Next generation architecture carries hefty price tag, but ARPU ebbs

Supporting bandwidth-heavy apps means telecom operators must revamp their next-generation architecture while also finding ways to raise the average revenue per user (ARPU).

Consumers don't expect their Internet and cable bills to look like their home heating bills. They subscribe to unlimited Internet, data and voice and get charged the same every month. But with bandwidth-gobbling services such as IP video choking their networks, telecom operators must reduce their cost-per-bit by revamping their next-generation architecture while also raising the average revenue per user (ARPU).

"To continue to grow our revenue is probably the greatest challenge. Everyone is under pressure, whether they're the largest telecoms or they're a company like XO."
Randy Nicklas
CTOXO Communications

"Our broadband subscribers are rapidly increasing the amount of information they consume," said Pieter Poll, CTO of Qwest Communications, at a SuperCOMM 2009 forum in Chicago this month. "Subscribers are not expecting [that], as their consumption goes up, the base price of their bill is going to go up at the same time."

Look no further than the legion of disgruntled Apple iPhone users on AT&T's 3G network to see the telecom carriers' fear of an "IP tsunami" realized -- millions of users melting down networks by devouring data-heavy applications over their computers, Web-enabled televisions and mobile devices while carriers' piggy banks aren't getting any fuller to fund building out their networks to handle that new traffic.

Next-generation architecture can reduce cost-per-bit

Although investing in next-generation architecture comes at a price, doing it the right way can reduce a carrier's cost-per-bit. Sprint was the first to roll out a 4G mobile broadband network -- using Clearwire's WiMax network -- a move that the third-largest wireless operator in the United States says has paid off. The operator launched 4G in Baltimore in 2008 and it has since become available in 17 markets, most recently Philadelphia.

"It's about costs per megabit," said Mathew Oommen, Sprint's vice president of device and technology development. "What we've done to manage that IP tsunami -- which is obviously driven by the devices, the applications and services -- is to turbo-charge our network."

Meanwhile, as Verizon Communications builds its 4G wireless network using Long-Term Evolution (LTE) technology, the Tier 1 telecom operator is making other moves to mitigate the increasing demand on its wired and wireless networks.

"The first step for us is to reinforce backhaul," said Mark Wegleitner, Verizon's senior vice president of technology. "We're able to at least envision the idea of routing base station to base station, instead of bringing everything back into the backbone and back out to the base station again. That's very inefficient routing."

Ihab Tarazi, vice president of global network planning for Verizon Business, said the operator plans to build a 100-gigabit powered network in the near term.

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"We want to get to the 100g backbone on our IP backbone," Tarazi said. "We need higher-speed backbone network capabilities because of the high level of capacity customers are looking for from us, and also [because of] the continued growth on the IP backbone."

Globally, Verizon will also continue investing in technologies to build intelligence and resiliency in its network, such as ultra-long haul in France and expanding its optical undersea mesh network into Europe, Asia and the Middle East, Tarazi said.

New business model to raise average revenue per user (ARPU)

Yet the existing business model for carriers won't keep them profitable if they have to pay for these infrastructure changes, according to operators and analysts.

"To continue to grow our revenue is probably the greatest challenge. Everyone is under pressure, whether they're the largest telecoms or they're a company like XO," said Randy Nicklas, CTO of XO Communications, a service provider based in Herndon, Va., which sells voice, data and IP services to businesses, governments, carriers and wholesale service providers.

"The principal [avenue for growth] is by going up market -- by going after larger customers. We got started as a [competitive local exchange carrier], selling business lines to relatively small companies. We don't do that anymore," Nicklas said.

"We certainly have lots of smaller customers, but we've got a large national account-slash-enterprise [sales] group that's going after the Fortune 500," he added. "We're seeing success there because we're facilities-based. We don't have to rely entirely on somebody else's network. We've got our own network. For higher-speed services and for bigger customers, that's crucial."

Market consultant Tom Nolle, president of CIMI Corp., said operators still need to find a way to generate more revenue from wireless customers to pay for all the infrastructure needed to support them.

"Service providers are going to have to figure out how to make money on smartphone customers beyond voice plans and beyond data plans," Nolle said. "People who are in the best position to make that happen are the mobile operators because they know what features of their network could easily be exposed to [application programming interfaces], to developers and to over-the-top players."

Operators also need to unwed themselves from the unlimited use models and give users another incentive to sign up, according to James Brehm, a wireless analyst at Frost & Sullivan. Although consumers may go quietly on giving up their unlimited plans, "there is that screaming demand for better quality as well," he said.

"[Carriers] really need to take a look at 'How do we maximize those data streams we have by marketing around quality of service?'" Brehm said. "People who are using video on a wireless device are probably willing to spend a little more money than people just using it for voice."

Continued: Streaming IP video strains carriers' service network architecture

Let us know what you think about the story; email: Jessica Scarpati, News Writer

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