Next-generation networks: challenges ahead

Dan Bieler, Research Director

The shift towards next-generation networks (NGNs) is possibly the most fundamental transformation the ICT segment has ever seen. However, it is an evolutionary rather than revolutionary development, which has long-term implications. As a rough timeframe for OECD countries, we expect NGNs to be in place by around 2012 for fixed and 2020 for mobile infrastructure.

NGNs mean slightly different things to different people. The ITU for instance, maintains that 'the fundamental difference between NGNs and today's network is the switch from current circuit-switched networks to packet-based systems'. Italy's regulator AGCOM defines an NGN as 'a packet-based network able to provide telecommunication services and able to make use of multiple broadband, QoS-enabled transport technologies, and in which service-related functions are independent from underlying transport-related technologies'.

We believe that these definitions describe NGNs well. Their essence, in our view, lies in the convergence of fixed and mobile, voice and data, data and content, and - most importantly - IT and telecommunications. We view the migration from circuit-switched to packet-based networks as a logical progression of the drive towards IP. The implications of the migration from 'spaghetti to lasagne', to use the words of a leading NGN planner, BT's CTO Matthew Bross, are wide ranging and will affect financial, operational and regulatory aspects of the market.

Financial implications

From a financial perspective, one of the most direct implications of the move to NGNs is a shift in capital spending. Although in most cases we see a gradual phasing out of circuit-switched networks and the introduction of packet-based equipment, we expect that the transition will require additional capex funding. Hence, in the medium-term we anticipate the average capex/sales ratio for fixed line activities to increase by about 1.5-2 percentage points from the current 12-13%.

Opex, meanwhile, is likely to remain fairly stable initially, before offering some cost reduction potential, mainly through more efficient network management. However, the evolution of NGN opex will no doubt be influenced by emerging pricing models. We assume that a NGN environment will result in a flattening supply curve. In an all-IP world, the correlation between unit production and price weakens. Flat-rate tariffs offer a glimpse of that shift. NGN is likely to intensify this move, throwing up uncertainties regarding the optimal point of capacity 'production', as the relationship between marginal cost and marginal revenues needs to be redefined. These uncertainties in turn affect the willingness to fund NGN projects.

Operational implications

In operational terms, issues such as QoS and interoperability are obviously crucial to the rollout of NGNs. VoIP, a core NGN service, takes centre stage, as it gradually becomes more widespread, leaving the soft-client segment. Outside a private network, it remains basically impossible to control the quality of service of VoIP. Moreover, it continues to be impossible to make calls between various soft-client VoIP providers. These problems will slow down the spread of VoIP amongst users.

A different, but linked, challenge relates to the adoption and marketing of an emerging range of services such as instant messaging, unified messaging, dual phones, click-to-talk, interactive gaming and shared TV. Whilst NGNs take the opportunities these services offer to a new level, old distribution channels are unlikely to work. Voice, for example, might well become a commodity product - despite remaining the ultimate killer application. Going forward, we see the policy of bundling gaining momentum, with service providers throwing in voice for free when offering broadband connectivity, multimedia and messaging services.

However, bundling and packaging require significant upgrades and changes to existing service arrangements. In particular, the areas of billing, content formatting, network management and data analysis often go beyond what service providers have traditionally been used to. We thus believe that the migration towards NGNs is best done in partnership with specialist providers. This, of course, raises the question of who controls the 'juicy bits' of the value chain. From our point of view, traditional telcos are unlikely to work matters in their favour.

Regulatory implications

There is no clear regulatory framework concerning NGNs on either side of the Atlantic, or anywhere else for that matter. Every European country is working on its own approach to NGN regulation, covering the entire spectrum from non-intervention to tight regulation. On an EU level, the debate remains focused primarily on the implementation of the new regulatory framework, rather than a NGN-specific solution. In the US, the debate focuses on net neutrality and a 'regulation-light' approach seems to have gained the upper hand.

The key regulatory issues surround numbering, law enforcement (i.e. bugging) and universal services. Also, the regulatory shift towards LRIC modelling and cost accounting remains hotly contested. As indicated above, we believe that it could be challenging to cost certain service elements adequately in an NGN environment.

Above all, there is discussion regarding the wholesale reform of the current inter-carrier compensation regime, focusing on IP interconnect. Without a clear framework outlining who gets paid what and how, there is an obvious risk that the NGN rollouts will be postponed. Without the ability to forecast reliable returns on investment, fewer investments will be made.

The biggest potential challenge

NGNs will no doubt have fundamental implications for business models and pricing. The meaning of unit costs will have to be redefined and market participants will have to radically reconsider how to charge for services, both on a wholesale and resale level.

But the most challenging task could turn out to be bringing together the worlds of IT and telecommunications. By and large, they remain dominated by different cultures. Yet, this transformation is crucial if NGNs are to deliver their full potential. Perhaps NGNs will only fully evolve with the arrival of next-generation employees.

Dan has ten years experience in the telecoms market. He currently works as Research Director at Ovum, responsible for the German telecoms market. He has a wide range of experience in the field, having covered mobile value-added services, broadband developments, backbone infrastructure, multimedia and service bundling.