Network equipment providers Changing the Communications Ecosystem?

Rebecca Watson, Program Manager

Communications Infrastructure and Convergence

Network Equipment Providers – Changing the Communications Ecosystem?

October 27, 2010

Contents

1. Introduction

2. Network Outsourcing Description

3. Outsource Business Model

4. Outsourcing Drivers and Restraints

5. NEP Outsource Strengths

Network Outsourcing Wins and Observations

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6. Network Outsourcing Wins and Observations

7. NEP Outsource Challenges

8. Service Provider Outsource and NEP Outsource

Considerations

9. Long Term Implications of Network Outsourcing

10. Final Observations

Introduction

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Network Outsourcing - A Definition

Stratecast defines network outsourcing as an arrangement between the

CSP and its network outsource vendor whereby the NEP is responsible for

total network operations and maintenance.

Other facets of a total network outsource arrangement may include:

• Planning, design and build out of new networks

• Planning, design and implementation on existing networks for

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capacity builds, new technology implementation and/or complete

outsource of portions of the networks

• 1st level network operations support functions

• 2nd level and above support functions

• Long term contractual arrangements

• Asset and personnel transfer

• Risk and Revenue Share Arrangements

The Traditional and New Outsource Arrangement

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Business Model Comparison

Traditional Outsource DetailsTraditional Outsource DetailsTraditional Outsource DetailsTraditional Outsource Details Total Outsource DetailsTotal Outsource DetailsTotal Outsource DetailsTotal Outsource Details

CSP is decision maker for content of and timeline for network upgrades and patches

Outsource vendor is responsible for network upgrades and maintenance

CSP is responsible for negotiation with and managing of network, IT, hardware, software other the entire vendor ecosystem

Outsource vendor is responsible for re-negotiating and/or assuming other vendor maintenance contracts and maintaining other vendor equipment

Outsource arrangement is typically for new network, network expansion and/or upgrade

Outsource arrangement is for management and maintenance of legacy infrastructure and may include network upgrade

Short term contract length; 1 to 2 years Long term contract length; 3-10 years or more

Outsource contracts with multiple vendors; one for network, one for billing, etc.

The CSP has a contract with one or two outsource vendors are the primary outsource vendors are responsible for other network and/or back office vendor equipment, contracts, and SLA

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and/or back office vendor equipment, contracts, and SLA enforcement, etc.

CSP is ultimate decision maker for network design and implementation

Outsource vendor has ultimate responsibility for network design and implementation

CSP network and IT personnel perform various planning, installation and other duties

Outsource vendor provides entire staffing for management, maintenance and upgrades.

CSP network operations staff and outside contractors are the responsibility of the CSP including payroll, benefits, and other human resource functions.

Outsource vendor may hire CSP staff as well as employing internal staff and/or contractors

Contract negotiations with other network and back office vendors are the responsibility of the CSP and payment is the responsibility of the CSP.

Outsource vendors either assume existing contracts with other vendors and/or renegotiate new terms and are responsible for payment.

CSPs provided all customer-facing support functionality. The outsource vendor may have one or all level customer-facing support responsibilities.

Disparate customer support systems were used; one by the CSP and one by the outsource provider.

Single system back office systems are used by the outsource vendor and CSP.

Outsource Drivers Ranked in Order of Impact

RankRankRankRank DriverDriverDriverDriver 1 1 1 1 ---- 2 Years2 Years2 Years2 Years 3 3 3 3 ---- 4 Years4 Years4 Years4 Years 5 5 5 5 ---- 7 Years7 Years7 Years7 Years

1 Reduction of costs X X X

2 Acceleration of revenue and

time to market

X X

3 New technology X X

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3implementation

4 Sharing and reduction of risk X X

5 Ability to bring next-

generation networks,

applications and technologies

to market quickly

X

Source: Frost & Sullivan.

Key Drivers Summary

Costs

Revenue Generation

8

New Technology

Bringing Applications to Market Quickly

Source: Frost & Sullivan.

Risk Sharing

Implementation of Trends

RankRankRankRank RestraintRestraintRestraintRestraint 1 1 1 1 ---- 2 Years2 Years2 Years2 Years 3 3 3 3 ---- 4 Years4 Years4 Years4 Years 5 5 5 5 ---- 7 Years7 Years7 Years7 Years

1 Internal culture X X

2 Cost effectiveness X X X

3 Due diligence requirements X X X

Outsource Restraints Ranked in Order of Impact

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3

4 NEP risk assessment X X X

5 Ability of NEP to provide

services effectively and

efficiently

X

Source: Frost & Sullivan.

NEP Risk Assessment

CSP Culture

Cost Effectiveness Due Diligence

Key Restraints Summary

10

NEP Capability

Source: Frost & Sullivan.

NEP Strengths in Network Outsourcing

• Ability to support a multi-vendor environment

• Global infrastructure

• Expertise

• Personnel availability and capability to acquire personnel

• Credit and funding facility

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• Credit and funding facility

• Research and Development

• Experience and References

NEP Outsource Challenges

Relationship Factors

CSPs wanting to continue to have control and input into outsourced

networks

Union and personnel issues with transferred personnel

Contractual Issues

Asset transfer of equipment or network outsource

NDA arrangements with CSP equipment vendors

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transferred personnel

Communication between CSP and vendor after transfer on network

upgrades and outages

Ongoing relationships with vendors that are competitors

Availability of software license transfers for other vendor products

Contract negotiation with other vendors on competitive network

elements

NEP Outsource Challenges

Equipment Issues

Inconsistent adherence to maintenance dates

Equipment operated outside of specifications

Major Equipment Supplier Issues

NDA arrangements and proprietary equipment information

Software and other license transfers, number seats and other software

related items

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Old equipment, due to be replaced, not operating at peak capacity

Cost to bring equipment to operating order

Obsolete or non-supported network elements

Uncooperative vendors and/or limited access for maintenance, product documentation, and equipment

upgrades

Network Outsource Arrangements

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NEP Outsource Arrangements - 2010

Outsource Provider

Outsource Client Description of Outsource Arrangement

Nokia-Siemens Lightsquared – United States

NSN and LightSquared signed an 8-year, $7 billion agreement. NSN is responsible for the design and deployment, maintenance, management, and operation of LightSquared’s terrestrial mobile network. The network build includes deployed approximately 40,000 cellular base stations by 2015

Nokia-Siemens NII, operating as Nextel, Latin America

The agreement covers the management of NII’s networks across markets in Argentina, Brazil, Chile, Mexico and Peru. The scale of the contract makes it the first of its kind in Latin America and is one of NSNs’ largest, multi-vendor, multi-country managed services agreements

Alcatel-Lucent Vivacom - Bulgaria Outsource of end-to-end mobile network including transferring

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Alcatel-Lucent Vivacom - Bulgaria Outsource of end-to-end mobile network including transferring approximately 600 employees to ALU

Ericsson Vodafone Germany Management of field services for Vodafone's fixed and mobile access and transmission network, and fixed core network nodes in Germany. The deal includes a personnel transfer of approximately 600 Vodafone employees

Ericsson Telefonica O2 UK Field maintenance services for radio and switch sites, spare parts management logistics support, network optimization and facilities engineering services

Ericsson Telefonica Brazil Operation of Telefonica's network operations center in São Paulo which is an extension of an existing agreement where Ericsson operates and maintains the new optical fiber network in São Paulo

NEP Outsource Deals - 2009 Previous

Outsource Provider

Outsource Client Description of Outsource Arrangement

Nokia-Siemens Orange – United Kingdom

Operations, maintenance and optimization of Orange’s 2G/3G mobile network including transfers of 470 line level employees to sub-contractors and/or to NSN direct employee status

Nokia-Siemens Orange - Spain Fixed and mobile multi-vendor network operation and management

Nokia-Siemens Embarq, Ltd. – United States

Ownership of Embarq’s (now CenturyLink) voice network and network operations center with employee transfers

Alcatel-Lucent Sunrise - Switzerland Mobile, fixed and broadband network outsourcing and employee transfers

Alcatel-Lucent Bharti Fixed network outsourcing and IP transformation

Alcatel-Lucent Reliance Telecom – This outsource arrangement involves a new joint-venture arrangement

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Alcatel-Lucent Reliance Telecom –India

This outsource arrangement involves a new joint-venture arrangement between the two parties. The arrangement includes ALU providing network outsource services to Reliance as well as Reliance and ALU partnering to provide outsourcing services to other CDMA and GSM network operators

Alcatel-Lucent Global Crossing –Global

Operations, management and maintenance of Global Crossing’s IP/MPLS network infrastructure

Ericsson Yoigo – Spain TeliaSonera’s mobile operator in Spain has entered into an agreement that Ericsson is responsible for the operations management and maintenance of its 3G network. The operations management includes field services, the NOC and support of the hardware and software.

Ericsson Sprint Wireless and wireline network outsourcing including employee personnel transfer

Ericsson 3 Italia Extension of an existing network outsource arrangement for management of 3 Italia’s 3G network and its IS & IT infrastructure. The extension also includes provisions for Ericsson to upgrade the 3G mobile broadband access and core network.

CSPs have made a strategic decision to support next-

generation services and technologies, legacy portions of the

network are outsourced to the NEP

CSPs have made a strategic decision to support next-

generation services and technologies, legacy portions of the

network are outsourced to the NEP

CSPs do not have the expertise to run next-generation

networks and/or do not want to assume the risk of next-

generation products

CSPs do not have the expertise to run next-generation

networks and/or do not want to assume the risk of next-

generation products

Services Business Model

Services Business Model

ExpertiseExpertise

Service Provider Outsource Considerations

There are many considerations for outsourcing:

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CSP networks are widely dispersed and there are geographic

areas that are far from the CSP core service area

CSP networks are widely dispersed and there are geographic

areas that are far from the CSP core service area

Mergers and acquisitions may drive CSPs to outsource a

portion or all of an acquired asset if bottom line profitability

Mergers and acquisitions may drive CSPs to outsource a

portion or all of an acquired asset if bottom line profitability

CSPs have multiple vendors and vendor products and

determine it is more efficient to outsource the entire network

to alleviate the time consumed by network equipment

upgrades, patches and scheduled maintenance

CSPs have multiple vendors and vendor products and

determine it is more efficient to outsource the entire network

to alleviate the time consumed by network equipment

upgrades, patches and scheduled maintenance

GeographyGeography

AcquisitionsAcquisitions

Multi-vendor EnvironmentMulti-vendor Environment

Source: Stratecast

Overall business objectives of the client, for example, is the client

willing to relinquish control of the network in its entirety

Overall business objectives of the client, for example, is the client

willing to relinquish control of the network in its entirety

Status of the network; what will it take to bring the network to a

reasonable operating level from both a re-design and equipment

status perspective

Status of the network; what will it take to bring the network to a

reasonable operating level from both a re-design and equipment

status perspective

Outsource ObjectiveOutsource Objective

Network ViabilityNetwork Viability

NEP Outsource Considerations

NEPs have many considerations too, the high level ones are:

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NEPs must be able to successfully complete an in-depth and

sometimes lengthy disclosure process

NEPs must be able to successfully complete an in-depth and

sometimes lengthy disclosure process

NEPs consider the viability of asset and personnel transfers,

assumption and/or re-negotiation of existing maintenance, hardware

and software license agreements, and the status of the network

equipment

NEPs consider the viability of asset and personnel transfers,

assumption and/or re-negotiation of existing maintenance, hardware

and software license agreements, and the status of the network

equipment

Financial stability of CSPs, the commitments to other vendors and

contractual obligations and risks of sharing arrangements

Financial stability of CSPs, the commitments to other vendors and

contractual obligations and risks of sharing arrangements

Due DiligenceDue Diligence

Outsource DetailsOutsource Details

Financial and Risk Assessment

Financial and Risk Assessment

Source: Stratecast

Long Term Implications of Total Network Outsource

• The decision of when to retire legacy network infrastructure shifts to the

network outsource vendor as long as required services can be provided

• CSPs can concentrate on services, and more importantly customer service

• Outsource arrangements keep the door wide open to the business model

where the CSPs are truly able to focus on new, innovative services, and retail

operations

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• Employment opportunities with CSPs shift from network-centric to customer-

centric

• Total network outsourcing has the potential to transform the CSP into a new

entity that can focus on its client base and not the network

Final Observations

• Total outsource changes the CSP and NEP relationship paradigm as

well as changing the definition of what each entity is…the CSP a true

provider of services versus a network operator and the NEP, and

network operator versus a product and services vendor

There is opportunity to ‘green up’ the network infrastructure

• Opportunity for network and back-office sharing

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• Opportunity for network and back-office sharing

• Opportunity for market-centric providers to enter the market

• NEPs become more sensitive to CSP operations

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For Additional Information

Jake Wengroff

Corporate CommunicationsInformation & Communication Technologies

(210) 247-3806

[email protected]

Becky Watson, Program Manager,

Communications Infrastructure and Convergence, Stratecast(A Division of Frost & Sullivan)

(303)695-7673

[email protected]

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Perry Somers

Director of Business Development, Stratecast(A Division of Frost & Sullivan)

(360) 416-4982

[email protected]