value chain and business model analysis of ict services in context of ngn

Center for Information and Communication Technologies Technical University of Denmark

Value Chain and Business Model Analysis of ICT

Services in Context of Next Generation Network

Master Thesis

Ming Xie (s041460)

Supervisor: Morten Falch

Lyngby Denmark

May 2008

Prediction is very difficult, especially if its about the future. --- Nils Bohr

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Acknowledgement

First of all, I would like to give my great acknowledgement to my project supervisor, Morten Falch. Without his support, I can not finish this thesis. Secondly, I appreciate my parents and all the family members. Your love and support gave me the courage to overcome the difficulties in my life. Finally, thank you for all my friends and people who had helped me.

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Abstract

The old telecom industry is featured as highly regulated and vertical integrated sector. The value-adding activities were confined in a close value chain. Walled garden model is the business model of traditional telecom service. Liberalization campaign introduced competition which facilitated the vertical specification. The Internet brought a radical change beyond what is thought as an ordinary technological evolution. Internet enables the disruption of the old business model and brings the public garden model. The industry got consensus that next generation network is based on the IP technology. One of the most important characteristics of NGN is the service plane separates from the network transport plane. This fundamental change of the technology paradigm profoundly impacts on the network architecture, the service provisioning environment, the market structure, and the business model of ICT services. Convergence is recently the most spectacular phenomenon in the ICT service market. Still, some problems related to the convergence emerged. The deep-seated reason for those unsustainable broadband services is the absence of a reasonable business model or a pricing schema. Convergence challenged the existing regulation. Regulators have to identify the potential control points in NGN and regulate them appropriately. The backbone network infrastructures may be regulated as public utility. Competition is encouraged in the access and service/content provisioning market. The upward value shift happened. Consequently, all the stakeholders need to develop their capabilities so as to seize the new opportunities. Indeed, NGN technology breaks up the close value chain and gives the possibilities of joining the value-adding activities to all market players including the potentials. An open and dynamic business ecosystem for ICT services come into being. Multiple co-existing business models rather than the one-size-fits-all model will be the status in future NGN market. Telecom operators can still play an important role in the business models for the new converged services at present. But they have the risk to degrade into bit pipe plumber in NGN market if they do not build up their core competency for instance service innovation and management capabilities. The gated garden business model could be promising for telecom operators. As possible transformation directions, telecom operator may evolve into a service provider, or an incubator manager.

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Keywords

Value Chain, Business Model, Next Generation Network (NGN), ICT services, Telecommunication, Value Shift, Convergence, Telecommunication Transformation.

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List of Figures

Figure 2.1 the Generic Value Chain Figure 2.2 the Value Network Figure 2.3 General Formulation of SWOT Figure 3.1 Layers of the Old Telecom Industry Figure 3.2 Public Switched Telephone Network Figure 3.3 Hierarchical Telephone Network Figure 3.4 Value Chain of Old Telecom Figure 4.1 Typical Representation of the NGN Architecture Figure 4.2 Inter-connected Networks Figure 4.3 Multi-services Based on Single Core Network Figure 4.4Mobility and Data Rate Comparison of Main Wireless Access Technologies Figure 4.5 Vertical service versus horizontal service implementations Figure 4.6 the IMS Service Architecture (Simplified) Figure 4.7 Determinative Factors of a successful new service Figure 5.1 Convergence in the Value Chain Figure 5.2 Sectors Involved in Convergence and Their Layers of the Value Chain Figure 5.3 Today's Networks and Next Generation Networks Figure 5.4 Market Share of TDCs fixed voice and broadband services Figure 6.1 Evolution of Telecommunication Service Value Chain Figure 6.2 NGN Ecosystem Figure 7.1 the Four Design Domains of Business Model Figure 7.2 Telecom Market Segment Figure 7.3 Three Business Models for Broadband Services Figure 7.4 System Architecture of MBC Services Figure 7.5 Typical Business Model of MBC Services Figure 7.6 Typical Business Model of Triple Play Service Figure 8.1 SWOT Matrix of Telecom Operator

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List of Tables

Table 3.1 Layer model of the info-communication industry Table 6.1 Telecoms R&D in 1999

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TABLE OF CONTENT Acknowledgement .........................................................................................................ii Abstract ........................................................................................................................ iii Keywords ......................................................................................................................iv List of Figures ................................................................................................................v List of Tables.................................................................................................................vi 1 Introduction.............................................................................................................1

1.1 Background ..................................................................................................1 1.2 Two Keywords of This Project.....................................................................1

1.2.1 Information and Communication Technology Service ......................2 1.2.2 Next Generation Network ..................................................................2

1.3 Motives of This Project ................................................................................3 1.4 Problem Definition .......................................................................................3 1.5 Structure of This Thesis................................................................................4

2 Basic Theory and Methodology..............................................................................6 2.1 Value Chain Theory......................................................................................6

2.1.1 Value Chain........................................................................................6 2.1.2 Value Network ...................................................................................7

2.2 Disruptive Technology .................................................................................8 2.3 Business Model ............................................................................................8 2.4 SWOT Analysis Methodology ...................................................................10

3 Evolution of the Telecommunication Industry......................................................13 3.1 Layer Model of Traditional Telecom..........................................................13 3.2 Overview of Traditional Telecom...............................................................14

3.2.1 Circuit-switching..............................................................................14 3.2.2 Hierarchical Infrastructure ...............................................................15 3.2.3 Telecom Service Offerings...............................................................15 3.2.4 Operational and Support System .....................................................15

3.3 Market Environment and Regulation .........................................................16 3.4 Liberalization of Telecommunication Industry ..........................................17 3.5 Emergence of the Internet ..........................................................................18

3.5.1 Layer Model of Info-communication Industry ................................18 3.5.2 Impact from IP .................................................................................20

3.6 Vertical Specialization of Telecommunication Industry.............................20 3.7 Value Chain and Business Model of Traditional Telecom .........................21

3.7.1 Value Chain Analysis .......................................................................21 3.7.2 The Driving Force of Old Telecom Industry ...................................22 3.7.3 Business Model of Traditional Telecom ..........................................23

3.8 Summary ....................................................................................................23 4 Technology of Next Generation Network.............................................................25

4.1 Fundamental Technological Changes.........................................................25 4.2 The Architecture of Next Generation Network ..........................................26 4.3 The Cornerstone of Next Generation Backbone Network .........................28

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4.3.1 Internet Protocol (IP) Network ........................................................28 4.3.2 Multi-Protocol Label Switch (MPLS) .............................................30 4.3.3 Transition Path of Core Network .....................................................30 4.3.4 Summary ..........................................................................................31

4.4 Access Technologies in NGN.....................................................................32 4.4.1 Digital Subscriber Line (DSL) Technologies...................................32 4.4.2 FTTx ................................................................................................33 4.4.3 Cable TV and Digital Broadcasting .................................................33 4.4.4 Mobile Access Network...................................................................34 4.4.5 WLAN..............................................................................................35 4.4.6 WiMAX ...........................................................................................36 4.4.7 Personal Area Access Technologies.................................................38 4.4.8 Summary ..........................................................................................38

4.5 Signaling Protocols of NGN.......................................................................39 4.5.1 H.323................................................................................................40 4.5.2 SIP....................................................................................................40 4.5.3 Centralized Signaling solution.........................................................40

4.6 Service Provisioning in NGN.....................................................................41 4.6.1 Rudiment of Service Separation ......................................................41 4.6.2 NGN Service Environment ..............................................................41 4.6.3 Web services ....................................................................................41

4.7 IP Multimedia Subsystem...........................................................................42 4.8 Standardization ...........................................................................................44

4.8.1 Importance of Standards ..................................................................45 4.8.2 Benefits of Standardization..............................................................46

4.9 Migration to Next Generation Networks and Services ..............................46 5 Convergence .........................................................................................................48

5.1 Technology Convergence ...........................................................................50 5.1.1 Challenges on Existing Infrastructures ............................................50 5.1.2 Network Convergence .....................................................................51 5.1.3 End-user Terminal Convergence......................................................52

5.2 Service Convergence ..................................................................................53 5.2.1 Integrated Service Proposition.........................................................54 5.2.2 Fix-Mobile Convergence .................................................................56 5.2.3 Mobile-Broadcast Convergence.......................................................56 5.2.4 Service Delivery Platform................................................................57 5.2.5 Summary ..........................................................................................57

5.3 Market Convergence ..................................................................................58 5.4 Regulation Issues........................................................................................59

5.4.1 Challenges on Current Regulation ...................................................59 5.4.2 Control Points in NGN.....................................................................60 5.4.3 Discussion........................................................................................62 5.4.4 Summary ..........................................................................................62

6 NGN Value Chain Analysis ..................................................................................63

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6.1 Main Value Chain Stakeholders in NGN....................................................63 6.1.1 Telecom Operator.............................................................................63 6.1.2 System Manufacturer .......................................................................65 6.1.3 Terrestrial Broadcaster/ Cable Operator ..........................................67 6.1.4 Software Vendor/System Integrator .................................................68 6.1.5 Content and Service provider...........................................................68 6.1.6 Service Aggregator...........................................................................70

6.2 Value Shift ..................................................................................................71 6.2.1 First Wave of Value Shift .................................................................71 6.2.2 Second Wave of Value Shift.............................................................72

6.3 NGN Ecosystem.........................................................................................72 6.3.1 Concept of Business Ecosystem ......................................................73 6.3.2 From Value Chain to Value Ecosystem............................................73 6.3.3 The Ecosystem of NGN Services ....................................................76

7 Business Model Analysis of ICT Services in NGN Market .................................79 7.1 Business Model Design ..............................................................................79

7.1.1 Service Design .................................................................................80 7.1.2 Technology Design ..........................................................................80 7.1.3 Organization Design ........................................................................80 7.1.4 Finance Design.................................................................................80

7.2 Market Segment .........................................................................................81 7.3 Value Proposition .......................................................................................82

7.3.1 Concept of Value Proposition ..........................................................82 7.3.2 Value Proposition in NGN Market...................................................82

7.4 Business Model Analysis............................................................................84 7.4.1 Business Model in Individual Segment ...........................................85 7.4.2 Business Model of Managed Network Service................................92 7.4.3 Summary ..........................................................................................93

8 Telecom Transformation .......................................................................................94 8.1 SWOT Analysis for Telecom Operator ......................................................94 8.2 Strategies for Telecom operator..................................................................96

9 Conclusion ............................................................................................................98 References:.................................................................................................................100 Acronyms...................................................................................................................104 Appendix....................................................................................................................107

Appendix 1: Main Standards of IEEE802.11 (Non-exhaustive)........................107 Appendix 2: WiMAX Forum Certification Profiles ..........................................108 Appendix 3: Evolution Path of Different Wireless Access Technologies..........110

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Technical University of Denmark CICT

1 Introduction

1.1 Background

Since the 1870s Alexander Graham Bell invented telephone, telecommunication industry has ever influenced human society deeply. Peoples ability of communicating and acquiring information has greatly been extended. Telecommunication industry has experienced and now is still experiencing a significant revolution which leads to intense changes of the market structure and accelerates the emergence of new services. The liberalization campaign beginning from the mid-1980s resulted in the first wave evolution of telecom industry. Then the Internet rose and began to develop rapidly. Eventually, fundamental technology developments brought forth disruptive applications which challenged the old business models and existing regulations of this industry. With the fast technology development, more advanced ICT services keep emerging. The ICT services are changing peoples life style and the way of business operation. More and more remarkably, ICT industry plays a pivotal role in globalization. It brings people more close, provides ever-greater information access, and enables business to operate more efficiently. The application of Information and Communication Technology has given rise to a fundamental transformation of global economy. IP, optical transmission, broadband access technologies, and software technologies together make up of the technical groundwork of Next Generation Network (NGN). The paradigm of IP platform is completely different from circuit-switching which is the base of Public Switching Telephone Network (PSTN). This radical change along with other factors led to the occurrence of convergence across sectors. Market roles especially the traditional network operators face both challenges and opportunities. They need to re-consider their positions in the NGN ecosystem. In particular, the business model issue to a large extent determines the perspective of ICT services in the context of NGN.

1.2 Two Keywords of This Project

As two keywords of this thesis, ICT and NGN are both umbrella terms. This section gives out basic definitions of these two keywords so as to confine the core study scope of this project.

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1.2.1 Information and Communication Technology Service

ICT, meaning information and communication technology, is a combination of information system, particularly software applications, and telecommunication networks. ICT has permeated in many sectors. The information and communication systems make up of the infrastructures supporting a lot of activities in modern society and will play an important role for the development of our society in the future. ICT service is an umbrella concept which covers a wide range of activities for instance telecommunication services, broadcasting services, IT services and etc [1]. This report, in principle, involves telecommunications, broadcasting, software-based value-added services, and the convergence of these services. ICT service could be either simply VoIP or a complex combination1 of information system and network technology such as E-banking.

1.2.2 Next Generation Network

The other keyword of this paper is Next Generation Network (NGN) which is characterized by the use of IP, software-based platforms for service delivery, and huge capacity optical transmission system in the backbone [2]. These three technology pillars profoundly changed the telecommunication industry. NGN can be divided into Next Generation Core Network (NGCN) and Next Generation Access Network (NGAN). The core network mainly performs traffic routing and forwarding. The service control and application functions are clearly separated from the transport plane. NGAN includes a wide range of access technologies from xDSL, Wi-Fi to HFC, FTTx, and etc. Fiber optics and other broadband technologies guarantee the bandwidth so that multiple types of traffics voice, data, and video can be easily delivered through the single core infrastructure and ubiquitous access networks. NGN discarded the circuit-switching paradigm by packet-switching. IP-based NGN can provide a universal platform to create and deliver new integrated services cheaply and rapidly. In NGN, the service logics are separated from the network transport plane. Standardized Application Programming Interfaces (APIs) are open to every application developer. The community of application developers is enormously enlarged, and the process of service innovation fundamentally changed. As a result, the market roles in the traditional telecommunication and other industries including broadcasting, computer, and media have to evolve their competences, adjust their strategies in order to face to challenges and seize opportunities in the new environment.

1 http://icttoolkit.infodev.org/en/Section.1509.html

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1.3 Motives of This Project

IP technology has ever thought as a disruptive technology by telecom operators. In fact, telecom operators face a future full of opportunities and challenges, depending on how they look on NGN technology. This thesis is not a prophecy of the future of ICT services or NGN. It seeks concepts and models through analysis based on durable principles and classical methodologies to provide a deep understanding of the fundamental forces in presently so-called telecommunication industry so as to enable stakeholders to craft their strategies for tomorrow. When researching the fast changing telecommunication industry and advanced ICT services, many people are so focused on the trees of technological development that fail to see the forest which is composed of market environment, regulation, business model besides technology. Technology is only one part of a successful business design. The advantages of new technology do not guarantee a market success. More importantly, the underneath business model plays a big role in the success of ICT service provisions. Business model in some sense is even a decisive factor concerning the ultimate outcome of ICT services under NGN environment. Underneath the technological changes, the close value chain of end-to-end service provisioning was broken. Moreover the value-adding process and relationships between value creators radically transformed. Market players facing with challenges and opportunities need to adapt themselves to the new dynamic business ecosystem and evolve together so as to offer customers the required ICT services. In short, this project focuses on the evolution of telecommunication industry with regard to technology changes, convergence, market environment, and business model issue. Based on the analysis of industry changes before NGN and the introduction of NGN technologies, convergence and the reshaping of value chain will be analyzed. One objective of this project is to clarify the evolution trend of telecommunication industry, especially the value shift direction.

1.4 Problem Definition

Telecommunication industry has ever experienced and is still experiencing profound change. The driving forces of the transformation come from technology development, progress of users requirements, changes of regulation, and etc. As one important stakeholder within this industry, telecom operator is the main object to be analyzed in this thesis with respect to issues about its core competency, value-adding activities, its

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Technical University of Denmark CICT position in the value chain, business model of the service offerings. Other key market players, including cable operator, broadcaster, equipment manufacturer, system integrator, value-added service provider, and etc. are also discussed in specific scenarios. The main part of this thesis commences with the review of the neoteric evolution of telecommunication industry beginning from the 1980s. During this evolving process, two events, telecom liberalization, and the emergence of Internet, happened, and the technological regime and learning regime of telecommunication industry [7] deeply changed. The main questions need to be answered in this part include: How the telecommunication industry was influenced and changed by the Internet? What did the liberalization campaign impact on the telecommunication industry?

Have the business model of telecommunication service changed? It is also meaningful to have an overview of the Next Generation Network technology before delving into the study of ICT service value chain and business model. The main components of NGN will be introduced. Moreover, they will be evaluated from a market point of view. What are the key technologies in the context of NGN? How will NGN technology influence the market structure and the value chain? How to migrate to NGN? As a hot topic, convergence will be emphatically studied in this project. After the analysis of convergence from a technical point of view, the service convergence as a conspicuous phenomenon nowadays will be study. What is the driving force in the process of convergence? How does the convergence shape the value chain? What are the regulatory implications of the introduction of NGN and ICT services? How did those companies position themselves in the value chain? What are the new industrial structures replacing the traditional telecommunication industry? What changes are essential for market players, like telecom operators, to survive and prosper in the volatile info-communications industry? What are the business models?

1.5 Structure of This Thesis

The main part of this thesis beginning from chapter 3 commences with reviewing of the traditional telecommunication industry. In chapter 3, the layer model is used to look through the main activities that telecom players involve in. The overview is from four perspectives: technology, service offerings, market environment, and regulation. Two important events, telecom liberalization and the Internet, are simply introduced. Then the main question How these two events impact telecom industry? is answered. And the value chain and business model of traditional telecom industry are studied and summarized.

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Technical University of Denmark CICT Chapter 4 is the tutorial of NGN technologies. Firstly, the NGN architecture is introduced, and the most important characteristic of NGN which definitely influences the value network and business model of NGN services is pointed out. Both the core network and various access network technologies are included in this chapter. As the key components of NGN, IMS and the service provisioning environment are studied. Also, the influence of technology standardization is also involved. Chapter 5 is about the convergence. Technology convergence is the groundwork of service convergence and market convergence. Service convergence is a main part of this chapter. The main types of converged service in current the market are included. Then several typical regulation issues related to convergence and NGN are discussed. Chapter 6 is the NGN value chain analysis. Main stakeholders are analyzed firstly. Then the two waves of value shift are clarified. Last part is the NGN ecosystem analysis. Chapter 7 is the business model analysis of ICT services. One business model design framework is firstly introduced. The market is roughly segmented into three parts. The value proposition of each segment is given out. By using the framework, typical business models are described. Chapter 8 simply involves telecom transformation. Telecom operator, as the research objective, is analyzed in the NGN scenario. Then basic strategies for operator are given out.

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2 Basic Theory and Methodology

In this chapter, theories and theoretical models used in this thesis to analyze the value creation of telecom services, industry competition environment will be synoptically described. This relatively brief summary of theories aims at helping understand the change in the telecommunication sector.

2.1 Value Chain Theory

2.1.1 Value Chain

Figure 2.1 the Generic Value Chain2

As the theoretical basis of this chapter, the concept, value chain, will be firstly introduced. Michael Porter [4] puts forward that a value chain is made up of a chain of activities. Figure 2.1 shows a most simple case where a product is produced within one organization. The product gets some value at each activity along the chain. The value-adding activities are categorized into primary activities and support activities as figure 2.1 shows. The value chain analysis describes those activities a business organization performs and relates them to the companys competitive position. In this paper, not all the activities of the market players including telecom operators, equipment manufacturers, software vendors, service or content providers, Internet service brand, and etc. are discussed. Technology development, network operation, and service management activities of the market players will be stressed in the value chain analysis. Only if these activities are arranged in a systematic way, it will be possible to produce

2 By Michael E. Porter: Competitive Advantage Creating and Sustaining Superior Performance, 1985; Available at http://en.wikipedia.org/wiki/Value_chain

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Technical University of Denmark CICT something for which customers would like to pay a price. The ability to perform specific activities and to manage the linkage amongst these activities determines the competitive advantage. The organizations margin depends on its ability to manage the linkages between activities in the value chain. These linkages include flows of information, goods and services, and processes for adjusting activities.

2.1.2 Value Network

In most industries, it is not common that a single organization performs all activities shown in figure 2.1. The value chain concept can be extended beyond individual organizations, like figure 2.2 showing, so as to make up an industry-wide value chain3 or value network. Organizations are elements of a value system. Therefore, the value chain analysis should comprise the whole value system where the organization works. Only a certain value of profit is available within the system. The structure of the value system determines how this margin spreads across all players. Each player in this system will use its market position to get a higher proportion of this profit. On the other hand, members of the value system can cooperate to get a higher total profit margin.

Figure 2.2 The Value Network (adapted from4) The value chain theory will be used to analyze the value-adding activities of the traditional telecommunication industry in chapter 3. The value networktheory, or the industry-wide value chain theory will be used to analyze the value system of NGN market players.

3 Industry-wide value chain can also be denoted as value network. And in this report, the term value chain almost means value network because of the habit in this kind of analysis. 4 Ibid

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2.2 Disruptive Technology

According to Clayton Christensen [5], disruptive technology may originally have a lower performance than the mainstream technology and target a different market segment. However, Disruptive technology could eventually overturn the existing dominant technology in the market. In detail, disruptive technology can only provide low performance service or low quality product to satisfy those low end market customers. The disruptive technology can surpass the mainstream technology after the technology is further developed. As a result, the disruptive innovators are able to compete with the incumbent in the same market segment. The other kind of disruption is to serve a new market which does not exist before. In this case, the performance characteristcs are different from that of the mainstream technology market. NGN offers both kinds of the disruptive application as described above. On one hand, VoIP erodes the core business of telecom operators. On the other hand, more innovative applications, advanced ICT services, create new revenue opportunities. Mainstream technology of the old telecommunication industry is the circuit-switched technology which is groundwork of Public Switched Telephone Network (PSTN). At the infant stage of IP-based communication services, there was no disruptive application. And Christensen mentions that a disruptive technology should be based on market possibilities rather than technological5. The QoS of VoIP was not good enough at that time. The quality of service keeps plaguing the best practice6 VoIP providers. So, it mainly targeted the low-end market segment or new market which was not strict with the service quality but was sensitive to the price of service. At that moment IP technology did not shake the dominant position of the Plain Old Telephone Service (POTS) in the market. IP-based services such as VoIP were still complementary to the mainstream circuit-switched voice service.

2.3 Business Model

The concept of business model was widely used to validate opportunities opened by technology changes. It has been thought as the sought-after recipe to built successful business taking advantage of new technologies. Business model to a large extent is an enabler for the implementation of technical innovations. People from both academia and industry have increasing interest in business model because of the Internet, market convergence, and etc. The term business model was brought forward during the boom of e-business in the

5 Tan Su-En: Ph.D Thesis: Heterogeneous Networks and Services, pp 3, CICT DTU, 2006 6 Best practice VoIP refers to the service which is provided over the public Internet rather than over the IP-based private networks belonging to for instance cable operators or even telecom operators.

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mid 1990s. The definition of business model is wide in scope and sometimes resembles business strategy and business plan. According to Paul Timmer [6], a business model is the organization (or architecture) of product, service and information flows, and the sources of revenues and benefits for suppliers and customers. It describes the business players and their roles. More clearly, Paul Timmer gave out the definition of business model to encompass7:

An architecture for product, service and information flows, including a description of the various business actors and their roles; A description of the potential benefits for the various business actors; A description of the sources of revenue. The business model is a loose concept. However, it encompasses and correlates many factors including the environment in which developments take place and the strategies of market players8. Analyzing business model makes it clear to position different market players in relation to one another in a complex industry environment. Chesbrough and Rosenbloom9 complemented the following aspects: articulating a value proposition for the customers and identifying a market segment and, furthermore, formulating a competitive strategy. By putting together these elements from Timmer, Chesbrough, and Rosenbloom, we have a more comprehensive description of the term business model10: Value proposition for the users and identification of market segments; Flows of products/services; Flows of information; Value creation, cost structure and profit potential; Position in the value chain/network. Value proposition is to find out the latent product offer which is unique compared to the available products on the market in the new technology. Could the new offering be served at a lower price? Does it provide new functionality or superior capacity to customers? Is it a modularized product? Market segment is to identify the specific customer segment for which the new service offering is useful. The next issue is the payment model including flat rate, monthly subscription fee plus service fee, pre-paid, post-paid, and etc.

7 Wiley, Paul Timmers: Electronic Commerce- Strategies and Models for Business-to-Business Trading, 1999, chapter 3 8 A. Henten, H. Olesen, D. Saugstrup, Su-En Tan: Mobile Communications: Europe, Japan and South Korea in a Comparative Perspective, Volume 6. Number 3. 2004. pp 197, Emerald 9 H. Chesbrough, R. Rosenbloom: The Role of the Business Model in Capturing Value from Innovation, Harvard Business School, Boston, 2000 10 A. Henten, H. Olesen, D. Saugstrup, Su-En Tan: Mobile Communications: Europe, Japan and South Korea in a Comparative Perspective, Volume 6. Number 3. 2004. pp 198, Emerald

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Technical University of Denmark CICT Analyzing the cost structure and evaluating the profit potential of the product offerings are important issues in the business model.

2.4 SWOT Analysis Methodology

SWOT which is an acronym for Strengths, Weaknesses, Opportunities, and Threats is a general but extremely useful model for understanding the situations of an organization. It provides a framework for positioning and directing a company, evaluating competitors, strategic planning, and etc. Figure 2.3 presents the general formulation of a SWOT analysis.

Figure 2.3 General Formulation of SWOT

SWOT is an assessment of both the internal factors - strengths, weaknesses - of the organization and the external factors opportunities, threats posed by the environment in which it operates. This methodology will be used to analyze the situation of telecom operator in NGN environment (See section 8.1). A SWOT analysis often begins with identifying the main competitors of the company. Competitors could be in the same line of business as well as from related sectors. Convergence and disruptive technology application as two important phenomena of telecom industry bring unprecedented competition pressure. The new competitors include cable operators, Internet service providers, value-added service providers and etc. Strengths A companys strengths are the capabilities and resources which can be used to develop competitive advantages. It is important for the analysis that the strengths as well as weaknesses are realistically identified. Generally, strengths of a firm could be the following: Good reputation and brand name Cost efficiency Innovation ability to differentiate the company from others Certain expertise knowledge for the business Weaknesses

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Weaknesses are the converse aspects to a companys strengths. The activities which the firm does not perform at all or perform badly are weaknesses. It is worth to understand that the flip side of strength may become a weakness in some cases and vice versa. For instance, the possession of ubiquitous network infrastructure of incumbent operators is the most powerful weapon to compete against new entrants, however, the mass of legacy systems becomes the barrier of deploying new systems especially when disruptive technologies emerge. Weaknesses could be: Lack of access to some resource Weak brand name or poor reputation Lack of innovation ability Low efficiency of the internal operations Opportunities After evaluating internal factors, opportunities coming from the external environment are crucial issues for any organization because only the firms which look wider than their present business have the possibilities to use new resources and gain competitive advantages. Possible opportunities in telecom industry relates to the following external factors: New technologies The change of regulation and policies Customers new demands To some extent, it is difficult to sheerly distinguish between opportunities and threats. New technologies, the change of regulation, and etc. all bring opportunities which can also turn into threats if they are ignored or not treated correctly. Threats Threats are pervasive in the volatile marketplace. It is vital for firms to recognize potential threats so that they can evade risks and survive climate change. Threats normally originate from: New competitors Substitute products The change of customers need, product obsolete Traditional telecom operators have been tremendously challenged by various competitors powered by disruptive technology and innovative business models. As a high-tech featured industry, it is quite important for firms in telecom sector to estimate the pace and nature of technological development before making their decisions. High cost of new technologies conceals ventures and prevents companies from entering the market. On the other hand, the market adoption of a new technology, because of the economy of scale, affects the cost. The lower cost can be achieved when the production volumes rise higher. The mature GSM technology11, as a good

11 According to Global mobile Suppliers Associations report, the GSM family reached 2.844 billion subscriptions

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example, is now affordable in a lot of poor countries. Regulation as an important aspect of the external environment can not be ignored when companies evaluate the opportunities and threats in the market. In particular to telecommunication industry, regulation can remarkably shape the competition and the opportunities or threats firms possibly meet in a specific market. The degree to which a certain issue, like vertical integration, is regulated determines whether it is an opportunity or threat for a company. This sub-section reviewed the straightforward method, SWOT, for business strategic analysis. As such, it provides the background of the strategy analysis for telecom operators in NGN environment in later chapters.

which equal to 86.6% of global mobile market by the end of 2007. (Source: http://www.gsacom.com/gsm_3g/market_update.php4#GSM_3G_Market_Update )

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3 Evolution of the Telecommunication Industry

Martin Fransman [7] divided the evolution of the telecom industry into three stages as Old Telecom, New Telecom and Info-communications Industry. Before the info-communication arrival, telecom industry was featured as a regulated and vertical integrated sector. The inception of Old Telecom discussed in this thesis is 1970s. The demise of old telecom happened in the liberalization campaign which was launched by many countries for different political-economic reasons in the mid-1980s. The telecommunication industry never stopped changing in terms of technology, service offerings, business model, and regulations. Digitalization and optical transmission technologies enabled telecommunications a big leap. Fixed telephony has been a kind of commodity service since the 1990s. Then, civilian mobile communications took off in the late-1990s all over the world. The demand of communication mobility was satisfied. The speed of mobile communication development is miraculous in the industry history. From a technical point of view, telecommunication industry has experienced the first wave of technological changes including digitalization, computerization and packet-based switching. On the basis of these fundamental changes, the industry also experienced the booms of Internet and the rapid development of mobile communication which are prelusions of the second wave of technological changes. Then convergence and next generation network happened in succession. Paving the way to the information society, the third wave of technical changes goes beyond the telecommunication industry and combines the information technologies to implement synthetic ICT services. This chapter primarily traces the evolution of telecommunication industry. It reviews the evolving process of telecommunication industry from different points of view including technology, regulation, market environments, and etc. It sets the scene for the following chapters about further analysis of ICT services business model in the context of NGN.

3.1 Layer Model of Traditional Telecom

The telecom industry by and large involves three layers12 as shown in figure 3.1. Layer 1 is the equipment layer including all the network elements, for instance switches, transmission systems, and CPE. Manufacturers of these equipments may be

12 Fransman Martin: Evolution of the Telecommunications Industry into the Internet Age, University of Edinburgh, 2000

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Technical University of Denmark CICT either an independent organization or a division of an incumbent telecom operator. The network layer is the infrastructure for service provisioning. Telecom operators set up, operate, and maintain circuit-switched telecom networks. Layer 3 shows the main service offerings, for instance voice, fax, and enhanced services.

Figure 3.1 Layers of the Old Telecom Industry13

3.2 Overview of Traditional Telecom

Telecommunication industry never stops changing since its birth. In the last several decades, new technologies greatly enhanced the quality of service and offered more convenient services to customers with the fast decline of price. These new technologies, including optical transmission systems, packet-switched networks, the mobile communication, and the Internet, permeated the industry.

3.2.1 Circuit-switching

In Old Telecom Industry, the network infrastructure was based on circuit-switched technology. Circuit- switching involves setting up a dedicated end-to-end connection between the two communicators. And this connection is exclusively occupied by the two participants during the whole session. Circuit-switching can support real-time transfer of voice signal with high quality that is critical for telephony service.

PSTNPSTN

Figure 3.2 Public Switched Telephone Network Circuit-switch technology in which network resources are statically allocated to communicating parties for the duration of the connection was dominant in telecom networks. And it was well suitable for the transmission of voice calls. Comparing with packet-switching which is particularly adapted for the transmission of data traffic

13 Ibid

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Technical University of Denmark CICT occurring in short burst, circuit-switching is not a cost-effective solution for data communication and results in high cost.

3.2.2 Hierarchical Infrastructure

Public Switched Telephone Network is a hierarchical network, as Figure 3.3 shown, which can be divided into access network connected by local central office switches, metropolitan network consisting of higher-speed communication lines and tandem switches, and national or international long-distance backbone network composed of toll switches and optical transmission systems.

Figure 3.3 Hierarchical Telephone Network

The plain voice service was segmented as local calling and long-distance calling charged by different tariffs.

3.2.3 Telecom Service Offerings

In the age of Old Telecom, the main services were voice, fax and some enhanced services for example toll-free 800 services. The main revenue source for Old Telecom operators was simply fixed Plain Old Telephone Services (POTS). This end-to-end service requires a full set of network assets that were provided by the monolithic monopoly operator within one country. Voice services have existed since the birth of telecommunication industry. The improvement of voice quality and the availability of long-distance telephony represented the main advancement of telecom service during this period.

3.2.4 Operational and Support System

The Business & Operational Support System (BOSS) is the underlying resource for any operator to manage and deliver its services. Generally, BOSS is composed of network management system, billing & accounting system, customer relation

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Technical University of Denmark CICT management (CRM) system, service management system, and business intelligence system. BOSS is a relatively new concept. In the old telecom industry, only some primitive supportive functions, for instance network management, billing and accounting system, existed. These isolated systems were separately managed by different divisions of the telecom company. Moreover, the supportive functions are service specific so that homogeneous support systems for different services co-exist. This situation was not a serious issue for operators in the non-competitive market environment. But with the increasing comprehensive service portfolio, the CAPEX and OPEX will raise steeply. And the linkages between divisions within one operator are so complicated that its competitive advantage is impaired. Management includes two categories, network management and service management. Network management which involves monitoring and controlling network systems is the main producing activity of Old Telecom operators. The knowledge and abilities of network infrastructure operation are the core competences of operators. Traditional telecom operators have rich experiences of network management, for example, configuration management, fault management, and etc. On the other hand, most telecom companies at that time did not have a vigorous function for service management.

3.3 Market Environment and Regulation

Telecommunication industry was ever definitely considered as an example of natural monopoly which means telecom services can only be offered efficiently by monopoly providers on account of the increasing returns to scale. In most countries, the PSTN infrastructures ranging from local area to international level were owned by incumbent telecom operators. It was not allowed by any others to deploy networks and provide services. The other feature of Old Telecom market is vertical integration [8]. The operators deployed and operated network infrastructures which were made up of equipments produced either by themselves or by a close supplier. One extreme case of this vertical integration is AT&T which developed telecommunication architecture, developed and manufactured equipments, operated PSTN, and offered telephone service until its voluntary divestiture in 1990s. In other developed countries, such as the UK, and Japan, there was a close, long-term, obligatory co-operative relationship between the network operators and technology suppliers. This form of the economic organization

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between Layer 1 and Layer 2 is quasi-vertical integration 14 . Although the stated-owned operators were not exposed to competition in their markets, they still had to increase the quality and quantity of services. As for the market in developing countries, more vigorous competitions existed in the equipment layer. Those national telecom carriers procured equipments from several specialist suppliers of industrialized nations who were locked into privileged relationship with operators in their home countries. The highly vertical integration of system manufacturing and network operation ended up in 1980s. Much of the equipment production was divested from service operation partly as a consequence of the liberalization of the telecom sector15.

3.4 Liberalization of Telecommunication Industry

Telecommunication industry has experienced liberalization since the mid-1980s. The notion of telecom regulation changed largely. The widespread consensus of telecom liberalization, opposite to natural monopoly idea, had come into being after the EU members made terms to fully liberalize their telecom markets. The liberalization opened the door for new entrants with new technologies. Telecom operators reduced R&D expense and focused on customer relation management and service provisioning. The knowledge base shifted further to equipment manufactures16. Those specialist technology suppliers which were formerly close to monopoly operators in their home countries spun off and operated more independently so that they can benefit from potential opportunities brought by new entrant operators. However, many operators, especially those incumbents, maintained R&D department mainly in software and service development in order to create a competitive edge through provision of the most advanced and innovative services17. The liberalization campaign led the demise of the Old Telecom Industry18 which is characterized as single circuit-switch based telephony service, state monopoly, and close innovation system, and gave birth to the New Telecom Industry.

14 Fransman Martin: Evolution of the Telecommunications Industry into the Internet Age, pp 9, University of Edinburgh, 2000 15 WDR discussion paper #0202 January 30, 2002, Some Implications for Regulation of ICT and Media Convergence pp 15, by A. Henten, M. Falch, R. Tadayoni at CICT of DTU, LIRNET.NET. 16 Fransman Martin: Evolution of the Telecommunications Industry into the Internet Age, University of Edinburgh, 2000 17 WDR discussion paper #0202 January 30, 2002, Some Implications for Regulation of ICT and Media Convergence pp 15, by A. Henten, M. Falch, R. Tadayoni at CICT of DTU, LIRNET.NET. 18 Martin Fransman divided the evolution of telecom industry into three stages as Old Telecom, New Telecom and Info-communications Industry in his book Telecoms in the Internet Age, From Boom to Bust to?

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The new entrant operators have a competitive advantage stemming from the legacy networks owned by the incumbents. They can begin with a clean board and only deploy the latest technology so as to offer innovative services fast and efficiently comparing with those lumpish rivals. But new entrant operators can not avoid the differentiation dilemma19 too because each of them buy technical solutions from those common specialist suppliers. In contrast to the Old telecom, the barriers to enter this market have been greatly lowered in some market segments by the deregulation and the IP technology. Consequently, a lot of new operators, either network-based or facilities-less service providers, were able to enter the market, resulting that network capacity and service offerings increased and prices fell. The most obvious effects of this falling fence happened in the market segments of long-distance and international voice and date services. Anyway, low barriers led intense competition in the information networking arena resulting in falling revenue growth or even absolute revenue. And it is crucial for market players to position themselves appropriately to reshape their core competencies and to take the upcoming industry changes into account. Indeed, this is exactly the difficulty that most incumbents had to face.

3.5 Emergence of the Internet

Comparing with circuit-switching, packet-switching is a completely different paradigm which only occupies network resources in the duration of the meaningful data transmission. Besides the efficient bandwidth usage, packer-switching network has the capability to carry different types of services. There have been many kinds of packet-switching technologies including X.25, ATM, IP, and etc., designed to support different types of services. It is no doubt that IP is the most important and dominant packet-switching technology which can interconnect heterogeneous networks so that the Internet is called a network of networks. To those market players, especially incumbent operators, IP brings a radical change beyond what is thought as an ordinary technological evolution.

3.5.1 Layer Model of Info-communication Industry

Layer models which play a particularly important role have a long history in the telecommunication and computer industry. In the same measure, the layer model20

19 See section 6.1.1.1 20 This layer model is not completely comparable with the Open Systems Interconnection (OSI) reference model standardized by ISO. This model is built to facilitate the analysis of industry vertical integration and specialization.

18

Technical University of Denmark CICT introduced by Martin Fransman [7] helps to look through the evolution of telecommunication industry.

LAYER ACTIVITY EXAMPLE COMPANIES

VI Consuming/Customers -

V Applications Layer, including contents packaging (e.g. web design, on-line information services, broadcasting services, etc)

Bloomberg, Reuters, AOL/ Time Warner, MSN, News Corp, etc

IV Navigation & Middleware Layer (e.g. browsers, portals, search engines, directory assistance, security, electronic payment, etc)

Yahoo, Netscape, etc

III End-To-End Connectivity Layer (e.g. internet access, web hosting) IAPs and ISPs e.g. Freeserve, etc

TCP/IP INTERFACE

II Network Layer (e.g. optical fibre network, DSL local network, radio access network, Ethernet, frame relay, ISDN, ATM, etc)

AT&T, BT, NTT, MCI WorldCom, Qwest, COLT, Energis, etc

I Equipment & Software Layer (e.g. switches, transmission equipment, routers, servers, CPE, billing software, etc)

Nortel, Lucent, Cisco, Nokia, etc

Table 3.1 Layer model of the info-communication industry21

Before the emergence of the Internet, the telecom industry only consisted of two layers, referred as Equipment & Software Layer and Network Layer in table 3.1. With the advent of IP, the industry was transformed into the Info-communication industry which includes more layers above the IP interface. Comparing with the Old telecom industry, the new layers includes Connectivity layer (layer 3), Navigation & Middleware Layer (layer 4), Application & Content Layer (layer 5) and Customer Layer (layer 6). The main activities and example companies of each layer are listed in table 3.1.

21 Source: Martin Fransman: Telecoms in the Internet Age, From Boom to Bust to?, pp 18, Oxford University Press, 2002

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3.5.2 Impact from IP

The profound impact of IP brought two results. First, IP makes the communication across diverse networks possible. The Internet is able to connect heterogeneous networks. It works as the network of networks since its birth. Secondly, IP allows other layers to be separated from the network layer and be independent from the underlying hardware and software. This facilitates firms to specialize in modules or sub-modules without being involved in the whole complex system. Furthermore, it enables the organizationally separated operation of the information systems, which paves the way for the birth of various relationships among different market players. IP network provides an open platform of service developing. On the other hand, the liberalization campaign gave the opportunity to new entrant operators who utilized packet-switched network and services as edge tools to compete against giant incumbents. As a disruptive technology, IP must be regarded by incumbent operators although it did not overthrow their regalities by the end of first wave of IP revolution which was symbolized by the burst of the dot com bubble. If mainstream firms do not manage disruptive technology properly, they will be in peril of failure in the future competition. And new companies with disruptive innovations have the chance to grow in size and surpass their former powerful rivals.

3.6 Vertical Specialization of Telecommunication Industry

The process of vertical specialization between layer 1 and layer 2 (figure 3.1) took place in the age of New Telecom22. On account of intense competition and more commercial pressures, monopoly incumbents decided to leave more and more R&D roles to specialist suppliers. On one hand, equipment manufacturers increased their capabilities of research during the co-operation with operators central labs. On the other hand, monopoly operators were enormously challenged in the liberalized telecommunication service market. The commercial pressures made CEOs to be reluctant to allocate resources to basic and long-term research because the benefits are uncertain and only bring accruement in the future. As the former vice president of Bell Laboratories, Dr Jack A Morton, argued: It is important to separate the R&D function in a centralized research laboratory so

22 According to Martin Fransman, the so-called New Telecoms Industry begins in the early-1990s, signified by the rise of new new telecom operators such as WorldCom. For more references, see Martin Fransman: Telecoms in the Internet Age, From Boom to Bust to?, pp 43-54, Oxford University Press, 2002

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that the long-term and more fundamental focus of R&D could be protected from the vicissitudes and demands of the businesses which had to concentrate more on the task of meeting current market demands on the basis of current technologies. However, R&D could become something of an ivory tower with R&D engineers in a separated central research laboratory losing touch with the demands of businesses23.

As a result, operators reduced their network equipment related R&D budget and reformed their innovation activities so that they were more business-oriented. The main reason that network operators left most of the R&D roles is the intensifying competition in the service market. After the liberalization, former monopoly operators had to face many new entrants so that the business performance rather than substantial technology advantages became the first priority. Those research labs of the incumbents were reorganized in order to be more responsive to the demands of the business. In conclusion, the liberalization opened the telecom service market and enabled new operators to compete against the incumbents. In turn, competition accelerated the vertical specialization and fostered a number of specialist suppliers which to a large extent empowered new operators to rival the incumbents successfully.

3.7 Value Chain and Business Model of Traditional Telecom

3.7.1 Value Chain Analysis

As for telecommunication industry, the value chain structure for operators changed along with the industry development. Before the liberalization, the value-adding activities of telecommunication industry can be summed up as the Vertical Value Chain (VCC) 24 that is basically a set of linked value-creating activities occur within one organization, ranging from technical R&D, equipment manufacture to network operation and service provisioning. Stakeholders in the market are vertically integrated over two or there layers25. The value chain analysis can be by and large confined within one organization as the original value chain concept proposed by Porter. Therefore, it becomes analyzing the internal linkages and activities of a monopoly telecom operator to create and deliver

23 Jack A Morton: Organizing for Innovation: A Systems Approach to Technical Management, McGraw-Hill, New York, 1971 24 Deng Zhiguang: Benefit for All: A Techno-economic Study on the Mobile TV Value Chain and Business Models, pp66, Master Thesis, CICT, DTU, 2007 25 Here, the layer model refers to figure 3.1.

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Technical University of Denmark CICT valued services. Figure 3.3 illustrates the main value-adding roles of the old telecom industry.

Figure 3.4 Value Chain of Old Telecom

In those big industrialized countries represented by the US, monopoly network operators were vertically integrated or quasi-vertically integrated with equipment manufacture. Technology architecture and elements were created and designed by labs within operators, for instance famous Bell Lab of AT&T. Network equipments were manufactured by either subsidiary division or affiliated companies of operators26. Service innovations and software R&D were assigned inside telecom companies. And the operators also monopolized the network infrastructure and service provisioning. In developing countries such as China, state-owned network operators buy network equipments from specialist suppliers. Generally, several equipment suppliers compete each other in the market. Operators fully control the infrastructure operation and service offering. In developing countries, operators generally did not have the technology R&D function. The operators ability to perform the above-mentioned activities and to gear them each other determines their level of production. No matter the degree of vertical integration, network operation division of operators plays the central role in the old telecom industry. Service provisioning department was just a sub-division of network operation because fixed voice service was highly integrated with the circuit-switching network. At the same time, several advanced operators, for instance AT&T, NTT, and BT, led the technology development. Initially, their laboratories researched, developed and tested the prototypes of new technologies, and then handed over mass manufacture to equipment suppliers. The innovation system was closed and of high entry barriers.

3.7.2 The Driving Force of Old Telecom Industry

It was not market competition to drive the industry ahead before the liberalization. The dynamics propelling the industry were mainly political incentives and pressures. Firstly, cooperative competition between national systems boosted the introduction of

26 For detailed account of the relationship between network operators and equipment suppliers in big industrialized countries, see Martin Fransman: Telecoms in the Internet Age, From Boom to Bust to?, pp37-39, Oxford University Press, 2002

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next generation technologies27. Secondly, telecom was considered as so important facilities for industrialization that the national authorities required operators to improve telecom services for both business and residential users. After the telecoms deregulation, market competition stimulated the naissance of different roles including suppliers, competitors, partners, customers which constitute a value system as Figure 2.2 shown. Specifically, the value systems is made up of specialist equipment and technology suppliers, incumbent operators, new network operators and customers.

3.7.3 Business Model of Traditional Telecom

All in all, the origin of this operator-centric circumstance is the strict regulation in the old telecom age. Only the operator had the opportunity to deploy network, improve technologies and services. By the mid-1990s, telecom service market was still a voice dominant market. The circuit-switching network infrastructure underpinned the walled-garden business model. The fundamental technical paradigm of telecommunication restricted the service innovation.

3.8 Summary

Traditionally, telecommunication industry featured as a highly regulated sector. Until the 1980s, the telecommunication industry was highly vertical integrated. Telecom operators ever involved the technology research and design a lot. Most of the innovative technologies originated from the famous R&D labs belonging to those leading operators, for instance AT&Ts Bell Laboratories. The regulation and the close technology paradigm to a large extent determined the business model of telecommunication service. As the telecommunication industry developed into 1980s, the knowledge base shifted to equipment manufactures28. The technology R&D activities became supportive more and more in network operators. They reduced R&D expense and focused on customer relation management and service provisioning. Operators became a kind of more service-oriented business organization which emphasizes service provisioning and marketing aspects. With the advent of Internet, telecommunication industry is experiencing unparalleled

27 Martin Fransman: Telecoms in the Internet Age, From Boom to Bust to?, pp40, Oxford University Press, 2002 28 Martin Fransman: Telecoms in the Internet Age, From Boom to Bust to?, Oxford University Press, 2002

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Technical University of Denmark CICT changes which are blurring the traditional industry boundaries. Internet which is based on IP technology has highly impacted this industry since it emerged in the mid-1990s as a mass phenomenon. IP technology has torn down the technical entry barriers of the telecommunication market which protected those incumbent operators in the past. Internet enables a lot of disruptive application such as VoIP, and peer to peer application. The biggest challenge for operator is the risk to become pipeline operator in the future. IP technology has ever been thought as a devastating technology by most of the telecom operators because it breaks down their walled garden business model, lowers the threshold of the market entrance, and increases their operational costs without too much return. On the other hand, some people saw the opportunities created by IP although Internet led the whole industry into a severe bust around 2001. It is admitted that the openness of IP technology can create infinite possibilities to invent and develop omnifarious services which satisfy peoples endless needs. With the onslaught of IP technology, the Internet has the alleged potential to change the established value chains of telecommunication. In conclusion, the Internet and the consensus of de-regulating telecom industry have deeply impacted telecommunication industry. However, the groundwork of the close value chain and walled garden business model were not broken up by that moment.

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4 Technology of Next Generation Network

ITU defines NGN as: a packet-based network able to provide telecommunication services and able to make use of multiple broadband, QoS-enabled transport technologies and in which service-related functions are independent from underlying transport related technologies. It enables unfettered access for users to networks and to competing service providers and/or services of their choice. It supports generalized mobility which will allow consistent and ubiquitous provision of services to users. [9] The definition of NGN from ITU emphasizes the separation of network and service layers, which is a main feature of IP platforms. NGN technology is an umbrella concept which includes technologies from physical layer to application layer. The technical tutorial part of this thesis is not exhaustive because NGN includes a broad range of technologies. Instead, only those underpinning components which influence the value proposition and players interaction in the ecosystem are included, for instance IP/MPLS, IMS, SIP, Web service and several standards in the NGN service environment such as JAIN, Parlay. The industry consensus is that Next Generation Network (NGN) will be composed of a single IP core network and Generic Access Network enabling ubiquitous access and seamless mobility. These technologies provide industry players with the value creation platform. They are crucial for players to coin their core competences. And these components are to some extent new business model enablers. In addition, the study of NGN technology can also help regulators to identify the potential control points in NGN environment. The aim of this chapter is to give out the technology foundation for the following chapters.

4.1 Fundamental Technological Changes

Two most important technological changes during the last four decades which massively revolutionized the communication landscape and laid a foundation for the forthcoming NGN and convergence are digitalization and computerization. Digitalization [10] is up to now the most fundamental precondition for any other technological changes. As a result of digitalization, the development of compression [11], modulation [12] and Forward Error Correction [13] technologies reduces the bandwidth requirement of services and enhances the quality of service. The

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Technical University of Denmark CICT integration of different services in the same network and the synergy of service production, distribution and consumption, for instance the convergence between telecommunication and broadcast sectors, are both based on digitalization. This radical technological change also makes it possible to create and develop new services, like TV on the Internet, beyond the scope of telecom sector. From an economical point of view, digitalization expands the value of both network resources and content. The capacity in telecommunication network can be used to transport any kinds of data. And the content from broadcast sector can be easily reused in the Internet. Anyway, digitalization gives the possibility that telecom operators make money through economy of scope. Computerization is another technological development in telecommunication industry. It happened on both the service production, consumption side and on the network infrastructure side. More and more traffics in the telecom network originate from customers computers. Service terminals have more intelligence and processing power than ever. The Business and Operational Support Systems (BOSS) as a back stage platform of operators are dependent more and more on advanced computer technologies like Data Base (DB) and middleware. The network management systems are also based on complex software implementation. It has had crucial impact on the effective maintenance and operation of networks. As for the network infrastructure, increasing numbers of key functionalities, for example the switching logic, are carried out to a large extent by software. Computer technologies underpin the control and intelligent parts of network especially in the NGN. Computer technologies have deeply diffused in the telecom sector.

4.2 The Architecture of Next Generation Network

Next Generation Network is a concept rather than a specific technology. It represents a range of different technologies, including both Next Generation Core Network (NGCN) technology and Next Generation Access Network (NGAN) technology. NGN is composed of several functional planes. As figure 4.1 shows, typical NGN architecture is divided into access, transport, control, and service planes. Layers are independent from each other so that they can be upgraded irrespective of other functional planes. To connect to other operators networks or integrate with 3rd parties applications, each functional plane provides open interfaces. Most importantly, NGN can provide multiple services by one network. Comparing with the legacy networks, like PSTN, it is efficient for operators to run their business and develop new services. On the other hand, users are enabled to enjoy the seamless services by this converged network solution.

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27

Figure 4.1 Typical Representation of the NGN Architecture29

The access plane provides the access methods by different technologies including wireless and wire-line. Circuit-switched and packet-switched, for instance ADSL, technologies co-exist at present. Typical access networks may be copper loops, GSM, UTRAN provided by telecom operators, and cable TV networks provided by broadcasters. Access plane is responsible for the connection between the transport network and end-user. The transport plane handles traffic flows, for example traffic routing and movement across the network. One key characteristic of NGN is the traffic separation from service and control planes, enabling service interoperability and seamless access to multimedia content regardless of access network and device. IP/MPLS technologies underpin the next generation backbone networks whose links are mainly based on fiber-optic media. To connect with legacy networks, e.g. PSTN, PLMN, and etc, gateways are needed at the edge of NGCN. Service control and network control are both handled by the control plane. NGN designers separate the control logic from the transport and switching hardware so the network resource provisioning for specific application is decided by this control plane. And communication session functions, e.g. voice calls set-up, and subscriber-related information are also handled by the control plane. The control plane facilitates the convergence of former divided technology stovepipes. The service plane supports service orchestration and application logic. Elementary service functions, for instance creating tunnels in or across networks, providing a

29 Source: Devoteam Siticom, http://www.devoteam.com/


Virtual Home Environment [14], collecting information about the users use of network resources, and etc, are offered in service plane. These elementary functions can be used to implement more comprehensive services. The service plane also provides interfaces for accessing the underlying infrastructures in forms of either API30 or open standardized interface31 which enable the unbundling of services and underlying networks. The most remarkable character of NGN is the separation between service32 and the transport plane. The NGN standard definitely separates the control and service functionalities from the network transport plane. Actually, Intelligent Network (IN), originated from U.S. in the 1980s, as the rudiment of the idea of separating services from the network infrastructures, had introduced the basic idea of providing standardized and modular ways of creating services irrespective of the underlying network. It facilitates the opening up service provision to 3rd parties and strengthens the market for content and other services. It made telecommunication operators aware the business opportunities in providing their infrastructures for content or value-added service providers. But these IN capabilities are mainly utilized internally by telecom operators by now. As already described, the implementation of the NGN architecture is a job of fitting together components on various functional layers. The following sub-sections explore those key technology components which could, either by themselves or in company with other components, affect the competition ability of each stakeholder in the next generation market.

4.3 The Cornerstone of Next Generation Backbone Network

The PSTN, mobile networks, cable TV networks and some data communication networks use dedicated core and aggregation networks as figure 5.3 (see section 5.1.2) shows. In the transition to NGN, the core network will be converged into one single infrastructure. It is also a consensus that IP will be used to establish the Next Generation Core Network (NGCN).

4.3.1 Internet Protocol (IP) Network

Service-specific networks are inflexible in terms of service delivery and are costly to maintain. In parallel, increasing number of new access technologies and devices stimulate the needs for service interoperability. All these appeal for a single IP-based

30 API: for service specific software running on servers within the network. 31 Open standardized interface: interfaces between the network and application servers. 32 Within telecom terminology, service and application are not strictly distinguished. In this thesis, application refers to a software application running on a server. This application could support one or several services.

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Technical University of Denmark CICT infrastructure. The IP layer concerns with the transfer of packets between machines connecting to different networks. It provides best-effort connectionless packet transfer service. As an open interconnection technology, Internet Protocol 33 (IP) [16] enables communications across heterogeneous networks including legacy systems based on various technologies. IP is a technology based on the concept that different networks co-exist and inter-work effectively. In this sense it is a layer that creates a network to interconnect multiple dissimilar networks, showing as figure 4.2. IP offers ubiquitous connectivity and economies of scale resulting from wide deployment.

Figure 4.2 Inter-connected Networks34

Although IP networks have shown their abilities of robustness in the failure scenario and ubiquitous connectivity, it is not enough for a carrier-class network. The challenge of an IP network for telecom service provisioning is more than building a network that functions. Furthermore, it requires a network with capabilities which make it possible to manage, operate and extend it. Carrier-class abilities mainly include the following abilities: scalability, reliability, manageability, service measurability and security. To provide the multi-service, multi-user, carrier-class services by IP, it is a prerequisite to improve the original architecture so that it can support real-time packet delivery, differentiated service classes, scalable network capacity. To cope with the high rate of growth is another big challenge IP network operators are facing to. Estimated growth rate of individual ISP ranges from doubling to ten times every year. BTs UK Internet infrastructure has consistently experienced a 400% per year growth in terms of bandwidth and customers since its launch in 199435. It is obvious that scaling and management abilities are the key features of a carrier-class IP network and directly determine the business performance of telecom service providers. These

33 Internet Protocol (IP) is a suite of protocols on which the Internet and most of the commercial networks run. It is generally referred to as the TCP/IP protocol suite. 34 Cited from: Alberto Leon-Garcia, Indra Widjaja: Communication Networks Fundamental Concepts and Key Architectures, 1st edition 35 P J Willis:The Challenges in Building a Carrier-Scale IP network, BT Technol J Vol 18, No. 3, July 2000

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Technical University of Denmark CICT technical challenges to contemporary networks can be solved by MPLS technology as introduced in the following section.

4.3.2 Multi-Protocol Label Switch (MPLS)

The convergence of voice, data, and multimedia services is expected to be based on single IP-based network. MPLS has been recognized as a crucial technology which offers new capabilities for large-scale carrier-class IP networks. The challenges of carrier-class IP network come from the service performance measurability. As the core infrastructure of NGN, it is a must to implement traffic engineering [17] which is the ability to manage where the traffic flows and reserve resources along the path to guarantee specific quality of service. The commercial counterpoint to service measurability is Service Level Agreement (SLA) which formally defines the service itself, levels of availability, performance measurement, various attributes of service, disaster recovery, and even penalties in case of SLA violation. MPLS has the capability of providing traffic engineering to packet-switched network which ensures the efficient utilization of resources and Quality of Service in IP-based infrastructure.

4.3.3 Transition Path of Core Network

Most of the telecom operators own both PSTN and IP networks as their core infrastructures. So the transition path which enables change and growth without abrupt asset obsolescence of the core networks is a decisive issue influencing operators, especially those incumbents, competitive power and strategy. The PSTN provides telephone services with guaranteed QoS and enhanced services supported by Intelligent Network (IN) technologies. Meanwhile, telecom carriers also built packet-switching data networks, relying on different technologies for instance ATM, IP, and Frame Relay. Currently, operators deliver different services by using different technologies and networks, resulting high costs and inflexibilities. However, migration to NGN requires substantive investment covering network upgrades, labor training, organizational changes, and etc. Some PSTNs operate very well and provide excellent voice quality. Therefore, it will be a gradual migration period during which circuit-switching and packet-switching technology will co-exist. There are two strategies to deal with the network migration. Operators could choose to replace the PSTN network equipments in the core to increase the capacity or at the edge of the network to offer advanced services. In this case, the legacy access netwo

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