Keeping a focus on operating costs was somewhat neglected during the early days of cellular. The drive to deploy networks and gain subscribers was considered paramount, and operators decided that sorting out the growing operating costs associated with these two business objectives could wait for another day. That day has come.

An increasing number of mobile operators are facing a harsh new truth: their markets have reached maturity with little further opportunity for real subscriber growth.

Their concerns have shifted from growing revenues to making sure that the revenues they do receive are as profitable as they can be. And these concerns are exacerbated for European operators by increasing EU tariff regulation.

Many are hoping that the decline in voice revenues is hopefully balanced by the uptake of data services. But the reality for most is that they have failed to attract large-scale subscriber interest to non-voice services, with the exception of text messaging.

This predicament has provoked the more established mobile operators into a harsh examination of the ongoing costs, or operating expenditure (Opex), of every aspect of their businesses.

According to the market analysis firm Pyramid Research (www.pyr.com), mobile operators are today spending three times more on Opex than on capital expenditure (Capex), or a total of US$400 billion to US$500 billion annually. The magnitude of this Opex figure needs to be considered alongside the fact that operators are presently involved in a dramatic transformation that will involve Capex investment to provide additional high-speed capacity, convergence and a network evolution towards next-generation networks (NGNs).

Outsourcing
This transition by the larger operators of placing the operation and management of their networks with an external company is well underway. The established equipment vendors – including Ericsson (www.ericsson.com), Nokia Siemens Networks (www.nokiasiemensnetworks.com) and Alcatel-Lucent (www.alcatel-lucent.com), have each built a services business based upon agreeing to operate and manage mobile networks for a contracted fee.

However, according to Stephen Carson, director of sales for strategic networks at Ericsson, this outsourcing model has progressed to now considering the total cost of ownership (TCO) which can include operator Capex items.

“This doesn’t mean we look at the overall operator’s business as a single TCO,” says Carson . “It’s more like looking at snapshots of an operator’s costs. For example, what if the operator makes a decision to improve coverage or capacity, and what would this mean to the annual cost structure? Depending upon the outcome we can look at alternative methods of servicing this potential increase in Capex and Opex.”

But Carson accepts that Capex is rapidly becoming a much smaller percentage of the overall cost structure and there is an urgent need for operators to investigate how costs associated with building and maintaining customer relationships and network costs can be driven down. “We take the approach that all of these cost elements can be reduced using our TCO process.”

What is recognised is that significant cost savings can accrue by applying network optimisation expertise in an effort to reduce the number of base stations deployed. This can mean modernising particular sites with more effective equipment or removing actual sites altogether.

Insiders within the vendor community will admit that many of the initial 2G network deployments were ‘over-dimensioned’, based upon pessimistic coverage assumptions, and with little time allowed to determine the optimum network layout. Forgivable sins, perhaps, given the overriding objective of rapid network deployment during the early days of cellular.

Certainly outsourcing is a booming business, if a new study by Insight Research (www.insight-corp.com) is accepted. The firm claims that telecoms operators worldwide will be spending nearly US$1.4 trillion over the next five years on outsourced services in order to reduce cost. By the close of 2007, says Robert Rosenberg, president of Insight, these companies will be spending more than US$198 billion on outsourced services worldwide.

“Outsourcing was used by operators to gain incremental cost improvements in the 10 to 20 per cent range,” says Rosenberg . “However, with lower margins as well as increasing competition, operators are being forced to rethink their entire strategy. These companies are unbundling their value-chain and using outsourcing as a transformational strategy to achieve cost savings between 30 and 60 per cent.”

Energy costs
While mobile operators can take advantage of outsourcing, they are now coming under growing pressure to be seen as ‘Green Citizens’, and to cut their ever-increasing electricity costs, by reducing the power consumed by the cellular infrastructure.

Given that the radio network is said to account for around 80 per cent of an operator’s overall electricity charge, it not surprising that some, including Vodafone, are making public their call for a 33 per cent energy improvement in new base station equipment. This could result in the radical redesign of the cellular power amplifiers which consume about 50 per cent of the energy to each base station, together with software to intelligently manage the cooling requirements, and even closing down selected cell sites during non-peak hours.

Today, with each base station consuming between 2kW and 3kW, some studies have estimated that a typical European operator with a network of around 25,000 cell sites would have annual energy costs of approximately US$65 million.

But Carson claims that the network energy costs only make up between eight and 10 per cent of an operator’s total Opex. “This does depend on the location of the operator and how effectively the network has been designed. In Western Europe and parts of Asia the site rental tends to be significantly higher than in developing countries, even though the power costs should be lower. While electricity costs will continue to be an issue, it’s not the highest concern in the developed regions.”

If energy costs might be containable, site rental charges are becoming a penalty, of sufficient importance, enough to provoke rival operators into consider sharing each others’ facilities. Vodafone and Orange have been negotiating for many months over forming a joint venture that would manage these shared cell sites.

However, the reason for these protracted discussions is not down to either operator’s tardiness and is more concerned with the issues of combining the necessary technical features and services each operator will demand from a shared site.

While the telecoms regulators have nothing against site sharing, although there are questions concerning spectrum usage and how it is farmed and shared, the delay in instigating this cost-saving move is all about where the sharing starts and finishes. Is it just the mast and site rental charges that are shared, or does it include the radio equipment and at what level, will the operators completely share the radio access network (RAN) with each operator then having its own core network?

Given that the large multinational operators have yet to find a workable solution, the issue also applies to Greenfield operators deploying cellular networks in developing countries. Carson claims that rural coverage in these new markets would be very questionable unless operators can agree to site sharing prior to network deployment. “As a rough rule, about 66 per cent of the network costs are associated with the RAN with the remainder going into the core network. It costs a lot to expand coverage into sparsely populated rural areas, especially when the operator doesn’t know the likely return.”

Benefiting from what has happened with 3G deployments elsewhere around the world, the Chinese regulator has stated that the three national 3G networks expected to be granted licences during 2008 will be required to adopt site sharing that will also include the RAN and core network.

Customer facing
While these actions seem set to help reduce ongoing network costs, over 40 per cent of the overall Opex is consumed by the operator’s sales, marketing and administration departments.

Within mature markets operators are less interested in attracting new subscribers and more concerned in retaining customers that have a history of high usage. According to Peter Nuthall, European telecoms analyst with Forrester Research (www.forrester.com), these high spending subscribers are now given special treatment in terms of discounted price plans, new handsets prior to the end of contract and regular contact from the operator’s customer care centre.

“It’s taken years for the operators to respond to the needs of this select group of customers,” claims Nuthall. “This does involve extra cost, but hopefully has its rewards by stopping these users from moving to another network and also increasing revenues by offering improved customer service.”

Where cost savings can be gained is by more intensive analysis of subscriber usage profiles. “There’s no reason for the major operators to expend effort retaining customers that are unprofitable, as they may have attempted in the past.

Evidence that this shift is already underway is seen from the extension of subscriber contracts out to 24 months. Operators are no longer willing to suffer the costs associated with handset subsidies when it takes up to 15 months to recover this outlay from the low usage subscriber.

To better address cost savings at this low-end, perhaps traditional operators could learn from MVNOs where the internet is used extensively to sell and support the service – with no handset subsidies and contact centres based in Eastern Europe . One claim made by the US-based MVNO, Sonopia (www.sonopia.com) , states that it can break even on an industry standard ARPU in less than nine months, whereas other MVNOs take around 20 months to achieve the same.

To help drive down costs further, and potentially increase call revenues, operators are placing contracts with equipment vendors for Femto cells. These micro base stations are designed as ‘consumer installable’ with the objective of enabling users to make calls using their existing cellular handset via the Femto unit.

“From a TCO perspective, users that purchase their own Femto cell are an operators dream,” states Carson . “There’s no site equipment, civil works costs, etc., and these units are self configuring and user installable. They completely turn the TCO model on its head.”

Operators in Western Europe and Japan have indicated a strong interest in pushing forward with Femto deployments and, following a large number of trials, contracts are being placed with vendors.

While Femto devices have been positioned as bringing 3G into the home, these initial contracts are for 2G devices with the intention of capturing voice and text traffic only. Given that the consumer will need an ADSL line to provide the Femto cell backhaul, operators are rightly assuming that the consumer will not want to pay to use 3G wireless broadband.

With Femto cell at the leading edge of persuading the customer to absorb an element of both Capex and Opex costs, the task faced by operators to make meaningful and ongoing Opex savings is complex and touches every aspect of the business.

It is time for firmer controls on what was an industry experiencing rampant growth and surging revenues. The days of wild expansion and investment are over, and the control exercised by the grey-suited financial men will now invade every decision making process.