Road to 4G
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The Rocky Road to 4G
As the dust from the technology battle settles, operators need to crystallize their thinking on what the timing and business model for fourth generation (4G) deployment should be and how to make the required spectrum available. Given the complexity of the issue, players need to start formulating the answers now. As the mobile industry prepares to select the 4G mobile broadband standard, three technologies are struggling on the competitive battlefield. Each promises low latency, high bandwidth, a f latter IP-oriented architecture, and higher spectral efficiency by using Orthogonal Frequency Division Multiplexing (OFDM) and advanced antenna technology (Exhibit 1). WiMAX is a wireless broadband technology pushed by Intel, sponsored by the WiMAX Forum, and based on the IEEE 802.16(e) standard finalized in 2005 for fixed and mobile deployment. LTE (long-term evolution) arises from the 3G Partnership Project (3GPP) ecosystem that dominates mobile deployment today and represents a new generation of mobile telephone standard that will probably replace current GSM/UMTS offerings. UMB (ultra-mobile broadband) comes from the Qualcomm-driven 3G Partnership Project 2 (3GPP2) ecosystem as the proposed successor to the CDMA/ EVDO product line.
with at least one fixed network now deployed in most key markets. From a technology readiness perspective, WiMAX currently enjoys a two- to three-year time-tomarket advantage over any other wireless broadband technology, for both fixed and nomadic applications. Furthermore, many key vendors (e.g., Intel, Samsung, Motorola, Alcatel-Lucent) are clearly supporting the standard, with Intel committing to embed WiMAX chips in its microprocessors starting in 2008 (as it did with WiFi). Given these factors, it appears that WiMAX will attract three times more network and ecosystem investment than LTE in the short term. However, the bulk of 4G demand will probably materialize only after 2011, by which time WiMAX could lose its lead, due to four factors: 1. The current technology cannot be deployed in paired frequency division duplex (FDD) spectrum, which dominates global allocations. 2. There are currently no tier-1 operators on the global level with the exception of Sprint/Clearwire with commitments to widely deploy a mobile WiMAX network. Most WiMAX deployments are small and promoted by new start-ups. The bulk of deployments is focused on fixed WiMAX implementations in emerging markets. 3. Most WiMAX deployments are in the 2.5 GHz spectrum or higher, where attackers are able to obtain spectrum. Radio signals do not propagate nearly as well as higher frequencies. Therefore, WiMAX operators must deploy far more cell sites and hence have higher
WiMAX: early lead, but faltering

Of these three, WiMAX took an early lead in deployment,
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4G effectively handles large spectrum blocks to deliver higher peak data rates and lower latency
costs than todays cellular networks. Subsequent improvements in WiMAX could close these performance gaps (e.g., adoption for the 700 MHz spectrum, paired spectrum), but it takes time to certify new standards, chipsets, and equipment. A new version of WiMAX, currently referred to as 802.16(m), is planned for full mobility, but it is on the same timeline as (or later than) LTE. 4. WiMAX is designed for fixed and nomadic applications and is only now being adapted for fully high-speed mobility. Other 4G technologies have been designed to handle high-speed mobility and hand-offs from the start. UMB does not appear positioned to gain any share, as current operators most notably Verizon, Telstra, and Reliance migrate from the 3GPP2 to the 3GPP ecosystem, either through the 3G WCDMA family or directly to LTE. And Sprint, which had been on the 3GPP2 path, has announced its plans to migrate to WiMAX, seemingly leaving UMB with no major operator support. While WiMAX has been perceived to have the lead based on early deployments in the race to become the 4G standard, momentum appears to be shifting to LTE. It is likely that LTE will capture the lions share of 4G investments post-2011, while advanced 3G systems will dominate investment for the next five years.
LTE: a late starter, but gaining momentum

LTE was just approved by the 3GPP in January 2008. Experience shows that most standards take more than six years to go from publication to commercial success, so it is likely to be a few years before LTE is available for broad rollout as the 4G standard. However, there seems to be broad mobile operator support for it. Most European GSM-based operators show a strong inclination to adopt this standard. In the US, Verizon, with its recent spectrum purchase at 700 MHz, is on an aggressive timeline to test LTE in 2009 and deploy limited LTE service as early as 2010. With the exception of Sprint, the other major players (ATT, T-Mobile, Alltel, etc.) appear to support LTE. Designed to be a smooth upgrade from the current GSM path, LTE is supported by leading operators, including Alcatel-Lucent, Ericsson, Nokia, Orange, T-Mobile, and Vodafone, who launched the LongTerm Evolution/System Architecture Evolution Trial Initiative in May 2007, aimed at promoting LTE. Since then, other operators, including NTT DoCoMo, LG, and Samsung, have also gotten on board. With the overwhelming backing of the mobile industry, LTE will have the strongest ecosystem, the lowest
RECALL No 8 Networks Mobile Networks of the Future The Rocky Road to 4G
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cost, and the earliest/broadest device availability. However, given that it will be tailored to paired spectrum, it is unlikely to be the sole technology used WiMAX may still be deployed for unpaired spectrum, especially if dual-mode devices become widespread. Nevertheless, LTE will most probably still capture the lions share of deployments, as existing carriers hold the bulk of the spectrum where these technologies will eventually modernize their networks.
loading their networks ahead of the late arrivals. However, as with 3G, first-to-market carriers will risk market demand and ecosystem maturity. What is the optimum spectrum strategy? The economics of high-quality, higher-frequency deployment can be daunting. Ideally, operators would use large blocks of lower-frequency spectrum to ensure 4G success. The major benefits of 4G over 3G occur in frequency blocks larger than 5 MHz. With the impending auctions and debate over access to 700 MHz spectrum around the world (US 700 MHz was recently completed), operators need to establish a clear plan for gaining access to the lowest-frequency spectrum in their markets. How should operators migrate their networks from 2G/3G to 4G? Nearly 40 to 50 percent of the cost (capex + opex) in transitioning from 3G to 4G will be attributable to migration (OSS, BSS, network reconfiguration, increase in backhaul capacity, customer information migration, re-farming of spectrum, sharing of networks, etc.). Operators will thus need to start investing in their 3G networks now (OSS, power, cabinets, applications, etc.) if they are to facilitate a smooth transition. ***
Challenge for operators

As technology-related issues get resolved (e.g., what exactly an upgrade will involve, the availability of multimode phones), operators will need to answer a number of strategic questions on the road to 4G. What is the profitable 4G business model? Without a change in business models, 4G will drive even higher bandwidth and capacity needs (the iPhone experience in the US is an example of this) without generating an appreciable increase in revenue to recover the investments. Operators need to resolve what applications/advertising and content models, pricing models, distribution models, partnerships, etc. they can use to make 4G a profitable venture. What are the economic advantages for starting early versus being a fast follower or laggard? First-to-market carriers could reap disproportional economic benefits by attract ing the large proportion of high-spending customers who are motivated by new devices/applications and by gaining a scale/pricing advantage through
In light of these issues and questions, the dynamics involved in any 4G upgrade will be market-specific and based on spectrum availability, competitive offerings, the level of spectrum exhaustion, and the need to re-farm spectrum using more spectrally-efficient technology.
Kurt Cohen is an Associate Principal in McKinseys Stamford office. kurt_cohen@mckinsey.com
RECALL No 8 Networks Mobile Networks of the Future The Alternate Spectrum Opportunity
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The Alternate Spectrum Opportunity
The demise of analog TV in the 2009 to 2012 time frame will free up large swathes of spectrum with superior propagation characteristics. How this spectrum is licensed and to whom it goes could significantly alter industry structure and individual player competitiveness. The approaching phase-out of analog TV will free up large chunks of spectrum for other uses and users. Across the US, Europe, and Japan, significant amounts of spectrum in the 400 to 700 MHz bands will become available by 2010. The spectrum will offer propagation characteristics superior to those reserved for 2G/3G mobile service, enabling truly wide-area, highly robust networking with good building penetration and far fewer cell holes. This spectrum the largest amount made available in years and potentially the last major offering for a long time to come will likely be licensed across markets for telecoms usage on a technology-neutral basis. This will create opportunities for new players to enter or for existing players to significantly increase their capacity and improve their coverage at a low cost. Non-mobile players have also shown interest in this spectrum, as demonstrated in the recent US auctions, although how much they will be willing to pay would depend largely on the conditions. While cable companies, satellite providers, and others were all participating in the current US auction, the dominant incumbent players Verizon and AT&T were able to outbid other entrants to acquire most of the prized real estate. Together, these two companies paid well over 80 percent of the cost in the winning bids. Satellite operator EchoStar (dish
network) won a single 6 MHz channel of 700 MHz spectrum for much of the US. Having failed to win any spectrum in the 2006 advanced wireless services auction, however, this spectrum is not likely to provide a solution for substantive two-way services. Possible new entrants, such as Google, did not win any spectrum, although it was successful in imposing open-access conditions through its bid. Google also just announced an investment in a partnership to develop a WiMAX network in the US.
Price determinants of the newly available spectrum

Given the intense interest from multiple competing sourc es, the analog TV spectrum will undoubtedly be more valuable than off-mobile spectrum in the past as indicated by recent auction activity (Exhibit 1). The 2006 US 700 MHz auction set a US record for money raised. In general, regulators appear to veer towards packaging this spectrum to be valuable to a large set of players. Five decisions will determine exactly what this value is. Service/technology neutrality. Will regulators pre-describe the services to be offered or the technology deployed? More flexible regulations will increase the number of potential bidders and thus raise the value of spectrum. US licenses, for example, are usually technology-neutral and offer a broad definition for allowed services. The European Commission has now also recommended service and technology neutrality policies, although responsibility for implementation lies with local regulators.
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01
Switchover to digital broadcast will free up valuable analog spectrum
Spectrum restrictions. Will regulators impose restrictions or obligations (e.g., limited spectrum per player or timing and rollout obligations)? Any type of caps will lower the value (and cost) of spectrum in an auction. The US has, for example, imposed an open-access obligation at the device and application levels for one of the recently licensed 700 MHz blocks. To date, no evidence has emerged of similar restrictions in other countries, although many EU wireless networks already have similar obligations (e.g., SIM unlocked). License structure. Will regulators award a lot of small licenses or fewer large licenses? The band structure poses a particular challenge for regulators. If they want to enable 4G in order to deliver maximum value in high-speed performance, licensing in large spectrum blocks is required. However, large spectrum blocks also mean fewer licenses, posing the problem that not all current operators can obtain the new lower-frequency licenses. Therefore, regulators may want to enable and encourage spectrum sharing among operators, so that no one is significantly disadvantaged. This would also enable operators to share the capex risk of new deployments and accelerate new technology platforms and applications. Spectrum configuration. Will spectrum be offered in a paired or unpaired configuration? Large contig uous
blocks of nationwide spectrum would be the most valuable. Whether this spectrum should be in paired or unpaired blocks is debatable: paired spectrum has distinct advantages for handling the difficult RF problems posed by wide-area, full-mobility networks, while unpaired spectrum provides more flexibility for handling asymmetric traffic. License method. Will regulators auction spectrum whereby market forces decide the winner or use a beauty contest approach in which the regulator picks the winners based on the perceived ability to provide the greatest public good?
How operators can take strategic advantage

Overall, there are four strategic options available for telcos looking at this spectrum. Buy and use immediately. Buy spectrum and deploy it either as an extension of current data capacity or as something new (e.g., mobile TV). To do this, telcos will need to resolve whether they can extend the current network for use in the 400 to 700 MHz band. Buy and squat until the 4G technology is really widely needed. Buy spectrum, but defer commercial deploy-
RECALL No 8 Networks Mobile Networks of the Future The Alternate Spectrum Opportunity
51
ment for the next few years. Questions here include whether the economic threat will be large enough to make this business case positive and whether regulators would allow idle spectrum for a period of time. Tailor to good economics. Influence regulations in order to optimize value from spectrum (e.g., licensing in small fragmented bands to allow many operators to access small amounts to fill holes, mandatory provisions for public safety and government usage to ensure futureproof public safety networks, forced use for mobile TV, mandatory wholesale pricing to ensure equal access). In this case, telcos need to prepare a good economic argument for why such regulation would be desirable. Ignore. Disregard new spectrum after ascertaining whether the threat of a new entrant can be ignored or whether the telco has sufficient bandwidth to meet future needs. When looking at the GSM spectrum particularly the 850 or 900 MHz frequencies the operator needs to evaluate how soon it can cost-efficiently migrate enough of the GSM traffic (incl. voice) onto 3G networks to be able to re-farm spectrum. LTE (long-term evolution) has been designed particularly to enable this re-farming,
since it supports multi-rates and, thus, deployment in channels from just over 1 MHz wide up to 20 MHz. So, operators can start with narrower channels and move to wider channels and better performance as GSM traffic is moved. In order to move the GSM traffic, it will be critical to provide cost-efficient, attractive, multimode subscriber equipment. Operators that have GSM spectrum must assess their ability to convince the regulator to allow re-farming without imposing any onerous conditions. Those without GSM spectrum must convince regulators to enact regulations that either require network sharing or prevent operators with GSM spectrum from gaining a strong competitive advantage. *** The soon-to-be-available analog spectrum offers significant advances in coverage, networking, and signal penetration. An operators approach to this harnessing the power of this spectrum will vary from market to market (e.g., which spectrum is available, what is the industry structure). It will also be dependent on players specific situations (e.g., amount of spectrum available, integrated versus mobile only, mobile data and network strategy, current network configuration).
Klemens Hjartar is a Principal in McKinseys Copenhagen office. klemens_hjartar@mckinsey.com
Tanja Vaheri-Delmulle is a Senior Research Analyst in McKinseys Brussels office. tanja_vaheri-delmulle@mckinsey.com
Michael Wilshire is an Expert Principal in McKinseys London office. michael_wilshire@mckinsey.com
RECALL No 8 Networks The Power of Letting Go
53
06 The Power of Letting Go

An interview with Mads Middelboe, CEO, TDC Mobile and Senior Executive Vice President, TDC
TDC is Denmarks leading communications solutions provider. It is the incumbent and leader in all segments including mobile, broadband, and cable. Mads Middelboe is Senior Executive Vice President at TDC and has eight years experience in the Danish/Nordic telecommunications industry. He has been a member of TDCs Group Management Board since 2006 and had served as CEO of Mobile Nordic since 2002. McKINSEY: Outsourcing a mobile network would seem to be counterintuitive for a telecoms operator. How did this become an idea you were willing to entertain? MADS MIDDELBOE: We intended to move to a different cost and capability curve referring both to network operation and expansion. Thus, outsourcing affects both the network we have and the one we want to build for the future. For any telecoms operator and for an incumbent in particular network ownership and network operations constitute core business. This makes the decision all the weightier. Still, we found the idea appealing. We did look into this five years ago and found out that we enjoyed some key economies of scale as the incumbent ones that we did not want to lose. In principle, outsourcing would mean sharing strategic business advantages with a partner who would use them to attract new customers in essence, our competitors. McKINSEY: So what changed? What made it clear to you that outsourcing on this scale would be advantageous? MADS MIDDELBOE: Well, five years have since passed. Now, we know that we are up against players in this
arena who have captured synergies and have even more network potential regionally. The time was ripe. We saw that we could benefit from an outsourcing partners synergies and potential, despite the reality that they would use the relationship to bring on new customers for themselves. It was the right time to gain the first-mover advantage, and we seized it by linking operating improvement potential with future capex investment. McKINSEY: What were the steps you took leading up to this decision? MADS MIDDELBOE: As I mentioned, we began laying the groundwork for this move five years ago. We conducted our own cost improvement project and streamlined the organization to a large extent. Knowing in detail your improvement potential prior to outsourcing makes the deal more transparent and enables the provider to focus its effort with further improvements on top of those ideas in order to maximize value creation. In other words, we were internally ready to capture a larger part of the value created in a transaction. McKINSEY: What factors did you consider in the selection process? What did you emphasize? MADS MIDDELBOE: The first key factor was the competitive element. We had three bidders, but it is imperative to have at least two. The second was the openness in our pitch. No wheeling and dealing. We opened our books and presented our baseline and current cost structure. We chose to outsource the full scope of network operations and build-out in order to provide the partner maximum potential to exploit and offer synergy benefits across the
54
value chain. This emphasized that we were looking for a strategic partner, not just a signature on an outsourcing contract with short-term savings. McKINSEY: At this point in the process, did you follow a standard request-for-proposals approach? MADS MIDDELBOE: Actually, we went on to design the competitive element by selecting specific players. Since two of our existing suppliers already had stakes in the network, each of them had an interest in becoming the sole vendor. This might have been sufficient in itself to spur competition, but we raised the stakes by adding a third player with no current interest in the network but who was doing very well in many other markets. However, with no existing experience and presence in the network, it turned out to be very difficult for this vendor to present a solid business case. McKINSEY: Some say facetiously that if you want negotiations like these to fail, simply involve your CEO. How did you define your role to ensure success? MADS MIDDELBOE: Involvement in such a strategic project is, of course, why Im here. I was deeply involved in all major decisions and acted as a project sponsor. My role was to monitor proceedings from the business perspective and integrate technological aspects into this perspective. We had our process in place. We identified key criteria for success that went well beyond the commercial bid. They reflected the inherent complexity in a technology swap, whether the candidate would retain our employees, how they could maintain employee motivation after such a move, and how they would ensure smooth operations during the transition and well beyond it. These elements rigidly served as the basis to evaluate candidates and assess risk. McKINSEY: As you said earlier, network operation has historically been the core competence of mobile operators. Now that this is being outsourced, what will be your core? MADS MIDDELBOE: Of course, it remains crucial to exert strategic and operational control over the network. When you outsource the network you obviously run the long-term risk of losing the feeling for the network the risk of no longer being able to maintain the competencies and the insights required to set the strategic network agenda. Competency elements move into a shared environment within a strategic partnership, and
financial, technical, and service contract management become the core competency. McKINSEY: How do you hold on to that level of influence? MADS MIDDELBOE: Operational control is ensured by ser vice levels agreements, KPI monitoring systems, and a structured governance model mirroring operational functions on both sides of the table as well as senior executive management levels. You dont need to do everything yourself if you can viably ensure that others can and will. It is vital to understand which strategically important features a network must offer, so that your network is also competitive in the long run. This is, for example, achieved through benchmark regimes and mechanisms for the quality and standard of sites. These are all new competencies our retained organization needs to acquire. With this new focus, I am convinced that our strategic competence will actually increase over time. McKINSEY: Is there an organizational effect of outsourcing such a major part of your value chain? MADS MIDDELBOE: Absolutely, and it is important to take a look at what remains after such a major move the residual organization. It might have the potential to take on other, more technically-oriented work. When outsourcing, you also outsource some of the complexity. This can free up capacity to concentrate on tasks previously handled elsewhere in the organization. In our case, various product management functions were spread among both market and technical units. Now, we have consolidated all technical product management functions into the network organization, and market units are purely focused on the commercial perspectives of product and customer management. McKINSEY: How is it possible for an equipment vendor to extract more value from network operation and development than the network operator? MADS MIDDELBOE: There are three reasons for this. The first is that no one knows the equipment better than the people selling it. The second is economies of scale and a single-vendor approach, which reduces complexity. Such vendors can operate a number of networks. We operate only one. Ours is at a national level, but networks can be regional or even global. The third very important reason is that we are currently
RECALL No 8 Networks The Power of Letting Go
55
seeing a shift in the industrys value chains. For a network equipment vendor whose core business has been the delivery of equipment, global competition developments mean declining growth rates and shrinking margins. This is why such vendors have strategically chosen to engage in managed services. So what enables these vendors to extract more value is the combination of having a strategic base in network operations and build-out, being a global player that enjoys both regional and local economies of scale, and the fact that they know their own technologies better than anyone else. McKINSEY: How do you ensure that your partners prices and service offerings remain competitive in an industry that is characterized by constant change? MADS MIDDELBOE: By establishing what we call a benchmarking forum. We involve a neutral third party to track both the partners prices and those of their relevant competitors around the world to establish benchmarks at regular intervals. Then we have agreed on principles and mechanisms to periodically realign the agreed prices and terms with the industry benchmarks identified. There are no price guarantees. There is, however, a shared understanding and a system or regime backed by a number of mechanisms integrated into both partners governance structures. McKINSEY: Will this change have any effect on your own job? MADS MIDDELBOE: When you outsource, you never outsource responsibility. If you ask me as CEO if I feel that Ive surrendered something if my job carries less weight than it did before the answer is no; absolutely not. Some people are motivated by managing people. I am motivated by managing people but equally as much by leading a business through the partnership. In this sense, I am the goalkeeper for our financial objectives. I still manage people. It just takes on a different form now. I used to conduct business reviews solely with our CTO and his staff. In this new governance structure, I also conduct reviews with the outsourcing partner. The job definitely doesnt become easier or less complicated after outsourcing. If anything, new competencies are required to operate your company through partnerships. McKINSEY: What were your considerations regarding your employees throughout this process?
MADS MIDDELBOE: We always knew this would be a relatively sensitive area for our employees. As an incumbent, many of them have been with us for many years. Understandably, they would have concerns about transferring to a new employer. This was our assumption and the reason why we chose a process with more restrictive information policies at the outset. We did communicate that we were launching a process to find a strategic business partner. The objective was to reduce costs, not necessarily to find an outsourcing solution. Outsourcing was an option to this end and, as it turns out, this was in fact the most value-creating outcome. McKINSEY: Were your employees reactions favorable? MADS MIDDELBOE: All employees involved were very positive on the day of the announcement. We spent a significant amount of time explaining the rationale for outsourcing, and the vendor also laid out a well thoughtthrough plan for all transferred employees. Despite having to leave TDC, the employees applauded at the end of the presentation. I believe that they truly understood why this was the right move and that the chosen vendor was the best possible partner. McKINSEY: What have you learned from making this ambitious move? MADS MIDDELBOE: The first thing we learned regarding operations is that nothing has changed. We are the same people. We sit in the same building. Employees do report to a new management team, but nothing has changed really. Of course it is unlikely that things would change radically in such a short time. On the other hand, you should not ignore the challenge of changing to a partnership. Over time it will develop into a completely new way of cooperation, and you need to develop your skill set and processes accordingly. If the processes we established with our partner did not work, the implications on all processes from customer support to fault handling would be immediate, and you should be prepared to adjust properly and timely. McKINSEY: You are the first incumbent in Europe to do this. Do you expect other mobile operators to follow in your footsteps? MADS MIDDELBOE: Yes, Im certain of that. I have no doubts that it will happen here in Denmark, elsewhere in Scandinavia, and in Europe on the whole. If one
56
incumbent has actually done this, it means there are many more out there weighing their options. *** Mr. Middelboe was interviewed by Klemens Hjartar, a Principal in McKinseys Copenhagen office.
RECALL No 8 Networks Appendix
59
McKinseys Telecommunications Extranet

McKinseys Telecommunications Extranet is the gateway to some of the best information and most influential people in the telecommunications industry. The Extranet offers selected McKinsey-generated information that is not available in the general Internet. Extranet users have access to selected McKinsey articles on subjects ranging from Industry & Regulation, Growth & Innovation, Sales & Marketing, Services & Operations, IT & Technology, Corporate Finance, Organization & HR, Corporate & Enterprise, and Equipment & Devices. Direct communication channels ensure that your questions and requests will be addressed swiftly. The site is updated weekly with new articles on current issues in the industry. Through McKinseys Telecoms Extranet you can: Obtain exclusive information free of charge and take advantage of an Internet portal specifically designed for the industry. Access cutting-edge business know-how, interact with other experts to gain new perspectives, and contact leading industry professionals. Stay well-informed with daily industry news from factiva that you can tailor to your needs and interests. General information about the site is available at: http://telecoms.mckinsey.com Contact: telecoms@mckinsey.com
RECALL No 8 Networks Appendix
61
The Telecommunications Practice

McKinseys Telecommunications Practice serves clients around the world in virtually all areas of the telecommunications industry. Our staff consists of individuals who combine professional experience in telecommunications and related disciplines with broad training in business management. Industry areas served include network operators and service providers, equipment and device manufacturers, infrastructure and content providers, integrated wireline/wireless players, and other telecommunications-related businesses. As in its work in every industry, the goal is to help McKinseys industry clients make positive, lasting, and substantial improvements in their performance. The practice has achieved deep functional expertise in nearly every aspect of the value chain, e.g., in capability building and transformation, product development, operations, network technology, and IT (both in strong collaboration with our Business Technology Office BTO), purchasing and supply chain, as well as in customer lifetime management, pricing, branding, distribution, and sales. Furthermore, we have developed perspectives on how new business models and disruptive technologies may influence these industries.
Telecommunications Practice 2008 Copyright McKinsey & Company, Inc.

www.mckinsey.com

McKinsey Telecoms. RECALL No. 08, 2009 - High Growth

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McKinsey Telecoms. RECALL No. 08, 2009 - High Growth

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Telecommunications

Jrgen Meffert EMEA Leader of McKinseys Telecommunications Practice

Tomas Calleja Co-leader of McKinseys Operations and Technology in Telecommunications Practice

Klemens Hjartar Co-leader of McKinseys Operations and Technology in Telecommunications Practice

RECALL No 8 Networks Introduction to Network Operations and Technologies

01 Introduction to Network Operations

The networks growing role

Telecoms operators costs comprise 4 domains

Highlighting network costs and leverage points

RECALL No 8 Networks Introduction to Network Operations and Technologies

Charting a technological network transformation

Duarte Begonha is a Principal in McKinseys Lisbon office. duarte_begonha@mckinsey.com

Hugo del Campo is a Principal in McKinseys Madrid office. hugo_del_campo@mckinsey.com

Javier Gil Gomez is an Engagement Manager in McKinseys Madrid office. francisco_javier_gil_gomez@mckinsey.com

02 High Fiber Diet: The Value of

Next-Generation Access Networks

Modeling fibers future

Several specific challenges ahead

Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com

Eric Grob is a Principal in McKinseys Zurich office. eric_grob@mckinsey.com

Luis Miguel Santos is an Associate Principal in McKinseys Madrid office. luis_miguel_santos@mckinsey.com

Achim Wrner is an Associate Principal in McKinseys Munich office. achim_woerner@mckinsey.com

03 Over the Seas of Complexity:

Consolidating Mobile Network Functions Offshore

Relocation and consolidation potential is highest for desk-based activities

Making the case for regionalization

Potential operating frameworks consider a geographic spread of responsibilities

Choosing from among three network operating frameworks

Consolidation around the Globe

Extending the benefits of regionalization

5 key practices ensure an accurate assessment of regionalization potential

Making it all work

Giorgio Migliarina is a Principal in McKinseys Beijing office. giorgio_migliarina@mckinsey.com

RECALL No 8 Networks Offloading the Core: Exploring Network Outsourcing

04 Offloading the Core:

Exploring Network Outsourcing

Operators outsourcing options

Operators have 3 basic network outsourcing options

A new approach to outsourcing

RECALL No 8 Networks Offloading the Core: Exploring Network Outsourcing

Jointly negotiating value add minimizes ambiguity of operator-vendor relationship

Four Cornerstones of a Collaborative Approach to Outsourcing

Vendor value add can be as much as 20% on top of internal case

RECALL No 8 Networks Offloading the Core: Exploring Network Outsourcing

Andr Christensen is a Principal in McKinseys Toronto office. andre_christensen@mckinsey.com

Martin Lundqvist is an Associate Principal in McKinseys Stockholm office. martin_lundqvist@mckinsey.com

Tor Jakob Ramsy is a Principal in McKinseys Oslo office. tor_jakob_ramsoy@mckinsey.com

Susanne Suhonen is a Practice Manager in McKinseys London office. susanne_suhonen@mckinsey.com

05 Mobile Networks of the Future:

Building a Sustainable Wireless Carrier Business Model

Questioning mobile datas profitability

Wireless data growth is exploding globally

Intense competition has resulted in flat-rate plans ...

Bart Delmulle is an Associate Principal in McKinseys Brussels office. bart_delmulle@mckinsey.com

Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com

Suraj Moraje is a Principal in McKinseys Johannesburg office. suraj_moraje@mckinsey.com

Tanja Vaheri-Delmulle is a Senior Research Analyst in McKinseys Brussels office. tanja_vaheri-delmulle@mckinsey.com

RECALL No 8 Networks Mobile Networks of the Future The Value of Femtocells

05 Mobile Networks of the Future

Femtocells offer wireless access through a homes existing broadband connection

RECALL No 8 Networks Mobile Networks of the Future The Value of Femtocells

Bart Delmulle is an Associate Principal in McKinseys Brussels office. bart_delmulle@mckinsey.com