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Analyst Viewpoint

This article summarizes the findings of a research project that Tellabs commissioned from STL Partners. It is the result of STL Partners’ research over many years, interviews with a dozen operators across Europe, North America and Asia Pacific and a survey of 100 industry executives.

How Mobile

Operators Can Build ‘Smarter Pipes’

By Chris Barraclough, Managing Director, STL Partners

Faced with new competitors and ever-evolving demands from customers, there is no doubt that telecom service providers need to reinvent themselves. But how? While many call for providers to move beyond yesterday’s “dumb pipe” business models, which limit their role in the communications ecosystem to mere conduit, the larger question is: what comes next? At STL Partners, we have identified 2 possible ways

in which telecom operators can substantially change how they do business. The first approach, driven by a focus on cost cutting, is dubbed “Happy Pipe”; the second approach, based on differentiation via strategic partnerships, we describe as “Full Service Telco 2.0.” Underpinning those 2 business strategies are 2 “smart

pipe” approaches to delivering telecom solutions, which we dub “smart network” and “smart services” (see chart). The Happy Pipe strategy is driven by a smart network—a well- functioning network that operates cost-effectively. By com- parison, the Full-Service Telco 2.0 strategy focuses on smart services, driven by a network that offers a strong customer experience. But its market approach focuses on delivering ser- vices in partnership with an extended ecosystem of partners.

It is important to note that having a smart network

is a precursor to offering smart services. It would be impossible for an operator to implement a Full-Service Telco 2.0 strategy without having significant network intelligence in the form of a smart network.

Smart network strategy is good; a smart services strategy is better Assuming that most mobile operators currently have limited “smartness” in either network or services, our analysis suggests significant financial upside from using either a Happy Pipe or Full-Service Telco 2.0 strategy. Most mobile operators generate Cash Returns on Invested Capital of between 5% and 7%. For the purposes of our analysis, we assumed a baseline of 5.8%. The lower capital and operating costs of a Happy Pipe strategy could increase cash returns to 7.4% and the successful implementation of a Full-Service Telco 2.0 strategy has the potential to increase these returns to a handsome 13.3%. The financial rewards should provide a strong incentive for service providers to consider these strategies.

Porter strategy Cost leadership

Telco 2.0 strategy Nature of smartness Characteristics Happy Pipe

Smart network

Differentiation Full-Service Telco 2.0

Smart services

Cost efficiency—minimal network, IT and commercial costs. Simple utility offering.

Technical and commercial flexibility: improve customer experience by integrating network capabilities with own and third-party services and charging either end user or service provider (or both).

Telco 2.0 strategy As is—Telco 1.0 Happy Pipe

Full-service Telco 2.0 Source: STL Partners

Nature of smartness Low—relatively dumb Smart network Smart services

Cash Returns on Invested Capital 5.8% 7.4%

13.3%

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