Executives in the United States have become accustomed to outsourcing a variety of jobs, from textile workers to call center employees. Yet if there is one task that U.S. wireless carrier executives remain loath to outsource, it is the management of their wireless networks.
"It's a strange dichotomy that I never quite have been able to put my hands on," said John Ramirez, vice president of the managed services division at Alcatel-Lucent (NASDAQ:ALU). "The U.S. was the birthplace of outsourcing. And yet you get to networks, and the rest of the world seems to be embracing it."
With a few high-profile exceptions--namely Sprint Nextel's (NYSE:S) outsourcing deal with Ericsson (NASDAQ: ERIC) and LightSquared's outsourcing deal with Nokia Siemens Networks--U.S. wireless operators have been reluctant to outsource network management to a vendor, mainly because they continue to believe that they are best equipped to handle those kinds of operations, analysts and representatives from vendors said.
Nonetheless, the global network outsourcing market is set to boom over the next few years. According to ABI Research analyst Aditya Kaul, revenues from network-related managed services are expected to more than double from $5.8 billion in 2008 to over $14.4 billion in 2013. Network outsourcing has taken off mainly in Europe and the Asia-Pacific region so far. However, Kaul said that ABI predicts North American total managed services revenue--including IT and network-related--will grow from $3 billion at the end of 2009 to $6 billion by 2013.
Ericsson, which analysts consider to be the leader in the market, has announced more than 100 contracts for managed services with operators worldwide since 2002, and the deals now cover 750 million subscribers. The company has inked agreements with the likes of Vodafone, TeliaSonera and Softbank.
For its part, Nokia Siemens Networks has more than 265 managed services contracts covering more than 380 million subscribers. The vendor has deals with Orange Spain, Tata Telecom and Vodafone Hutchison Australia.
And Alcatel-Lucent has 90 managed services deals worldwide.
Costs and benefits
There are several reasons why U.S. carriers have been resistant to engaging in network outsourcing. One reason, especially for larger carriers such as Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) that have strong balance sheets, is that it simply is not a prudent business decision that will yield tangible gains, said Phil Marshall, an analyst at Tolaga Research.
However, the biggest stumbling block to the growth of network outsourcing is the deeply ingrained attitudes of the carriers themselves. "They've got it figured it out. They've been doing it for years," Current Analysis analyst Peter Jarich said, describing the mindset of many carriers. "They believe that coverage and capacity are key differentiators that they don't want to give up."
Representatives from Verizon, AT&T and T-Mobile USA declined to comment.
Vendor representatives uniformly said they understand and respect carriers' attitude toward outsourcing, but argued operators' point of view is short-sighted and that market dynamics are bound to change in favor of network outsourcing. Moreover, they said, the benefits for operators are clear.
Alan Petry, the head of managed services for North America at Nokia Siemens, said carriers have "started to understand that [the network] is not the strategic advantage it used to be."
Ramirez was blunter. "It's an emotional argument. It's understandable," he said, noting that European operators like Vodafone and Orange made similar claims years ago. "But it's really one that's not based in fact, it's based in emotion."
There are three core benefits to network outsourcing, according to the vendors. Chief among them is pure cash savings. "The customer is paying less from day one," said Valter D'Avino, the head of managed services at Ericsson.
D'Avino also said that because Ericsson has developed uniform processes for dozens carriers around the globe, operators also benefit from entering that "world club" and gaining access to Ericsson's accumulated knowledge--and purchasing power.
The second key benefit flows from the first: flexibility. If carriers are not as focused on their daily network operations, they will have more opportunities to spend time and resources on marketing, customer care and other key elements of their business. "What is it you want to be?" Ramirez asked. "We're not here to tell you what business to be in; we're here to help you be successful in that business."
And finally, the vendors argue, with more streamlined and focused operations, carriers can more quickly deliver new features to subscribers. "The carriers are really moving at the speed of light just to try and get that stuff implemented," Petry said. "We try to focus on aligning what they want to accomplish in their business strategy and really picking up the speed to do that."
The most high-profile U.S. network outsourcing deal to date is, of course, Sprint's $5 billion deal with Ericsson, which went into effect nearly a year ago. Bob Azzi, senior vice president of networks at Sprint, led the team that selected Ericsson and has managed the transition. He said Sprint wanted a partner that would help to continuously improve the quality of its network and manage back-end operations, like network and capacity engineering.
Now, one year into the deal, he said the time he spends worrying about day-to-day operations is around 10 percent of what it used to be. He said that through the processes Ericsson has put in place, Sprint now has a more systematic way of understanding the stresses on its network.
Azzi also noted that now his team has had more time to focus improving Sprint's CDMA network and enhancing the company's 4G product set. Ericsson likes to term what it does "transformation." "We're living it now," Azzi said.
The other large deal is LightSquared, which is launching a wholesale LTE network next year that will allow for terrestrial-only, satellite-only or integrated satellite-terrestrial services. The company inked a $7 billion deal with Nokia Siemens to design and build its network.
"We're well down the path on managed services to stand up that operation, from the monitoring to the field operations to the core system services," Petry said.
However, analysts said the Sprint and LightSquared deals represent anomalies in the U.S. market due to the carriers' unique positions.
Petry acknowledged that LightSquared's position as a greenfield operator helped drive its decision to outsource.
"I would say they're definitely outliers," Tolaga's Marshall said, adding that Sprint made its move out of desperation in a bid to recover ground against Verizon and AT&T.
Azzi conceded that Sprint's situation was unique. "It would be certainly true that we had motivation to open our minds to the idea of managed services. If circumstances were different, one can speculate, would we have been so open-minded about it?"
For carriers to buy into the model, Azzi and others said, operators must have clear goals. "It has to be a compelling case," said Strategy Analytics analyst Susan Welsh de Grimaldo. "It's a change, so it takes time and focus and attention to get it done right."
Catalysts for change
Analysts and vendor representatives acknowledge that most U.S. carriers likely will not emulate their European counterparts in adopting networking outsourcing--certainly not on the same scale--in the near future.
However, there are several opportunities that could open up the market. Jarich said network outsourcing might start on a smaller scale--it might include discrete applications or parts of the network, for example, or even something as simple as supply chain management for the network. "If you can offload that or take off some of that, that's significant," he said.
Another opportunity is the emergence of LTE--and multiple LTE standards in the U.S. market. "From my standpoint, this is a matter of time," Ericsson's D'Avino said. Smaller operators that do not have the resources or capability to manage LTE network expansion and management could be key movers, he said.
Still another opening could center on capacity as a service, in which network capacity is offloaded to a third party, said Ericsson's D'Avino.
But challenges remain.
"You have to get through a couple of emotional hurdles," Sprint's Azzi said.
Alcatel-Lucent's Ramirez said there are numerous pressures weighing on carriers--the transition to 4G networks, Internet calling taking away revenues, competition from over-the-top players like cable companies. This confluence of factors could push U.S. carriers to be more open to network outsourcing.
"I think we're at an 80-degree temperature," he said. "When we get to 100, I think you'll start to see a move."