IP Transformation Beyond the Boxes (2007)

IP TRANSFORMATION CENTERPartnering for change

Marc JadoulMontreux, 20 November 2007

IP TRANSFORMATIONBeyond the Boxes

All Rights Reserved © Alcatel-Lucent 20072 | NGN Europe - Montreux | 20 November 2007

Read in the Press …


Why Service Providers are Transforming their Business


Why “Doing Nothing” is NO Alternative …

‘Legacy’dominates

revenue mix

~ 55 %

~ 45 %Growth

Legacy

Revenue Mix

Low margins onnew services

~ 75 %

~ 25 %Growth

Legacy

EBITDA Mix

+2000 2003 2004 2005 2007

35 %42 %

Impact onEBITDA margins

=Source: service provider reports, Morgan Stanley

(~ 2- 4 %) YoY

Fast erosion oflegacy revenues

*Legacy revenues

Source: the Yankee Group, Alcatel -Lucent

Low return (RoA, RoI) due to ‘legacy’ & ‘proprietary’ infrastructure.Limited innovation capacity due to network silos & heavy processen/IT.

Traditionele telecom service providers

New market players(Google, Yahoo, eBay, ...)

Market Cap/Revenue

EV/PPE OPEX/Revenue CAPEX/Revenue

< 3

> 8

< 5

> 53 < 47%

> 62%

< 10%

> 18%

RoA = Return on Assets; RoI = Return on InvestmentsEV = Enterprise Value; PPE = Property, Plant, Equipment


The Approach — Business Transformation vs. Network Upgrade

Optimize for “where you have been”

“Upgrade” approach• Tactical infrastructure upgrades

• Unchecked/uncontrollable TCO

• Poor user experience

• Technology and operations “silos”

Increased churn - ARPU erosion - margin pressure

Time

Costs

OpEx

CapEx

QoE

Optimize for “where you are going”

“Transformation” approach• Strategic network transformation

• Cost control & investment protection

• Managed end-to-end QoS/QoE

• Global IP transformation project

Customer focus - ARPU expansion - margin protection

Costs

Time

OpEx

CapEx

QoE


The Scope (1) — Cost Optimization along the Entire Value Chain

Enterprise management

Developing & providing

network services

Acquiring & managing customers

Developing new markets & products

Source: Global service provider annual and quarterly reports, FCC ARMIS Database; IBM Institute for Business Value analysis.

Notes: *Global spending breakouts are an average of Europe, Asia Pacifi c and U.S. wireline carriers, and were derived from U.S. benchmarks using total cost of goods sold (COGS) and Sales, general & administrative (SG&A). ** CAPEX breakouts are based on U.S. benchmark only.

83%

10% 31% 49% 10%OPEX

OPEX 10% 5% 12% 14% 9% 8% 32% 5% 2% 2% 1%

CAPEX 4% 1% 1% 2% 3% 2% 1% 1% 1% 1%

Procure-ment

Finance & Accoun-

tingITHR

Network Develop-

ment

Service Assurance

OrderFulfillment

Billing & Collections

Customer CareSalesMkting

and NPD


The Scope (2) — Convergence in Network AND Services

Service Provider’s perspective

MobileFixed Nextgen SP

+ +ISP

+Fixed Mobile FMC

VideoInternet Triple Play

+Telephony

+

+Voice IP VoIP

+ +Phone iPod PDA iPhone

+Gaming Communication XBox360, Wii, PS3

PersonalizationTV ShareTV

+

OfficeMobility Mobile Office

+

End-User’s perspective


The Benefits — Bottom-line Improvement across Different Domains

Source: Telecom New Zealand, Gartner

Cash Benefit (x1000 NZ$)

2002 2003 2004 2005

10,000

20,000

30,000

40,000

50,000

60,000

70,000

• Outsourcing benefits• Operational cost savings• Sales & support• New business opportunities• “One-off” Benefits• Other

• Vendor reduction benefit• NGN transition benefit

• Inventory mngmnt savings• Depreciation savings• Promotions• IP edge margin retention• DSL business penetration• DSL consumer penetration


Transforming thelegacy network to

support growth assets

Revenues from new-wave services

18.3%36.5 %

20072004

Focus on investing in growth services

Broadband sharein CAPEX mix

27%

20052000

64%

What are Other Service Providers Doing TODAY ?

Streamlining processes and IT systems

Number of OSS/BSS systems

20112006

1252

~50

Simplifying the product portfolio and the

‘customer experience’

Products in portfolio

~100~50

20062005

Source: service providers reports and analyst presentations

Integration of networks to allow cost synergies

20072006 2008

$1.1B>$3B

Cost synergies from integration & transformation

>$5B

Optimization of the network and operations

Cumulative OpEx savings

20072005 2009

€150M€450M

€850M


IP is a Means, NOT the Target ...

Services

• Portfolio rationalization• New customers, higher ARPU• Enhanced ‘user experience’

Operations

• Time-to-market• Cost reduction• Processes & organization

Infrastructure

• ‘All IP’ network• IMS and SDP• Getting rid of silos !


Case Study* — an European Fixed Incumbent

1.000 €

1.500 €

2.000 €

2.500 €

3.000 €

3.500 €

2004 2005 2006 2007 2008 2009 2010 2011

10%

2004 2005 2006 2007 2008 2009 2010 2011

15%

20%

25%

30%

35%

40%

45%

Target scenario

Baseline scenario

Target scenario

Baseline scenario

Environmental impact from:

Price erosion• Competition Take rate

Customer churn• Regulation• Internal/external costs evolution

Transformation impact from:

• Service Delivery (NGN/IMS/SDP)• New services/bundles (VoIP, IPTV,

Multimedia)• Network transformation (All-IP)• Process re-engineering and NG OSS/BSS

Revenues (M€) EBITDA margin (%)

(*) business case simulation based on anonymized service provider reports, analyst data and extrapolations of the former


Impact of Transformation on the Business Results

Impact on revenues Impact on EBITDA

71%

29%

64%13%

6%

17%

Transformation impact from:

Service Delivery (NGN/IMS/SDP)

New services/bundles (VoIP, IPTV, Multimedia)

Network transformation (All-IP)Process re-engineering and NG OSS/BSS


Some Lessons Learnt from this Case Study

• IP Transformation changes everything

• Regain economies of scale and allow cost synergies• User-centricity is the new paradigm

• QoS is more than ‘bits per second’ QoE• “Less is More” and “Simpler is Better” …

• … but don’t under-estimate end-to-end complexity• No service innovation without network capabilities

• OSS/BSS modernization goes hand in hand with BPR

• Need for a “holistic” vision and roadmap• Migration will not happen overnight

• Internal alignment & external communication• Each transformation project is unique …


Why Telco-Supplier Relationships are Changing

“ As more IP transformation projects launch, their inherent complexity will steer carriers towards closer ties with fewer vendors. It is happening already.”

“ As time passes, carriers will invariably be drawn into closer relationships with fewer vendors — and those vendors will play a more active role in planning and building networks.”

Andrew Chetham, Gartner


Approaches to Carrier-Vendor Partnering

Strategic Partner • Streamlined decision, 3rd party procurement, implementation and management process

Multiple Vendors • Selected suppliers directly managed by the Service Provider

Leverage partner’s

experience for an

aggressive roll-out

Retain in-house

control of multiple projects

JP Morgan, November 2005

“ With Telstra following the example of SBC and with other operators such as TNZ also adopting this approach… [Alcatel-Lucent]’s turnkey proposition does seem

to be resonating well with a growing number of major global operators.”


Benefits of a Strategic Partnering Model

Strategic Partnering Model Traditional Decision Process

Tech. strategy& CapEx

allocation

Technologyselection

& planninjg

Tenderspec

preparation

Evaluate& selectvendor

Negotiate& place order

Delivery /post-salessupport

Businessdriverneed

Limited opportunity for Telco except when functions are outsourced under contractual relationship

Enables telco to focus on core competencies by outsourcing/outtasking non-core activities to vendor

Focus oncompetencies

Widespread deskilling in Telcos can potentially lead to slow and poor decisions

Vendor can work in alignment with telco to prepare business cases and help make good investment decisions

Good investmentdecisions

No incentives for vendorsRisk-reward model allows vendors to get more upsideIncentives

Pricing outcomes vary dependent on state of market, number of competitive vendors, incumbency

Benchmarking and risk-reward model ensures that vendors provide attractive pricePricing

Global expertise generally not provided unless at a cost or little incentive

Telco has access to Strategic Partner’s global expertise, R&D, products, solutionsGlobal Expertise

Complex network, high total cost of ownership; high vendor management costs

Integrated network with lower total cost of ownership, low vendor management costsNetwork & Cost

Long process (12-18 months) of technology spec, tender selection, pilot & rollout

Short process (3-4 months); vendor assists in technology evaluation, rapid pilot and rolloutTime to Market

Multiple Vendor ModelStrategic Partnering ModelBenefits


Alcatel-Lucent’s Partnering Approach to IP Transformation

Full-lifecycleProfessional ServicesPrime Integrator

BusinessTransformation

ServiceTransform.

NetworkTransform.

StakeholderEngagement

Consult

Design

IntegrateDeploy

Maintain& Operate

2

1

34

5

Cross-domainMulti-vendorEnd-to-End


Alcatel-Lucent IP Transformation Centers

Regional competence centers•Business/Technology Consulting•Network/System/Solution Design•Network/System Integration & Validation•Technology/Services/Subscriber Migration•Project/Program/3rd Party Management

End-to-end hosted integration facilities•Multi-technology, multi-vendor•Network, CPE, IT and applications

Alcatel-Lucent IPTCs launched in Europe, North America and Asia Pacific

IPTC’s mission: “Assist Service Providers in defining, executing and managing their transformation journey.”


Alcatel-Lucent IPTC in Antwerp, Belgium

First center of such scale in Europe•1500 m2 lab and integration floor•50+ cutting-edge technologies (network, IT, ops, apps., test, …)•80+ multi-domain experts (consultants, designers, engineers, …)•End-to-end: from satellite antenna to 500 xDSL modems bank•Can handle up to 10 large projects

Flexible integration of reliable solutions•More than 150 km UTP cable and fiber•More than 15000 patch ports, AC/DC everywhere•Unique concept, no sub-floor cabling•One ‘virtual’ lab across ALU Antwerp campus•Secure interconnection with other ALU, 3rd party

& customer premises/networkServing customers in Europe, Middle-East, CIS, Africa and Central/Latin America

•300 IPTC visits since opening in September ‘06•About 30% of customer audience is CxO level


The Conclusion (1) — Making IP Transformation “Predictable”

Hidden costsand risks !

Containing costs and De-risking investments

• Shareholder-proof business case

• Scalable all-IP architecture

• Market-proof service roadmap

• The right skills and experience

• End-to-end integration

• Streamlined business processes

• Cost-effective OSS/BSS

• Overall project management


The Conclusion (2) — IP Transformation “Beyond the Boxes”

Infrastructure: reduce costs• Strengthen IP footprint and BB coverage• Simplified architecture, getting rid of

network and service“stovepipes”

Services: fuel growth• Right portfolio mix• Streamlined and redesigned

end-to-end delivery process

Operations: free up cash• Leverage cost saving programs• Automated processes with

optimized systems & tools• Alternative partnership models

Transform predictably. Transform comprehensively. Transform profitably.


www.alcatel-lucent.comwww.alcatel-lucent.comwww.alcatel-lucent-iptc.com

[email protected]

IP Transformation Beyond the Boxes (2007)

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