Transcript
Page 1: The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

© Copyright 2011. Yankee Group Research, Inc. All rights reserved.

The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

by Jennifer Pigg | February 2011

This custom publication has been sponsored by Juniper Networks.

I. Network Traffic Growth: Choose Your Hyperbole

Every day, service providers watch the needle climb on network traffic. Operational reports of Tier 1 mobile network operators (MNOs) that

have already introduced smartphones and absorbed the initial data traffic spike still show mobile traffic volume doubling every two years. On

both fixed and mobile networks, real-time video as a percentage of overall traffic is growing at a blistering rate. At the same time, user adoption

of video-capable mobile devices is soaring. Consider the following:

Streaming video accounts for an ever larger percentage of peak-hour traffic• . Streaming video, which accounted for just under

30 percent of traffic during peak usage hours in January 2010, accounted for over 42 percent of peak-hour traffic nine months later in

September 2010.

User-generated content (UGC) is exploding• . YouTube reports that it adds 27 hours of content every minute.

Netflix’s streaming traffic is now a flood• . Streaming video content provider Netflix now accounts for 20.61 percent of downstream

traffic in North America during peak hours, second in traffic volume only to generic HTTP sessions, according to statistics from deep packet

inspection (DPI) vendor Sandvine.

Smartphones sales are outstripping PC sales• . Yankee Group forecasts that sales of smartphones will reach 475 million units in 2012,

exceeding the sales of PC and notebook computers combined for the first time.

Apple’s iPad continues to sell like crazy• . Apple released the iPad in Q2 2010, and sold 3 million of the tablet computers in 80 days. By

the end of 2010, the company had sold over 14.8 million iPads.

As truly astounding as some of these statistics are, Yankee Group sees them as the tip of the traffic iceberg. Examining the usage and purchasing

trends of subscribers overall masks the impact of the segment of the population that is changing the way we communicate, but may still rely on

mom and dad to foot the bill.

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© Copyright 2011. Yankee Group Research, Inc. All rights reserved.2

The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

II. The Gigabyte Generation

The Gigabyte generation, the rising generation of technology-

savvy, bandwidth-hungry users, is changing the way we view video

content—not only what we watch, but where we watch it (see

Exhibit 1).

The Low-Down on Upload

Users under the age of 40 are moving away from traditional TV and

toward more interactive experiences such as online gaming and UGC,

much of which ends up on YouTube. Today, over half of Internet

video content is UGC. This has important implications for service

providers, particularly mobile and cable operators that have networks

configured with a wide gulf between downstream versus upstream

capacity. The move to video- and graphic-intensive interactive applications,

as well as UGC such as photo and video upload, interactive video,

crowdcasting, collaboration and gaming, is challenging service providers’

ability to provision sufficient upstream capacity and manage network traffic

on a more symmetric basis. To meet this challenge, service providers

must add network intelligence and policy management at both the

network edge and the device side. And these devices are not confined

to the “three screens” of mobile phone, TV and laptop. Consumers

expect to be able to view content on their choice of screens, most of

which are mobile devices.

The influx of video traffic onto the mobile network is a symptom

of the Gigabyte Generation’s tendency to leave the land line

behind completely.

The Very Social Network

At the beginning of the previous century, three generations ago, we

had three ways to communicate with each other: in person, by mail

or—for 1.76 percent of the U.S. population—by telephone. Today,

the list is a little longer (see Exhibit 2 on the next page).

Exhibit 1: The Gigabyte Generation Prefers Their Video on Mobile DevicesSource: Yankee Group’s Anywhere Consumer: US Consumer Survey - Wave 1-12, 2010

How often do you watch video on your… (by video, we mean TV, films, YouTube clips, etc.)?

11%

35%

38%

40%

47%

53%

66%

72%

85%

15%

34%

38%

35%

42%

61%

67%

79%

88%

5%

22%

20%

26%

27%

55%

45%

66%

78%

Retail set-top box (n=2,213)

Handheld game console (n=1,399)

Mobile phone (n=3,151)

Digital audio player or MP3 (n=1,902)

Video game console (n=2,400)

TV (VoD) (n=788)

PC/laptop (n=3,711)

TV (programs recorded on DVR) (n=1,749)

TV (live TV) (n=3,684)

Older (45+)

Millennial/Mid-Age (18-44)

Teenagers (<18)

Base: Respondents who use the following at least once per week for viewing video

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3© Copyright 2011. Yankee Group Research, Inc. All rights reserved.

February 2011

Results from Yankee Group’s Anywhere Consumer: US Consumer

Survey - Wave 1-12, 2010 show a strong age bias: The younger

you are, the less tied you are to a land line for voice or text. The

home phone is not even among the top three preferred methods of

communications for three-quarters of respondents under the age of

45. Even social networking, for which our consumers like to use a

computer, will move to a mobile-device-dominated access method,

according to Yankee Group research.

Consider mixi, the ultra popular, exclusively Japanese social

networking site. In the second quarter of 2006, 83 percent of

mixi’s page views were accessed from a desktop device, while

17 percent were accessed via a mobile device. In four short years,

those numbers completely flipped. As of the third quarter of 2010,

mobile devices accounted for almost 84 percent of mixi’s 31.2 billion

monthly page views, according to the company’s October 2010

operational metrics.

Gigabyte Tastes, Megabyte ARPU

The financial realities facing MNOs are in counterpoint to the traffic

growth and flood of smartphones and tablet computers hitting the

network (see Exhibit 3).

Exhibit 2: The Connected LandscapeSource: Yankee Group’s Anywhere Consumer: US Consumer Survey - Wave 1-12, 2010

Exhibit 3: Traffic vs. ARPU Dilemma Source: Yankee Group, 2011

4%

7%

6%

10%

15%

20%

62%

24%

71%

59%

6%

4%

9%

13%

19%

27%

29%

27%

50%

50%

55%

5%

4%

10%

6%

21%

32%

37%

26%

61%

38%

50%

1%

Text messaging from a computer

Something else

Social networking from a mobile phone

E-mailing from a mobile phone

Instant messaging on a mobile phone

Social networking from a computer

Instant messaging on a computer

Talking on a home phone

Text messaging from a mobile phone

E-mailing from a computer

Talking on a mobile phone

Teenagers

Millennial/Mid-Age

Older

Please rank the following ways you communicate with your friends/peers/family. (Top 3 answers are shown)

n=2,516

0

5,000

10,000

15,000

20,000

2010 2011 2012 2013 2014

$-

$10

$20

$30

$40

$50

$60

Mobile Lines

Monthly Blended ARPU

0

Monthly Blended ARPUPetabytes of IP Traffic per Month

Petabytes of IP Traffic per Month

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© Copyright 2011. Yankee Group Research, Inc. All rights reserved.4

The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

How will today’s service providers compete with Google, Amazon,

Alibaba and Baidu, four of the top 15 publicly traded Internet

companies by market value in 2010 (the last two went public

only within the past six years)? The service providers are being

challenged to incubate the innovation necessary, shed their TDM

baggage quickly and cannibalize their legacy services to compete

with Web 2.0 innovators. On the other hand, incumbent service

providers own the network and must scale it to the Gigabyte

Generation, while over-the-top (OTT) players ride for free. Yankee

Group believes service providers have an opportunity to get in front

of the dumb-pipe pack and position themselves as active participants

in the Internet economy, rather than as incidental enablers. In doing

so, they will succeed in achieving the following four goals:

Lower their cost per bit•

Enable new products and services•

Participate in OTT revenue streams•

Increase their revenue•

First, however, they need the foundation for innovation: an efficient,

high-speed network with a low cost per bit.

III. Lower Cost Per Bit Through Network Design

This is something service providers understand well. They are very

focused on slicing network costs in terms of equipment, facilities

(space, power) and operational expense. In the past, this frequently

meant “sweating the assets,” or leveraging existing infrastructure

for as long as possible until it is fully depreciated and at or near

capacity. However, service providers are taking a closer look

at capital equipment TCO along with ROI. The gulf is widening

between product generations in terms of space, power, HVAC and

operational requirements (e.g., ease to configure, deploy, change

and manage). The rate of change we are experiencing in user

demand has left many of our service provider clients with networks

they admit are broken, even as they continue to move bits. Service

providers cannot achieve the cost per bit they need with legacy

infrastructure that demands excessive space, power, cooling,

maintenance and operational support.

An increasing majority of infrastructure decisions focus on a “cap

and grow” strategy in which service providers use legacy solutions

to support some traffic (usually voice) and customers but channel

other traffic to an optimized, packet-based infrastructure. Since

innovation and capex are focused on the packet network, this

strategy results in a service provider with a network that:

Uses a converged, packet-based, multi-vendor •

architecture. The ideal is one converged IP network delivered

by a defined set of vendors. A restricted number of vendor

partnerships satisfies both the service provider’s need for

innovation and a competitive field (i.e., many vendors) as well as

its desire for simplified procurement, management and problem

escalation (i.e., one vendor).

Enables innovation in an open world• . Proprietary

applications cannot keep pace with the rate of innovation

we see in software development or that subscribers expect

in personalized services. In today’s environment, access to

resources is much more important than ownership of resources.

This calls for open APIs to invite rapid innovation at all layers of

the ecosystem: client, device and network.

Requires adaptive, self-healing, self-learning capabilities• .

The network must be able to adapt to the changes we see in

user behavior. The moves to virtualization, cloud computing

and mobile communications all mean that neither end of the

communications session—user nor data—can be nailed down

or predicted. This, coupled with the increase in traffic overall

due to data and video content, means the network must be able

to adapt to abrupt changes in demand gracefully and without

service provider intervention.

Service providers need to create a present mode of operation (PMO)

to future mode of operation (FMO) road map in partnership with

vendors that will help them unleash innovation while executing in an

integrated fashion. We detail the five requisite building blocks below.

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5© Copyright 2011. Yankee Group Research, Inc. All rights reserved.

February 2011

1. Data Center

Tier 1 carriers Verizon, Time Warner Cable and AT&T each have

between 20,000 and 26,000 servers. Akamai uses 73,000 servers

to provide its content hosting and Web optimization services.

Google dwarfs all other enterprises with over a million servers.

The mobile data center must be an integral part of every service

provider’s overall network strategy. The rollout of 3G and 4G

networks, along with the rapid uptake of smartphones and tablets

and the mobile applications they enable, is fueling demand for

data-center-hosted services, including rich mobile multimedia

and unified messaging applications. This, in turn, necessitates the

build-out of a highly optimized next-generation MNO data center.

To meet the expanding bandwidth and service delivery needs of

mobile subscribers, the data center must:

Support a low-latency, flattened network that eliminates •

aggregation layers.

Scale to very-high-speed interfaces (GigE to 100GigE).•

Improve operational cost with integrated management and •

provisioning for multiple network elements (e.g., routing,

switching, security, network services).

Be highly robust and recoverable, with in-service •

software upgrades.

Support zero packet loss.•

Be energy efficient through reduced power draw, cooling •

and footprint.

Provide superior security in this current climate of increased •

security risk and vulnerability.

2. Access Network Universal Edge

Service providers are moving to a converged IP core network.

Convergence at the core, however, means we are pushing

complexity out to the edge. The network building block addressing

access must evolve to provide an intelligent network edge featuring:

Multi-protocol support. •

Managed network traffic, including QoS for delay-sensitive •

traffic and traffic prioritization.

Network synchronization services where needed (for the •

mobile network).

Secure transport. •

Network policy enforcement.•

Access aggregation. •

3. Evolved Packet Core (EPC)

EPC, the core network architecture for the LTE mobile network

standard, provides converged IP mobile communications via the

following three core network elements:

Mobility Management Entity (MME)•

Serving Gateway (SGW) •

PDN Gateway (PGW) subcomponents •

Of the 80 LTE trials and implementations Yankee Group currently

tracks, 90 percent are using a single vendor to supply the entire EPC

and 70 percent are using a single vendor to supply both the EPC and

the radio access network (RAN). However, service providers have

become more adept at interpreting the posture and positioning of

their suppliers in terms of strategic focus and incumbent strength.

As a result, Yankee Group estimates that less than 30 percent of

service providers use only one vendor to supply RAN, EPC and the

access network or high-performance core. IP commands a unifying

and critical role in the converged core and access network. Service

providers are insisting on best-of-breed IP solutions from vendors

with a stable, comprehensive and innovative product set, substantial

intellectual property, a large installed base and robust support

capabilities focused on IP.

4. Unified Transport (Optical Packet)

Converge, flatten, simplify: This is the mantra of successful service

providers looking to deploy a network that is low-cost, scalable,

easily managed and able to react quickly to changes in bandwidth

demand driven by new devices, locations or applications. Service

providers’ main focus today is on deploying packet optical transport

with protection and restoration schemes that rival or exceed that of

their expensive SONET infrastructure.

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© Copyright 2011. Yankee Group Research, Inc. All rights reserved.6

The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

At the same time, they acknowledge that sub-50-millisecond

SONET-like recoverability is an arbitrary goal, and the packet

network and the applications running over it are more tolerant

of longer restoration times of under 200 ms. With the

implementation of robust protection and restoration mechanisms,

service providers are able to transition away from the TDM

transport to a converged packet network.

5. Single-Layer High-Performance Core

In parallel with the migration to converged IP networks, service

providers are collapsing silos of service control, aiming to create

an environment for introducing new services and applications

quickly, cost-effectively and with minimal risk. The goal of

the next-generation service control layer is to maximize the

revenue potential of new services and applications in the face of

unpredictable service demand cycles. Successful service providers

will build a core IP network that is optimized for the dynamic,

unpredictable nature of the demand for their services. This

next-generation intelligent IP core affords service providers the

following capabilities:

It lets them distinguish among Layer 3 services and applications. •

It employs advanced traffic engineering to a diverse mix of services. •

It leverages adaptive intelligent functions in a •

virtualized environment.

A network based on these building blocks gives service providers

the foundation they need to keep pace with innovation, as well as

a platform on which they can introduce a variety and richness of

applications and services they could never offer before.

IV. Enabling New Products and Services

Service providers have worked with third-party application

developers for decades. However, their history of collaboration

has been marked with friction. A common complaint has to

do with the red tape service providers require developers to

unravel to do business together. These issues include difficult and

proprietary APIs, onerous application testing requirements and

reviews, and poor commercial models that favor splits on the

service provider side. Service providers developed the reputation

that they “just didn’t get developers,” and developers were content

to fish elsewhere for their revenue stream.

So who does “get” application developers? Not surprisingly, Apple

and Google. Apple’s barnstorming of the mobile industry continues

to fundamentally shift the balance of power among device hardware,

network and service developers. Apple simultaneously plays the role

of innovator, savior, disruptor and teacher. The iPhone’s excellent

user experience and vertically integrated App Store have prompted

the entire mobile ecosystem to look in the mirror and question its

future identity. Apple’s success—its App Store recently hit the 5

billion downloaded apps milestone—has prompted dramatic activity

within MNOs looking to emulate it with their own branded app

stores. Every single Tier 1 OEM and MNO has launched or will be

launching its own app store in the next 12 months, enabled by white

label app store solutions.

Open APIs can help overcome many of the problems between

developer and service provider. In addition to a commonly supported,

lightweight, Web developer-friendly API, they also provide a

consistent, commercial structure for revenue sharing. Open APIs

benefit all elements of the application value chain. Consumers get

choice and services tailored to what they want. Developers get access

to millions of subscribers through a single standard interface and a

simple, easy to-understand commercial model—without the hassle

that went into this process in the past. And carriers, by opening their

network assets up to third parties, gain access to long-tail applications

that make subscribers happy—without having to invent them

internally. Plus, they get a piece of the action.

Open APIs for an Expanded Ecosystem

The implementation of open APIs is the first step toward expanding

the service provider development ecosystem and exposing the

network and customer base to an infinitely varied application

environment. Yankee Group sees three business models that

successful service providers are, or will be, adopting to expand their

service offerings to subscribers and leverage the power of a large

and varied development community:

Open access integration:• This replaces traditional vertical

integration with open access devices and a standardized

modular infrastructure. It targets enabling complex services and

applications across a wide variety of devices and appliances, such

as converged telephony applications.

Page 7: The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

7© Copyright 2011. Yankee Group Research, Inc. All rights reserved.

February 2011

Harvest and personalize:• This capitalizes on opportunities to

distribute services offered by established third parties (such as

Apple in media entertainment, and Johnson & Johnson in health

care). This approach replaces the traditional service provider

walled garden, which stifles these opportunities with undue

control on the part of service providers. Service providers that

deploy Apple and Android devices are, in essence, implementing

harvest strategies but they are falling short on the personalize

side of the equation. These strategies should capitalize on the

device-side developer community, and personalize and enhance

key applications.

Federate and incubate: • This creates an environment for long-tail

applications to thrive and ultimately be harvested and personalized

should they prove commercially viable in their own right.

Network Policy and Security Are Critical for Differentiated Services

Service providers are in a unique position in that they have access

to both subscriber and network information. By leveraging this

rich data set, they can create and offer solutions in a way that

other ecosystem players, such as content providers and device

manufacturers, simply cannot.

Features such as intelligent network and connection management

functions can help control network expenses by offloading traffic

to a less expensive, better performing network. But they can

also enable new services, such as mobile broadband boost, which

can drive revenue by offering subscribers an improved viewing

experience when watching video on the road. The intelligent

network can add rich contextual information about when, where

and how subscribers are using their devices and applications on the

network. Service providers that are scratching their heads trying

to figure out how to personalize applications should be examining

the policy and usage information available to them and creating mini

mash-ups that add value to subscriber transactions and increase

service stickiness. Policy information can be leveraged to monetize

a wide variety of use cases across the service provider organization

(see Exhibit 4).

Security, for example, is an area where service providers can

leverage network policy and control to bring significant and

bankable value to subscribers and enterprises. According to Yankee

Group’s 2010 Enterprise survey, security is by far the top concern

preventing enterprises from moving more aggressively to a lower

cost, productive remote and mobile work force. Respondents are

primarily concerned with loss of intellectual property, securing

internal networks and controlling the spread of malware, among

other issues (see Exhibit 5 on the next page). Overall, enterprises

realize personal and corporate firewalls are increasingly permeable

and offering less protection from Internet bad guys. They are

looking to strong security solutions located in the network itself

and offered by ISPs, content providers and service providers.

Exhibit 4: Monetizing the Network with Network PolicySource: Yankee Group, 2011

Network IT Security Legal

Wired

Wireless

Cable

Billing

Customer Care

Finance

Host

Network

Device

Regulatory Compliance

Network

Marketing

Bundling

Promotions

Upgrades

Fair Use

RAN Congestion

Application-Specific QoS

Tiered Services

In-Session Upgrades

Bill Shock

DDoS

Content Controls

Parental Controls

Lawful Intercept

Net Neutrality

P2P Controls

Triple Play

Event Upgrade

Application-Specific QuotaExemption

Increasing Value to the Business

Related Business Function

Policy-Enabled Use Case

Page 8: The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

© Copyright 2011. Yankee Group Research, Inc. All rights reserved.8

The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

Long-Tail Apps: Infinite Diversity, Limitless Revenue Potential

Service providers continually ask Yankee Group to name the top 10

or 20 applications for monetizing the network. This question seems

to imply there is a finite number of applications service providers

can roll out and support, and they want to be certain they choose

the right ones. We have two observations:

There is no right set of applications, since leading applications •

vary by geography, subscriber community and network.

If there were a right set of applications, it would change tomorrow. •

Revenue opportunities will splinter among a plethora of services

and applications spanning the Internet, media, mobility and

machines. We saw this trend in the 1990s when the Internet

enabled the separation of product creation, inventory management

and distribution, allowing Amazon to differentiate itself through

its ability to profitably sell an ever-increasing variety of products

in smaller volumes. Wired Magazine’s Chris Anderson coined the

phrase “the long tail” in 2004 to describe, among other things, the

Amazon bookstore. The long tail phenomenon, however, extends

beyond Amazon book sales and is at the heart of the service

provider opportunity (see Exhibit 6 on the next page).

Embracing the long-tail model enables service providers to create

best-seller applications, which gain greater adoption through rich

service and application blending and personalization. It is not enough

for service providers to federate long-tail services and applications

or confine themselves to the safety of the short tail. Instead, they

need to incubate, orchestrate and enhance services and applications,

and seize each opportunity to coerce key applications into the

lucrative short tail.

Exhibit 5: Enterprises See Security as the Roadblock to Mobile WorkersSource: Yankee Group’s Anywhere Enterprise: 2010 U.S. Enterprise Mobility/IT Decision-Maker Survey, Wave 1-2

Main security issues in supporting remote and mobile workers

11%

19%

24%

26%

42%

59%

60%

De-provisioning temporary, contract or other externalparties after they no longer require network access

De-provisioning internal users when they leave theorganization

Providing separate network infrastructures foremployees versus guests

Management of heterogeneous mobile devices

Controlling the spread of malware from mobileemployees or external parties with network access

Providing secure access to the internal network forremote or mobile employees

Potential loss of data or other intellectual property

n=328

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9© Copyright 2011. Yankee Group Research, Inc. All rights reserved.

February 2011

However, to pursue long-tail apps, service providers must first

create the network and ecosystem discussed above. They must

lower their costs to deploy and develop innovative charging

solutions for subscribers and likewise innovative payment schemes

for application developers. For example, there are dozens of

applications for which users do not want to pay an additional

monthly fee, including:

SMS me if a 911 call is made from my house.•

Activate a GPS locator on my pet’s collar.•

Give me better service quality for the big game.•

However, users are willing to pay each time they use these

applications. Similarly, service providers should be able to establish

a risk-sharing agreement with developers whereby developers get

paid when the service provider gets paid. The ability to support this

revenue split between service provider and partner transparently is

critical to reducing the cost structure and improving the margin of

long-tail apps for the service provider. Intelligent automation of online

charging systems to handle all charging and billing events will decrease

B/OSS costs and enable service providers to innovate with ease.

V. Turning OTT Players into New Customers and Partners

Video and voice OTT services can present service providers with

a revenue opportunity instead of a threat. The greatest concern to

service providers with OTT video services is the business model.

While consumers may claim to want OTT video on their TVs, their

willingness to pay for it remains relatively low as they continue to

equate Internet content with “free.” The same could be argued

about content considered traditional pay TV fare but viewed on

devices other than TVs. In that case, we believe most consumers

would have a highly negative reaction to paying for content they

believe they’ve already paid for via their pay TV service subscription.

OTT video providers, such as Skitter TV and Sezmi, are actively

pursuing a telco partnering strategy in areas where service

providers are convinced a rational business model exists. This allows

traditional telcos to enter the video arena with significantly reduced

cost structures by leveraging existing broadband infrastructure and

wireless and/or broadcast frequencies.

Exhibit 6: The Long Tail Comes in Many FlavorsSource: Yankee Group, 2011

Number SoldUsage and Adoption

Doonesbury

The Omnivore’s Dilemma

Elementary Theory of Numbers

Helicopter Aerodynamics

Book Title

Telephony

Google

SMS

Intelligent Rx Bottle

YouTube

Facebook

IPTV

MMS

Application/Service

Long Tail of Books at Amazon Long Tail of the Anywhere Network

Harry Potter and the Sorcerer’s Stone

Turbo Connect

Political Observer

Pet Locator Collar

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© Copyright 2011. Yankee Group Research, Inc. All rights reserved.10

The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

On the voice side, early service provider trials with OTT VoIP

have been limited in scope and success, and voice-over-4G (Vo4G)

standards such as VoLTE are not yet mature. 4G networks need

to achieve a level of consistent coverage before Vo4G rolls out.

As a result, Yankee Group expects Vo4G services will not achieve

significant rollout before 2013. Instead, MNOs will continue to

leverage their 3G and 2G networks for the next several years,

possibly into the next decade, negating the need for a quick move of

voice onto high-performing 4G data networks.

Because of this, service providers are choosing to partner rather than

compete with OTT players like Skype, Google, Vonage and others.

While some users will always gravitate to the free/lowest cost option

and some will always gravitate to the higher cost/higher quality option,

the real battle is for the users in between. As the XYZ generations and

their voice-limited, UGC habits arrive, Yankee Group believes today’s

service providers will actively partner with OTT competitors.

To capture new opportunities afforded by wider-economy services,

service providers must first take stock of the key assets, services

and enablers they can offer OTT partners. Service providers must

determine which assets add significant value or are differentiated

in such a way that an Internet (OTT) competitor could not

easily deliver the service without the service provider’s direct

participation in the value chain. Examples include location-based

advertising combined with user demographics, or home energy

management services that use location technology to trigger

in-home actions when a consumer (and his or her device) passes a

geofence (e.g., turning on the heat when the consumer is five miles

from home).

Some of the key assets service providers can present to an

interested, upstream third party are shown in Exhibit 7.

Exhibit 7: Service Providers Have a Rich Set of Bankable Assets to Offer Upstream PartnersSource: Yankee Group, 2011

Service Provider

$

$

$$

$

$

$

Network control

Network user awareness

Abstraction of user information

Network access devices awarenessNetwork services

Network security, billing and authentication

Other services: Field support, customer care, technical help desk

Page 11: The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

11© Copyright 2011. Yankee Group Research, Inc. All rights reserved.

February 2011

Key assets include:

Network control• . Network ownership combined with

intelligence allows for guaranteed end-to-end QoS.

Network user awareness• . Network owners can present

full subscriber context, including static information like

demographics and profile, as well as dynamic information such as

location, state of presence, credit status, etc.

Abstraction of user information• . Service providers can

provide an abstraction of user information to enable targeted

marketing without violating privacy regulations. This allows

service providers or their partners to introduce new models

for monetizing services where the service provider manages

commercial transactions.

Network access device awareness• . Network owners can

discern end-user device usage and capability to ensure the best

user experience.

Network services• . Network owners can expose key services

such as voice, SMS, SMS-short codes, voice mail, software as a

service (SaaS) and more.

Network security, billing and authentication• . Network

owners can provide secure access to services via single sign-on

(SSO) or xSIM, as well as account management and

billing capabilities.

Other services• . Field support, customer care, technical help

desk—exposing these capabilities can serve to reduce friction

and overhead for upstream partners and provide utilization

upside, turning cost centers into profit centers.

VI. The Operator as Innovator: Recommendations and Conclusions

The Internet disrupted traditional service provider business models

by offering users an unlimited application ecosystem including OTT

media applications, social networks and gaming applications. This is

making new players such as Amazon, Facebook, Google and Flickr

a controlling force in the customer experience, while threatening

traditional service providers with disintermediation.

There is no reason service providers must accept the confines of

a utility provider role, however. They are in an ideal position to

insert themselves into the value chain. A move in this direction will

benefit the user, as well as the service provider itself. Yankee Group

believes service providers can leverage many points of insertion into

the value chain. We recommend service providers:

Look beyond managing costs and traffic• . This is where

service providers need to start. If this is where innovation stops,

however, service providers will relegate themselves to a utility.

Service providers must convert cost per bit (opex/capex) to

value per bit because it is not a fixed-per-bit-revenue game. All

bits are created equal, but some are more equal than others.

Work only with those vendors that can take you from •

PMO to FMO seamlessly. Vendor partners must be able to

meet the needs of your existing network and provide a transition

strategy to your future network that preserves your investment

while meeting the needs of the Gigabyte Generation network.

Insist on an open, flexible, extensible architecture• .

Service providers must be able to respond quickly to changes

in user demand and traffic, and this means continually shrinking

service and application development and rollout life cycle. The

only way to achieve this is with a network architecture purpose-

built to accommodate change.

Expand your ecosystem• . Service providers cannot achieve

these goals by themselves. Literally thousands of potential

partners are waiting to help service providers that are willing and

motivated to be collaborative partners.

Service providers are at a crossroads, and they can decide whether

they want to turn around, go sideways or move forward (see Exhibit 8

on the next page).

Page 12: The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

© Copyright 2011. Yankee Group Research, Inc. All rights reserved.12

The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

All these paths can be profitable. The paths toward utility and service provider are well charted, known quantities, even though they are undergoing

some changes. The path of operator as innovator has its challenges, but with proper innovation and execution, the rewards can far exceed those of

today’s business models.

Service providers have three unparalleled assets: They own the network, today’s customer relationship and rich subscriber information. Yankee

Group believes those service providers that take the path to innovation while simultaneously leveraging these assets will increase shareholder

value, bring value to their subscribers and become full participants in the Internet economy.

Exhbit 8: Which Path Will Service Providers Take? Source: Yankee Group, 2011

Operator as Innovator

Utility Provider

Service Provider

ROI: 15 percent and higher

Full participation in Internet economy

Key assets are fully leveraged

ROI: 7-10 percent

Known quantity

Vulnerable to utility, service provider and over-the-top competition

ROI: 5 percent

Critical infrastructure

Ripe for regulation

Page 13: The Operator as Innovator: Smartphones, Smart Apps and Smart Pipes

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We are uniquely focused on the evolution of Anywhere, and chart the pace of

technology change and its effect on networks, consumers and enterprises.

For more information, visit http://www.yankeegroup.com

Yankee Group—the global connectivity experts

Headquar ters

Jennifer Pigg, Vice PresidentJennifer Pigg is a vice president in Yankee Group’s Anywhere Network research group. Her area of expertise is Anywhere Network Infrastructure, technology and management, including carrier convergence infrastructure, carrier Ethernet services and transport, mobile backhaul, packet optical transport, active and passive optical networking, core and edge routers, and multi-service aggregation devices. She also examines the technology challenges facing service providers as they address shifts in the Anywhere Network, such as peer-to-peer content delivery, the approach of IPv6 and cloud computing. On the infrastructure management side, she writes on network OSs, Domain Name System (DNS) and policy management.

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© Copyright 2011. Yankee Group Research, Inc. Yankee Group published this content for the sole use of Yankee Group subscribers. It may not be duplicated, reproduced or retransmitted in whole or in part without the express permission of Yankee Group, One Liberty Square, 7th Floor, Boston, MA 02109. All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.

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