Now managed and hosted services are becoming really, really big business beasts. According to Pyramid Research, for example, mobile network services currently represent an annual US$80 billion spending area. Meanwhile, the Ovum market research house reckons that the value of the mobile hosting market could expand from around €670 million in 2005 to €1.35 billion in 2009. Not chump change then.

While the size of the managed services market has rocketed, the remit of the managed services providers has expanded enormously. Nowadays some mobile operators appear to be content just to count the money, and leave everything else to an outside supplier, a trend perhaps sponsored in part by the growing legitimacy of the concept of the mobile virtual network operator (MVNO).

But the managed services proposition isn’t any longer just relevant to virtual operators, start-ups and niche cell phone service providers. This year alone, for example, has seen companies of the calibre of  E-Plus Mobilfunk, Mobistar, Orange Netherlands and T-Mobile Netherlands sign up to the outsourcing deal. As part of its ‘Networks and Vendor Business Models Solutions’, Pyramid Research conducted an online survey at the end of 2006 to try and get an understanding of how operators allocate their network OpEx and CapEx among the different network functions identified by Pyramid Research. Interestingly, this found that mobile operators appeared to be most open to managed and hosted services, although more of the wireline incumbents had already engaged in such relationships. Almost 30 per cent of the mobile operators said that they were already in such arrangements, versus 36 per cent of the wireline incumbents, while  another 43 per cent of the mobile operators said that they would consider them if the quality and price met their requirements.

The farmer’s market
The recent and dramatic growth in the profile of managed services can be attributed to several factors (for a thumbnail explanation of the differences between managed and hosted services see panel story ‘Farming Out And Intensive Farming Out’). Chief among the catalysts of the managed services market is the possibility that outsourcing can simultaneously deliver significant operational cost savings, allow mobile operator execs to  re-focus on what they’re supposedly good at, and fill any holes in the cell phone company’s technology repertoire.

The big daddy driving outsourcing is, of course, cost reduction. “Service providers will be under pressure from several directions in 2007,” says research director at ABI Research Lance Wilson. “They must focus as never before on maximising profits and reducing costs, rather than just recruiting as many new subscribers as possible.” ABI is the publisher of the recent study – ‘Managed Services for Mobile Networks’ - that forecasts double-digit compound annual growth rates in this sector over the next five years.

OpEx reduction is a particular focus for mobile operators. The Pyramid Research study ‘Demystifying Opex & Capex Budgets - Feedback from Operator Network Managers’ calculates that today mobile operators spend three times more on OpEx than CapEx, or a total of US$400 billion to US$500 billion annually. What they can expect to save by outsourcing their network operations and management responsibilities obviously depends on the scope of the particular outsourcing relationship. It also depends on who you ask and what you believe, but one fairly sober wireless industry estimate is that outsourcing can reduce the cash costs of a typical mobile operator by between 20 and 30 per cent.

Hand-in-hand with cost reduction is the notion that farming out the processes of running the network frees up executive time to concentrate on those things that should be concentrated on. ABI Research suggests that running the network distracts operators from their core business of rolling out services, combating churn, and ensuring that they can attract high-paying subscribers.

This is certainly the line publicly taken by mobile operators that are buying into managed services. “By outsourcing individual business divisions, we can apply greater energy to our core business – and that means quality and especially care for our customers. It will put us in a position to focus even more attention on the development of simple, cost-effective mobile communications solutions for clearly defined customer segments,” asserted Elmar Grasser, chief technical officer of E-Plus Mobilfunk GmbH & Co KG on the occasion of the announcement earlier this year of an outsourcing deal with Alcatel-Lucent.

It’s probably worth remarking here, though, that it is natural for a mobile operator’s existing operational staff to see support of outsourcing and managed services as a career-limiting move (notwithstanding the fact that. a wholesale transfer of  personnel from the network owner to the managed services provider’s organisation is often part of the transaction). Some incumbent wireless operators might be a little coy about owning up to buying in expertise to run their core networks - some perhaps persuaded that this jeopardises their Tier 1 status. It may also be the case that network operations are easier to outsource to an equipment vendor if the vendor concerned is also the infrastructure supplier; and the network and services being rolled out are new.

And, on the supply side, network equipment suppliers do seem to be the natural beneficiaries of the boom in demand for managed services. “In practice, managed services vendors primarily are the major wireless infrastructure equipment vendors,” points out ABI Research’s Wilson. “This is logical: they already have close relationships with the service operators; they have the very deep pockets needed to succeed in this field; and they have always offered some services relating to their own equipment installation and maintenance. Finally, they enjoy economies of scale, because they may offer the same service to many different operators.”

Next to the opportunity for management to concentrate on core competencies, a third – and related – driver of the managed mobile services industry is the chance to offload responsibility for getting to grips with new network technology.

The issue of growing technical complexity is not a trivial one. In order to combat flat or declining voice-based average revenue per user (ARPU) a growing number of network owners are presently being obliged to contemplate the additional income-generating possibilities of challenging mobile multimedia-friendly technologies such as 3G, followed by high speed download packet access (HSDPA) and high speed uplink packet access (HSUPA). As of mid-March, according to the Global Mobile Suppliers Association (GSA) some 100 HSDPA networks had commercially launched mobile broadband services in 54 countries. The GSA also reported at that time that the first commercial HSUPA network had been launched, and several more were set to follow in 2007. WiMAX/WiBro is another demanding contemporary replacement or complementary mobile broadband technology option.

Then, famously, the IP Multimedia Subsystem (IMS) is barreling down the turnpike. Although designed to reduce the complexity of new service creation, and enlarge the service provision repertoire of both wireless and wireline operators, IMS is often seen as a ‘difficult’ proposition to implement. So much so, in fact, that analysts such as visiongain predict it will become a major catalyst of the managed mobile services market, starting this year.

Either way, though, managed and hosted services look set to become the adopted business model of choice (or necessity) for an increasing number of wireless operators worldwide.

PANEL STORY
Farming Out And Intensive Farming Out
What appears to differentiate hosting from managed services in general is that the former is initially run on platforms owned by a specialised hosting service provider or equipment vendor. A recent example is the multi-year deal announced in March for Clarity Communication Systems Inc to supply hosted push-to-talk (PTT) services to Jamaican wireless services provider MiPhone (and, incidentally, this deal is claimed to have broken new ground in the hosting business in as much as MiPhone is the first ‘off-US mainland’ wireless carrier to offer Clarity’s inTouch PTT solution that utilises this supplier’s hosted model for service deployment).

The main attractions of hosted services for the people that buy them are shorter time to market for new products, reduced CapEx obligations, and the opportunity that this arrangement allows a mobile company to cost-effectively try out new services, and then turn them off if the market turns out to be less than enthusiastic.

By contrast, managed services can involve a supplier assuming a greater or lesser degree of responsibility for planning, operating, maintaining and expanding an operator’s network (and vendor financing of new network build and the takeover of network personnel can be part of this). A recent example of such a ‘full-bodied’ managed services transaction is Alcatel-Lucent’s deal with E-Plus. Under the terms of this, E-Plus Mobilfunk, Germany's third-largest mobile communications provider, will transfer the operational business divisions responsible for the operation, maintenance and deployment of its cellular network to Alcatel-Lucent. As part of this agreement, about 750 E-Plus employees in Germany will join Alcatel-Lucent.

As stated elsewhere the plus points for mobile operators in farming out network operations to third parties include cost reduction (particularly OpEx), the opportunity to concentrate on what are perceived to be ‘core’ competencies, and the divestiture of technical complexity and responsibility for network technology upgrades.