NGN funding gap

Craig Skinner, Senior Consultant, Ovum

UK: The dilemma facing both fixed and mobile next generation network builders is the current and foreseeable gap between network costs and the revenues that can be captured by the network business.

Even in the absence of regulation, the shift to IP based networks has seen an increasing commoditisation of network services. New services are being enabled, but the benefits are largely being captured either by end customers or the retail service providers.

The traditional bulwark of telecoms revenues, voice, is also progressively becoming a commodity service provided over the network rather than from within the network. The response by operators is to supplement and eventually largely replace voice revenues with a combination of commodity bandwidth services and, where possible, value added services.

In an antithesis of the IP network vs services separation philosophy, standards and technology such as IMS seek to re-embed service functionality into the network core.

Most operators are attempting to delay the inevitable for as long as possible, with the non-approval of the Google Voice application being a recent high-profile example.

Video, whether live streaming or stored content, has long been hyped as a next generation service. While video over IP does require high bandwidth to deliver customer expectations on quality and hence justifies building higher bandwidth networks, the revenue model has proven more challenging.

With viewers typically not willing to cover the costs of most video viewing, the traditional broadcasting industry model is to source the revenue gap from advertising. The question for network providers is whether they can capture any of this revenue source.

The standard approach to regulating next generation networks (predominantly fixed) in a number of countries looks like it will focus on creating wholesale only networks.

While there are sound economic arguments to separate the network infrastructure from the services delivery to promote services competition, it should be understood that a strict retail-wholesale separation will also separate the retail revenues from the wholesale network costs, exacerbating the cost-revenue funding gap.

A lot of the debate about the value of next generation networks seems to confuse this retail-wholesale distinction, with analysts talking up retail services and revenues that will not be accessible to the wholesale network provider.

One solution to this cost-revenue funding gap is for government subsidy of the network infrastructure costs, diverting money from other infrastructure budgets where benefits from greater use of telecoms network services can lead to potential infrastructure cost savings, such as in transport infrastructure.