According to the 2022 Mobile Economy Report by GSMA, the number of 5G global connections is predicted to double to 2 billion by 2025. The pace of 5G deployments has overtaken the previous generation of mobile technology, and in a short time, marked progress has significantly impacted network deployment, consumer services and industrial applications.
As a result of this rapid advancement in connectivity, accelerated by COVID-induced remote work and long-distance online business activities, the global trends in accessibility, network reliability and user experience have taken a sharp upward turn. As urban and rural communities’ dependence on high-speed connectivity to access public resources, health care, and social services grows, telcos are increasingly and voluntarily splitting their integrated telco operation into separate businesses referred to as “NetCos” (network operators), “ServCos” (customer-facing entities), “InfraCos” (infrastructure) and “TowerCos” (tower companies). Although not a new concept per se, this business model is proving somewhat effective in addressing the challenges of the current financial and market pressures given the capital-intensive evolution toward 5G and fiber to the home.
Striking Feature of NetCos
For telcos, their network is the biggest generator of revenues, as it allows them to establish a competitive advantage for an extended period of time.
Operating as an independent NetCo allows telcos to offer wholesale access to other operators, resulting in various operational and financial advantages. It can increase its network occupancy by letting multiple service operators use the network. By solely focusing on the network, it can provide specific services to different operators. It can also help them operate efficiently, deploy capacity, provide technical know-how and improve their pricing and quality of service.
“What we see in today's market is that networks are becoming more virtualized, and they are becoming more intelligent. This requires that the OSS platforms that manage those networks also become more intelligent,” says Bob Titus, CTO at Netcracker, talking about his company’s investment in cloud BSS/OSS solutions that are enabling service providers to sell new services in order to monetize them through the use of new technologies. “Service providers must come up with a new operating model by leveraging agile DevSecOps and other methodologies to become faster and more flexible in terms of how they deploy their solutions and services in the market,” adds Titus.
Furthermore, investors are interested in these new branch-out operations rather than a “monolithic” structure of operation that manages everything from acquiring land and building towers to creating consumer apps and running service call centers. In contrast to traditional telcos, NetCos are less controlled by regional licenses and can expand geographically by acquiring telco infrastructure or through new construction.
In the latest development, Zain Group recently announced that its operation in Iraq was inking a 15-year agreement with TASC Towers Iraq for the sale and leaseback of and the management rights to the passive physical infrastructure of its 4,968 tower portfolio in Iraq for $180 million.
“Zain’s ‘4Sight’ strategy aims to create significant value for shareholders through the unlocking of capital and optimization of infrastructure assets, which will flourish under the management of an independent team,” explains Zain Vice-Chairman and Group CEO Bader Al-Kharafi in justifying their decision to opt for the independent operating model. This model will essentially focus on providing Zain Iraq with the low-complexity assets that make up the passive infrastructure.
With robust investor support, the leading NetCos are becoming more ambitious, with the potential to be worth 15 to 20 times their margin compared to most traditional telecom operators, which are valued at merely six to seven times their annual operating margin, according to Deloitte.
In considering the independent operation of network functions, a survey by Forrester shows that visibility and integration of security and networking teams are critical to network security. An improved visibility results in improved network security, security response, automated audit and compliance tasks, and better management of the network’s performance and capacity planning.
Telcos planning to operate as NetCos would do well to increase their investments in network visibility to better empower their networking and security teams in a cost-efficient manner. Further high-demand, foundational solutions, such as integrated DNS, DHCP and IPAM, can help improve network discovery, visibility, performance and capacity planning.
Setting up a network as an independent entity could create value in the following ways; however, proper planning and implementation will remain a detrimental factor.
Regulatory Respite: The separation from the existing market structure can increase retail competition, resulting in some form of regulatory relief as retail price regulation can impact gross margin. With fewer restraints, greater pricing and contracting flexibility may be achieved.
Bigger Market: An independent NetCo can grow its wholesale business with other operators since combining demand from multiple wholesale customers increases household conversion rates, resulting in a higher ROI from new infrastructure construction.
Cheaper Capital: Since NetCo’s primary investments are in infrastructure, they have the advantage of attracting long-term investors interested in buying into a physical asset.
Defined Management: NetCos normally plan for a 10- to 15-year timeframe for infrastructure investments that can last for 50 or more years. Strategizing and budgeting can be based directly on the specific company requirements, leading to greater strategic clarity and operating space.
5G Compatibility: There is little doubt that 5G will drive up the TCO of the network given the increased penetration in urban areas, resulting in the need for fiber deployment. A well-functioning independent NetCo is better positioned to support the industry’s need for fiber rollout than an integrated carrier, given the expected network sharing with the onset of 5G.
Planning for Growth:
Despite the apparent possibility of value creation, telcos mulling the idea of leveraging their assets independently must come up with a plan for a smooth business split — a plan where the benefits and setbacks are clearly defined. Most importantly, it must be congruent with the evolution into next-gen infrastructure and services for fiber rollout, 5G, and ecosystem-based businesses. The wrong preconditions may result in higher transaction costs in daily dealings due to price differentiation or a lack of access to integrated operations such as package bundling and cross-subsidization, as certain types of product development warrant deep network integration. Moreover, the adopted regulatory frameworks could impact the independence of ServCo and NetCo operations. Further, the splitting of the once-integrated business will undoubtedly be costly and time-consuming, requiring significant management attention and having the potential to render leadership ineffective, resulting in delayed product development cycles.
As more digital-first and cloud-native trends emerge, telcos must provide a seamless experience for consumers and enterprises with new and innovative services. The combination of rapid 5G deployments and powerful computing will empower the digital ecosystem to exponentially expand in sectors such as gaming, education and healthcare, among others. The digital transformation taking place in organizations, including governments, conglomerates and corporations, has opened new opportunities for telcos to operate NetCos to better fit into today’s digital fabric. Meanwhile, new open standards, virtualization and cloud-based platforms are making it easier to disaggregate network hardware and software components, facilitating the way for NetCos to deploy active infrastructure, such as antennas and radio transmission equipment, that can be used by multiple ServCos.
The new wave of value creation will require telcos to become well-rounded, customer-centric providers of connectivity, entertainment and digital services while also driving sustainable growth. Adequate investment in fixed and mobile network infrastructure as well as digital and data platforms could see the NetCo model bear fruit in the years ahead.