Eva Lindqvist, the President of TeliaSonera International Carrier, has held a long line of positions within the telecom industry. Ms Lindqvist joined Telia as Senior Vice President of the Enterprises Business Area. Ms Lindqvist was later appointed Head of the Equity Business Area and a member of Telia’s Group Management. Subsequently, Ms Lindqvist assumed the role of Senior Vice President of Telia Mobile responsible for all staff units and overall strategic business development. Before joining Telia, Eva Lindqvist was employed by the Ericsson Group for 18 years, where she held leading positions in Japan, Australia and the US. Upon her return to Sweden, Eva Lindqvist was nominated R & D Director for Corporate Technology at Ericsson. Eva Lindqvist holds a Master of Science, Engineering degree in Applied Physics from Linköping Institute of Technology, Sweden, and a Master of Business Administration from Melbourne Graduate School of Management, Melbourne University, Australia.
Mobile telephony, for mobility and reachability, and the Internet, for affordable global connectivity, are changing how we work and live. Although mobile evolved into a cash cow, there are few truly profitable Internet Service Providers. Both will soon provide voice, data and video and will be forced to migrate towards flat-fee pricing and bundled services. This will pave the way for a battle between the two. The Internet peered interconnect model will also need revision to reflect international needs and costs.
It is human nature to over-estimate what can be achieved within one year and under-estimate what can be achieved within five years. Even from an outsiders perspective this is a fundamental reality of the wholesale telecommunications industry. The long-term changes have been almost impossible to predict, whilst the industry response to short-term changes has been somewhat of an over-reaction. To be able to comment on future developments within the carrier market, we need first to consider our origins. During the 1990s the telecoms industry was fundamentally changed by two major revolutions, namely mobile telephony and the Internet. Two very different forms of communication changed forever our way of working and living: mobile telephony, which offers levels of mobility and reachability never before possible, and the Internet, which offers global collaboration and connectivity within the means of most people. From a business perspective, these two innovations were as different as they were revolutionary. Mobile, with its roots in the voice world, with healthy margins and a controlled service offering, naturally evolved into a cash cow. On the other hand, although commercially developed by entrepreneurs, the ideal of global collaboration and connectivity–rather than any more structured business model–drove the Internet. Indeed today, it is still difficult to find truly profitable Internet Service Providers (ISP). Internet broadband and mobile telephony are amongst the fastest growing telecom services; they will provide the platforms for new and exciting service offerings. Undoubtedly, the next phase of consolidation will be the ‘triple play’–voice, data and video on the same network–offering to the consumer, paving the way for an epic battle between the two revolutionary developments of the 1990s. Due to fact that mobile networks are still a relatively closed environment, we shall consider the current situation from the broadband Internet perspective. Broadband penetration is now reaching significant levels in Western Europe, the US and certain markets in Asia. This, combined with rapid technological evolution, means that service consolidation is far more than a mere buzzword. Today, most providers are able to offer multiple services over their respective broadband connections. Dependent upon the service providers’ origins, service offerings have evolved differently. Cable TV operators, for example, might start by adding Internet services and then follow with a voice offering. Conversely, the ISP first adds voice and then, perhaps, TV/Video on demand. This push for bundled services is mainly driven by the suppliers’ desire to increase the revenue derived from each subscriber and, if possible, to reduce churn rates. From a consumer perspective, the main incentive for acquiring additional services from a single provider is to lower the overall cost. This, in turn, will trigger yet another price fall within the market. Consequently, the Internet business model may now start to influence the profitability of voice and TV/Video-on-Demand services. Of course, traditional telecom providers have been painfully aware of this threat for some time! Ironically, it is not the consumer who is driving the technological convergence, but rather the convergence business model itself. In the traditional voice model, the consumer had to keep track of different rates to different destinations available at different times. This made life easy for the carrier, but extremely complex for the consumer. Dial-up Internet started with a fixed fee for usage, regardless of destination. However, combined with variable phone charges this made it somewhat difficult for the consumer to keep track of costs. On the other hand, broadband Internet offers mostly fixed costs. What we now see is the voice model beginning to migrate towards the Internet business model. Flat-fee pricing for both mobile and fixed telephony is becoming increasingly common, which in turn makes it simpler for the service provider to offer bundled services With convergence now well underway on the end-user side, the telecom industry will change in two ways. First, non-traditional telecom operators will offer traditional telecom services such as voice. Secondly, price pressures will force traditional telecom operators to reassess operations and scrutinise costs in order to maintain profitability. Both will create new demands and indeed new business opportunities, for international carriers. Coming from an IP background, service providers offering voice services will demand simple and cost efficient international voice, IP and media distribution solutions. Certainly, today’s carrier backbones already have the technology in place to support this and Ethernet, MPLS (Multi-Protocol Label Switching) and QoS (Quality of Service) are the tools, which will enable this transformation. A single Ethernet port will be sufficient to deliver all the services offered by a service provider, all of which can be provisioned over a single local ‘tail.’ Initially voice services will be a combination of PSTN (Public Switched Telephone Network) and VoIP (Voice over Internet Protocol) traffic and will therefore require the supplier to provide a mixed international voice offering. Traditional telecom operators will be forced to fundamentally review current operating models as their margins are subject to ever-increasing pressure. Most providers will not consider international operations a core business and this may prompt new demands for network outsourcing. Moving forward, transport will be more of a managed network service due to the carriers’ need to become fundamentally more cost efficient. Considering the tremendous erosion of prices for transport capacity, particularly on the most popular stretches in Europe and the US, it is no longer necessary to actually own infrastructure to achieve a low cost base for international capacity services. As such, leasing capacity is currently a very attractive solution, however this by itself will not change the overall cost structure for national service providers. As an alternative, international carriers can offer managed network operations for services ranging from DWDM (Dense Wave Division Multiplexing) to IP VPNs (Internet Protocol Virtual Private Networks). In considering such outsourcing deals, it may not be the network elements themselves that are core components of the offering. For example, the deal may also include the management of certain key business processes on behalf of the customer. Such requirements will, of course, differ between markets but network management, service provisioning and field support are prime examples of processes which could be outsourced. The result is that the carrier industry may separate its offerings into two basic services–transport or communications. Furthermore, for carriers to become the seamless, transparent link between end-user service providers, it is essential to improve IP interconnections. Current interconnections, peering, date back to the early days of the Internet when the key driver for interconnection was to rapidly build an Internet for ‘best effort’ service. Conceptually, the Internet was also extremely US-centric. To support the regionalisation of content and bandwidth consuming applications it is necessary to move towards a more appropriate model for interconnection. In the longer term, the IP interconnection model may go in one of two directions, either applications/flow-based, or along the lines of current voice interconnection. Both models have their respective strengths and weaknesses and both present distinct challenges for the underlying technology. Most likely, the change will begin with applications, which will later change into something more robust for the majority of the traffic. In the IP world today, there is only one operational interconnection model, the tier structure, which currently has three tiers. Tier 1 carriers are Internet service providers with broadband IP backbones that are essentially global in reach and have all the internal resources to manage their backbones and maintain quality. They ‘peer’ with most, or all, other tier 1 providers and generally speaking have a massive customer base. Tier 2 providers normally have to buy access from tier 1 providers, whereas ‘peering’ between tier 1 providers is free. Tier 3 providers are mostly regional. In essence, the tier structure is based on the premise that networks of equal size peer with each other, but pay larger networks for upstream connectivity. This has worked well within the US and at a country level but has largely failed on a pan-regional basis. This is mainly due to the legacy of the Internet being very US-centric, which has forced all other pan-regional backbones to peer with US tier 2 providers to achieve lower costs and to maintain quality. Today, no European tier 1 has free peering with the tier 1 providers in US. This is mainly due to the US policy of treating every ISP as equal, in line with FCC recommendations. This US-centric legacy prevents European tier 1s from getting free peering. Therefore, the European tier 1 can only derive cost savings from peering with US tier 2/3 and even European tier 2/3 providers. Being market driven, the Internet has thus far failed to find a workable solution to improve its interconnection model. Initially, it was the lack of regulatory control that facilitated the rapid growth of the Internet, but ultimately this may contribute to its downfall. Current IP prices do not reflect the costs associated with maintaining and operating an international backbone network and, as such, carriers are struggling to find ways of upholding the carrier-to-carrier market, whilst maintaining a low cost structure. Persevering with the US tier 1 model in other regions will create the need for a new tier level–‘tier 0’. This new tier will facilitate intercontinental or global peering. Consequently, this will remove the need for a European tier 1 to peer with US tier 2 and allow US tier 1 and European tier 1 to peer without changes to domestic or regional policy. Such innovations will ensure the creation of a more stable Internet tier 1, which could then focus on issues such as improving the security and quality of service of interconnections. However, for as long as the tier 1 players have to maintain 50 or more peering connections, rather than say 20 equal peering partners, such developments are simply not feasible. For the proposed peering system is to function, European tier 2 carriers must no longer be allowed to peer with European tier 1 carriers. Instead, they will have to buy upstream transit, which in the long run will be available at lower cost. In other words, if we consolidate the traffic–currently thinly spread over many half-empty networks–onto fewer optimised networks, the result will be a far better cost structure for global IP. Although some operators will not receive this well, it will undoubtedly benefit the industry as a whole. Over the coming years, volume growth will no longer be able to compensate for price erosion. Conversely, with the right volume and cost structures, carriers will not be forced to face drastic operational changes. The main concern should not be the current slowdown in bandwidth growth, but rather how to address concerns regarding the underlying structure of the industry. Average pricing for global connectivity works well when leased lines are relatively expensive and IP volumes are high. However, under current market conditions, the average pricing model backfires to the detriment of the carrier. The result being that service providers build their own peering networks on stretches where they have high volumes and relatively low cost and purchase transit for access to the more expensive routes. Therefore, it is reasonable to conclude that maintaining the average pricing model for IP will result in non-profitable business. As such, IP needs to adopt a pricing model more in tune with the voice model–in other words destination-based pricing. The coming years will certainly be an exciting if somewhat tumultuous period for the telecom industry. Convergence of consumer service offerings will send shockwaves of change throughout the value chain. This evolution of the industry is inevitable. At the end, most providers will have comparable service offerings and, as such, will compete mainly on price. Even more interesting is the point at which mobile services and the Internet truly collide. Today few mobile networks provide access to the public Internet and, as such, this is not an issue. However, as mobile providers begin to reposition themselves as entertainment providers rather then telecom operators and link their services directly to the Internet, it will be akin to opening Pandora’s Box. It is difficult to predict the exact consequences for the carrier industry, suddenly faced with the prospect of phones with IP addresses that need to be always ‘online’ regardless of region, country or city. Applications and other services have to follow the client, which in turn will place a totally new set of demands on International Backbones. To believe that mobile networks can be kept private is simply not realistic. Economies of scale within the international, regional, or domestic IP backbones will force a convergence between the Internet and mobile platforms. The winds of change have just begun to blow.