Making data pay
There is a growing consensus amongst telcos, analysts and equipment vendors that data, now the predominant traffic across telecoms networks, presents an opportunity to generate profits to compensate for less-thanrobust voice revenues. But the current reality is that revenues from voice traffic actually subsidise the cost of providing data services. Data’s share of traffic on most carrier networks has long since overtaken voice, yet the latter still constitutes most revenues — as much as 80% some estimate. Indeed, an RHK report earlier this year found that, while Internet traffic grew 100% in 2001, revenues grew just 17%. More worrying for the carrier community is that revenue per Petabit declined by 45% between 2000 and 2001. In other words, rapid data growth is stressing service providers’ operating cost models. The more data a network carries, the worse its margins become.
Ciena’s own research into the public accounts of 20 major US carriers has found that running data over legacy networks, ostensibly built for voice, is actually adding to operating costs rather than increasing profits. Leading service providers expect more than 50% growth in data traffic this year, but less than 10% growth in data revenues. Voice services still drive 80% of carrier revenues, even though data represents a disproportionate 55% of the traffic mix. Data margins are small and eroding due to the inability to scale and efficiently manage networks to accommodate traffic growth. Clearly, this model of data-service economics is ultimately unsustainable.
Although there is a view that data is not pulling its weight in terms of revenues, arguments begin to differ when considering the service providers’ best options for profiting from the demand for data.
Vendors that supply network equipment to the carriers have a vested interest in their return to economic health. Most traditional network equipment providers have been developing suggestions, even entire marketing programmes, to drive new types of data services onto the network. They argue that boosting demand for data is the best way to generate revenues in a depressed market.
Although new customised data services are critical to a healthy portfolio, it is useless to drive up demand if the traffic increase harms the bottom line. Priming a network for increased data volume by adding static voice, or legacy, solutions does not make it data-profitable. Indeed, the cost of delivering data services over today’s telecom infrastructure can be up to 40% of total outgoings.
The reason for these inordinate operating expenses is the inherent limitations built into legacy network equipment and management architectures. Inventory management is still based on decadesold, top-down systems with records entered manually. These records are often outdated and may contain errors. Provisioning an end-to-end connection is therefore a slow, manually intensive process that may take weeks or months to complete and is also a burden for the carriers’ end-users.
The solution is to make the network smarter and automate these processes by adding intelligence. But European service providers are reluctant to move away from traditional networking technologies.
These carriers need to learn from the example of the US, where the more progressive carriers such as AT&T and Sprint are already deploying such intelligent optical network systems — distributing intelligence to every network element and linking the elements at the control level plane so that they can communicate and provide bottom-up data and functions for management.
With this advanced approach to network evolution, service providers can immediately restore order to data profit margins that are out of balance with the traffic mix. Distributed intelligencebased optical networking architectures can reduce capital expenditures by up to 60% and annual operational expenditures by up to 34% compared to legacy architectures.
This platform for efficient multi-service networking sets the stage for customised data services and will allow European operators to capitalise on the huge data opportunity.