Beyond commoditization: The way forward for traditional telecom operators

'The future success of traditional telecom operators depends on having structurally separate entities managing customer services and network facilities,' said Bahjat El-Darwiche, a Principal in the Communication & Technology Practice with Booz Allen Hamilton.

'Several international players are transitioning to a customer-focused business model as they outsource network operations to an independent internal or external body,' El-Darwiche said during a presentation at the recent 2007 Telecoms Wholesale conference in Berlin.

At the same time, operators, even some in the Middle East, are responding to user demand for seamless mobility. This is facilitated by the implementation of IP technologies that enable convergence between fixed networks and mobile networks using technologies such as broadband, 3G, and WiMax, El-Darwiche said.

In the MENA region, an increasing number of traditional operators are considering the adoption of all-IP networks to match the offerings of competitors and to cater to customer needs. This is in line with traditional thinking that network facilities are part of an operator's strategic assets in the face of competition. Reduced profitability and the need for capital-intensive next-generation networks (NGNs) are leading some operators to go even further and position their network as real value generators.

'However, the broad adoption of IP will limit the ability of wholesale providers to differentiate themselves on traditional services, significantly decreasing their value proposition and reducing their overall profitability. The emergence of IP-based networks is leading to the commoditization of basic telecom services,' he added.

'As such, traditional operators are faced with a strategic choice: concentrate on high-value retail business or focus on wholesaling facilities services,' El-Darwiche said.

Hinting at the direction high-value retail services will take, he pointed out that applications and content are emerging as the key success factors and differentiators in the retail marketplace, in part because they improve customer retention.

This is reinforced by the emergence of disruptive business models such as mobile virtual network operators (MVNOs) and IP greenfield players, which demonstrate that a profitable customer relationship can be sustained independent of network ownership. In fact, the traditional operator's 'need' to maintain a physical network may distract operators from the crucial focus on end-user requirements.

'As a result, retail operators will begin to question the value of owning and managing their own networks, versus delegating management to a pure wholesale entity,' noted El-Darwiche.

However, revenue growth in the wholesale market is expected to slow in the future, impacted by lower prices and increased competition.

'Moving forward, network consolidation trends will emerge, as wholesalers seek to increase network utilization and leverage economies of scale,' explained El-Darwiche. 'Adopting a structurally separated wholesale model, implementing new technologies such as NGN, and opening wholesalers' networks to competitors will help reduce regulatory pressures on infrastructure sharing and limit competition from alternative networks and technologies.'

Changing market conditions - affected by everything from profitability to regulations - are forcing traditional telecom operators to carefully review their wholesale-versus-retail strategies. Ultimately, the successful implementation of independent retail and wholesale businesses, each concentrating on a specific customer segment and providing targeted services, is key to the future success of traditional telecom operators.