Making IP Transformation More Predictable (2008)

IP TRANSFORMATION CENTERPartnering for change

Marc JadoulWarsaw — June 23rd, 2008.

Making IP Transformation More PredictableProving It by Business Cases

All Rights Reserved © Alcatel-Lucent 20082 | Carrier IP Voice Transformation | June 2008

IP Transformation — What are we Talking About ?

“ The process through which communications service providers will evolve their people, process and technology to leverage a single, converged network based on the Internet Protocol (IP).IP Transformation should enable greater efficiencies, lower costs and provide the basis for value propositions centered upon applications, services, network access, and data carriage.From a technical perspective, IP transformation is the migrationtowards standards-based architectures that allow service providers to create multipurpose platforms sharing a common infrastructure.From a business perspective it is the creation of new business models and relationships to support a service-and-application-focused orientation. ”

PriceWaterHouseCoopers


Competition and Cost Drivers Keep the Pressure On to Transform

Source: the Yankee Group, Alcatel -Lucent

Low return (RoA, RoI) due to ‘legacy’ & ‘proprietary’ infrastructure.Limited innovation capacity due to network silos & heavy processen/IT.

Traditionele telecom service providers

New market players(Google, Yahoo, eBay, ...)

Market Cap/Revenue

EV/PPE OPEX/Revenue CAPEX/Revenue

< 3

> 8

< 5

> 53 < 47%

> 62%

< 10%

> 18%

RoA = Return on Assets; RoI = Return on InvestmentsEV = Enterprise Value; PPE = Property, Plant, Equipment

Source: service provider reports, Morgan Stanley

‘Legacy’dominates

revenue mix

~ 55 %

~ 45 %Growth

Legacy

Revenue Mix

Low margins onnew services

~ 75 %

~ 25 %Growth

Legacy

EBITDA Mix

+2002 2004 2006 2006 2008

35 %42 %

Impact onEBITDA margins

=(~ 2- 4 %) YoY

Fast erosion oflegacy revenues

*Legacy revenues


IP Transformation is Vital to Service Providers’ Competitiveness …

Strongly Agree

Agree

Neither Agree or Disagree

Disagree

Strongly Disagree

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Percentage of Respondents

Source: Heavy Reading, “Class 5 Migration and Adoption: A Multi-Client Study”, November 2007

Is IP Transformation Vital to Future Competitiveness ?


… and a Major Means to Increase Shareholder Value

ShareholderValue

Cost reduction(CAPEX & OPEX)

ARPU increaseCompetitive

differentiation

Customer retentionEnhanced

user experience

• Uniform infrastructure for fixed & mobile

• Common service delivery• Lean operations (staffing,

processes & tools)

• New services (IPTV, 3G, multimedia, …)

• Convergence (voice-data, fixed-mobile)

• Nextgen OSS/BSS

• Quality of Service, e2e SLA mngmnt

• Customer self-service• New IP terminals


Integration of networks to drive cost reduction

20072006 2008

$1.1B>$3B

Cost synergies from integration & transformation

>$5B

[AT&T]

Cutting costs throughnetwork and operations

transformation

Cumulative OPEX savings

20072005 2009

€150M€450M

€850M

What are Service Providers Doing Today ?

Source: service providers reports and analyst presentations

Transforming thelegacy network to

support growth assets

Revenues from new-wave services

18.3%36.5 %

20072004

Focus on investing in growth services

Broadband sharein CAPEX mix

27%

20052000

64%

Transforming cost structure,processes

and IT systems

Number of OSS/BSS systems

20112006

1252

~50

Optimizing the product portfolio and the

‘customer experience’

Products in portfolio

~100~50

20062005


Transformation at all Layers of the Network — But will not happen All-at-Once

Wireline

New Services/Bundles

SDP/SDE & NG OSS/BSS

IMS

IN & Telephony Apps

Fixed Mobile Convergence

Class 4 & 5 NGN

Legacy Data Services

IP Core

High Speed Access

Business/Consumer VoBB

Wireless

New Services/Bundles

SDP/SDE & NG OSS/BSS

IMS

IN & Telephony Apps

Tandem & Class 4 NGN

Fixed Mobile Convergence

End-to-End VoIP

Distributed R4

IP Core/Backhaul

High Speed Access

Applications

Call/SessionControl

IPMultiservice Edge

IP/ MPLSCore

Transport

Consumer

Enterprise

Access Networks

PublicInternet

Voice

Video

Content

Data

OSS/BSS

DataCenter

PSTN/PLMN

Transformation enables Convergence


Evolution of Voice Service Architectures

IMS Architecture

ALLSubs. Data

Session ControlCSCF

MGCF

Signaling

Media GWController

IP MediaGateway

AS

SIPXML

SIP

SIP

H.248

Switch Fabric

Features

IN

WirelineSubs. Data

Call Control

Signaling

Bearer Control

WirelessSubs. Data

Traditional Switch

IN, AIN, Camel

NGN “Softswitch”

ASWireless

Subs. Data

EmbeddedFeatures

WirelineSubs. Data

Call Control

Signaling

Media GWController

MediaGatewayIP

IN, JTAPI, Parlay& proprietary

H.248SIP, H.323, MGCP

voice +MM


Service Provider Voice Transformation Strategies

Source: Heavy Reading, “Class 5 Migration and Adoption: A Multi-Client Study”, November 2007

Voice Services Delivery Strategy

0%

20%

40%

60%

80%

100%

1- 2 Years 2-5 Years > 5 Years

IMS PSTN SimulationIMS PSTN EmulationNGN Basic Features NGN Full Features


Transformation is no ‘Business as Usual’

• Tactical infrastructure upgrades• Unchecked/uncontrollable TCO• Poor user experience• Technology & operations “stovepipes”

• Increased churn• ARPU erosion• Pressure on margins

Time

Costs

OPEX

CAPEX

QoE

Upgrade approach

• Strategic network transformation• Cost control & investment protection• Managed end-to-end QoS/QoE• Global IP transformation project

• Customer-centric services• ARPU growth• Margin protection

Costs

Time

OPEX

CAPEX

QoE

Transformation approach


Making the Transformation “Predictable”

Need for a Business Case to balance the opportunities, costs and risks.

• Network modernization• New services launch

• Fast market evolution• Continuity of business• Top & Bottom lines• Network & Services alignment• Network & IT alignment• Operations model• Eco-system & partnerships• Organization & processes• Acquiring the right skills

Hidden opportunities,costs and risks !


Scenario #NScenario #2

Building the Business Case for Transformation

Selecting the optimal Transformation Scenario based on techno-economic criteria• Identify and analyze major revenue growth opportunities• Find the optimum CAPEX return opportunities• Find the best OPEX savings opportunities• Analyze migration strategy, methodology & timing

Scenario #1

Market Evolution Obsolete Equipment Network Management

Demand Coverage OSP Improvement O&M Optimization& & &

Incremental REVENUE Transformation CAPEX OPEX savings


The Transformation Business Case* — Focus on Costs Optimization

Replacement of obsolete equipment:• Access, transport & switching • Introduction of IMS service platform• Next Generation OSS/BSS• Real-estate consolidation/disposal

Outsourcing of OPEX intensive activities:• Network Mgmt, Services & Provisioning• Inside Plant & Outside Plant• Regional COC/EGR & regional NOC• Multi-Vendor Spare Management • Tools & Test Set Management• Technical Support & Administration

(*) business case simulation based on anonymized service provider reports, analyst data and extrapolations of the former

-600

-400

-200

0

200

400

600

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CAPEX variation (M€)

400

800

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1,200

1,100

1,000

900

700

600

500

Network OPEX (M€)

Moderate scenario

Aggressive scenario

Baseline scenario

Moderate scenario

Aggressive scenario


10%

2005 2006 2007 2008 2009 2010 2011 2012

15%

20%

25%

30%

35%

40%

45%

Target scenario

Baseline scenario

EBITDA margin (%)

The Transformation Business Case* — Focus on Revenue Growth

1.000

1.500

2.000

2.500

3.000

3.500

2005 2006 2007 2008 2009 2010 2011 2012

Revenues (M€)

Target scenario

Baseline scenario

Environmental impact from:

Price erosion• Competition Take rate

Customer churn• Regulation• Internal/external costs evolution

Transformation impact from:

• Service Delivery (NGN/IMS/SDP)• New services/bundles (VoIP, IPTV,

Multimedia)• Network transformation (All-IP)• Process re-engineering and NG OSS/BSS



Impact on Costs Impact on Revenues Impact on EBITDA

The Transformation Business Case* — Where is the Impact coming from ?

Transformation impact from:

Service Delivery Platform (IMS/SDP/SDE)

New services/bundles (VoIP, IPTV, Multimedia)

Network transformation to All-IP (CAPEX & OPEX)

Process & IT re-engineering and NG OSS/BSS (OPEX)

Outsourcing of activities: O&M, ISP/OSP, etc. (OPEX)



Proofpoint: Telecom New Zealand’s Transformation project

Source: Telecom New Zealand, Gartner

Cash Benefit (x1000 NZ$)

2002 2003 2004 2005

10,000

20,000

30,000

40,000

50,000

60,000

70,000

• Outsourcing benefits• Operational cost savings• Sales & support• New business opportunities• “One-off” Benefits• Other

• Vendor reduction benefit• NGN transition benefit

• Inventory mngmnt savings• Depreciation savings• Promotions• IP edge margin retention• DSL business penetration• DSL consumer penetration


IP Technology is a Means, NOT the Target of Transformation ...

Services

• ROI on broadband access • New customers, higher ARPU• Enhanced ‘user experience’

Operations

• Time-to-market• Cost reduction• IT, processes & organization

Network

• ‘All IP’ infrastructure• IMS and SDP• Getting rid of “stovepipes”


Some Lessons Learned on Network Transformation

“Less is more” and “simpler is better” …• Regain economies of scale and allow cost synergies• One single multi-service network, without (network & service) silos

… but don’t under-estimate end-to-end complexity

• “Standards compliance” is not always a synonym for “interoperability”• Understand the legacy before designing the next generation• Work with a prime Network Integrator to manage technology, solution

architecture, project and multi-vendor interdependencies

QoS is more than “bits per second”

• It’s the overall quality of the end-user experience (QoE) that matters• Invest time & money for upfront QoS/QoE design, testing and validation• Always develop and evaluate the service against well-defined KPI/KQIs

Inter-working is a business decision, not a technical one

• Inter-working with PSTN and peering with VoIP are hard requirements• Don’t (mis-)use SIP for what it was never intended for• Security, QoS and inter-carrier roaming and settlement need to be

covered by end-to-end IP peering scenarios


Some Lessons Learned on Services Transformation

Avoid the voice feature parity/transparency trap• A service portfolio based on “differentiation” instead of “continuation” will

minimize R&D costs and and maximize revenue potential• Synchronize with marketing & sales early in the project to challenge

features and to quantify costs, risks and benefits of approaches• Work closely with vendors to communicate your priorities and expectations

“Plain Vanilla” services are not enough• A well designed SDP will allow to smoothly ramp-up move from voice

to converged, blended and personalized services• Three activities not to neglect: MARKETING, MARKETING, and MARKETING

IMS is a great framework for design and delivery• Appoint Solution Architects to maintain integrity of the architecture• Adopt a consistent set of R&D practices and an efficient delivery organization • Get organized for a dramatically shorter SLC: weeks instead of 12-18 months

Combine new services with portfolio rationalization• Launch new services bundles combined with a portfolio rationalization• Align your network and service capability roadmaps• Create a prioritized transition & launch plan to balance revenues with costs


Some Lessons Learned on Operations Transformation

IP Transformation changes everything• Network Interface Points: e.g. collocation from CO to street cabinets• Services: e.g. regulated vs. non-regulated• Products & vendors: network, IT, CPE … content• Customer Interfaces: “Zero-Touch” provisioning and Customer Self-Service• In-house skills: spanning the present and the new technology and operations

Migration will not happen overnight• ‘Technical’ (SP driven) vs. ‘Commercial’ (user driven) migration approach• Physical (MDF), Network routing, Subscriber DB, OSS/BSS Migration, …• Migration strategy & planning, tools development and customer communication

Network transformation should go hand-in-hand with IT• Transform operations from managing networks to managing services and customers• Challenges the processes, not just the technology !• Also look at alternative operation models such as outsourcing

Each transformation project is unique• Transformation may start anywhere in the service provider’s organization• Geography, local market, regulation, legacy infrastructure, resource availability,

budgets, etc.may affect transformation strategy, scope, roadmap and implementation


Conclusion

• IP transformation is a ‘once in a lifetime’ business opportunity for service providers, butneeds to be part of a ‘holistic’network + services + operations transformation vision

• As there is no ‘one size fits all’ solution; a business case will help to identify the optimal scenario for OPEX, CAPEX spending and new revenue generation

• A ‘best practices’ approach and working with an experienced partner are the most effective paths towards predictable execution

• Carriers worldwide are leveraging Alcatel-Lucent’s global reach, experienced technical staff, and IP subject matter expertise to accelerate their network evolution and to incorporate the lessons learned from the early adopters

Transform predictably. Transform comprehensively. Transform profitably.


About Alcatel-Lucent’s IP Transformation Solution

Full-lifecycleProfessional ServicesPrime Integrator

BusinessTransformation

NetworkTransform.

ServicesTransform.

StakeholderEngagement

Cross-domainMulti-vendorEnd-to-End

Consult

Design

Integrate

Maintain& Operate

Deploy& Migrate

“ While many vendors have positioned themselves for IP network transformation and FMC services, only Alcatel-Lucent can point to actual customer references that involve the complete NGN transformation of a large incumbent network, including access, switching and core, and both fixed and mobile elements. ”

Current Analysis, Inc.


Some Alcatel-Lucent Transformation References

Migration to NGN• Business case development and financial planning / budgeting• Strategic Partner for full solution delivery + Migration + Network operations

Lightspeed/U-verse: AT&T to deliver VoIP, IPTV & HSI to 18M households • IMS Core Prime Integrator• Network provider: access, Ethernet switching, IP routing• Video service integrator: Head end, Middleware, CM, DRM, CPE

Strategic Partner for Titan Network Transformation Program• End-to-end network integrator• End-to-end deployment: access, Ethernet Aggregation, NGN voice, OSS

Strategic partner for migrating 20 million customers to the new 21CN all- IP network• Assist BT in ensuring that its 21CN Migration Control Centre (MCC) is operational • Develop a workflow tool for tracking deployment activities associated with the customer

upgrade process and the transition of over 5,500 telephone exchanges

Mobile NGN to greatly reduce the cost of the wireless core network, enabling FMC services• 2G extension with a distributed NGN core; introduction of FMC services• Gradual migration to a 100% Mobile NGN Core Network• Integration, multi-vendor testing, deployment & migration services

Prime integrator to migrate 7 million subscribers to an all-IP network in 3 years• Network design, E2E multi-vendor integration, migration planning, overall program mgmnt• Access, Ethernet, IMS technologies

IMS technology and Network Integration partner• Supplier of IMS Core, Application Factory and Management components• Prime Network Integrator: network design and integration, testing and validation between the

IMS Core, third-party applications and communications devices

[AT&T]


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