Burdened by mammoth outlays for 3G licenses, European carriers have been searching for ways to cut corners on their infrastructure costs. Although unfortunately they don't sell base stations and antenna masts at Wal-Mart, mobile operators have come upon a strategy: network sharing.
Co-location of network hardware is a common practice in today's wireless networks; carriers turn to companies like Crown Castle, American Tower, NTL, or SpectraSite to find suitable locations for their base stations, often on the same tower or building as their competitors'. But network sharing goes a few steps further - sharing the actual physical elements of the network - to offer build-out savings of up to 40 percent.
Sounds complicated, right?
There's no question co-location will be used in 3G networks. But whereas in the build-out of 2G networks, there were large real estate acquisition costs associated with building towers, the bulk of the costs is in the expensive radio network required for the advance services.
A shared network comes in several flavors. The first and simplest is for operators to divide up their shared geographic areas and individually build compatible networks in "their" territories, then allow each other's customers to roam on the networks. This offers a simple way to reduce the amount of infrastructure required to cover large areas; it does however, put a carrier's customers on its competitor's network where quality may not be an easily addressable issue.
Carriers can take the sharing idea a step further and address some of these concerns by maintaining individual core networks, but sharing base stations and radio controllers, although this method requires special multiple-carrier base stations.
But the common "shared network" idea goes the whole way - operators sharing one common network that's then attached to their individual billing and customer management systems.
Ouch say the vendors
It's this scenario that should be the most appealing to operators - and at first glance, the least appealing to equipment vendors.
Operators have nothing to lose and everything to gain by building shared networks. They cannot hope to offer the current levels of geographic coverage without doing so. What looks most likely to happen is that operators will build and operate their own metropolitan-area networks, then collaborate on networks to cover rural areas.
Either way, sharing the costs of building and operating these initial networks offers the quickest and most financially viable path to 3G profits.
What worries the network equipment vendors is the idea that instead of selling equipment for three networks, they'll only be selling equipment for one. But there are a number of possibilities for these vendors to more than make up for the initial savings carriers will incur. And they've already learned from second-generation networks that lower cost network deployments drive increased coverage.
First and foremost is the simple truth that these companies (ie Nokia, Ericsson, Siemens, et al) need 3G to be a success. Proof of this lies in the immense loans they're providing their customers to buy their equipment. Never before have these companies had so much - their very future - riding on such a huge technological change. So anything that helps to cement 3G's future should be looked on favorably, as should anything that offers vendors a better guarantee on payment for those huge self-financed loans.
Shared networks are a short-term strategy to get these networks and services up and running with somewhat reduced investments. But the long-term outlook remains as it has: each operator running their own network with their own equipment.
Also, government regulations may play into vendors' hands. For instance, although German authorities have said they'll allow network sharing, they've said each operator must maintain their own network management transmissions, receptions, and control signals. This will require different technology from standard networks, offering vendors an in.
Another interesting twist for vendors is the possibility that they could build and run 3G networks. As mentioned above, operators have significant concerns about sharing networks with their competitors, especially in the geographic split model. But leasing space on the networks from a third party offers a solution: it's in the host's best interest to keep its customers happy, and it does so by keeping the playing field at a suitably equal - and high - level.
Vendors or other third parties need to be mindful of the risks inherent in building and running these networks and the massive costs associated with it (which gives a company like Crown Castle or SpectraSite an early advantage due to their existing portfolios of real estate and towers). They must have guaranteed customers before they set out to build the networks, lest they be left with huge surplus equipment inventories and dead networks.
Leave it to the government
But of course leave to European Union Competition Commissioner Mario Monti and his continent-wide band of cronies to scuttle carriers' sharing plans. Telecoms regulators in several countries have ruled on network sharing - some positively (the United Kingdom, Germany) and some not so positively (such as the Netherlands, which ruled out any cooperation) - but none of the countries' (nor the EU's) competition regulators have entered the fray...yet.
It's certainly clear that parts of the operators' networks must remain separate and distinct, particularly those containing customer information and other sensitive data. Furthermore, operators will not be swapping or sharing the spectrum they paid so dearly for, so the need for regulatory bodies to interfere appears minimal.
Regulators are concerned that sharing these networks would lead to and encourage collusion among the operators, a scenario that does not seem very likely. These are the same operators that are cannibalizing each other's customers with lower and lower pricing, not to mention fighting off virtual operators.
The competitive equation will play out in much the same way it has with earlier networks. Assume that quality of service won't be a factor as the network is shared, but operators will compete on the same factors they do today - quantifiable criteria like pricing, and more abstract ones like brand image and handset choice. But in the end, the competition will really come down to one thing: services.
Mobile carriers, just like any other company, focus on growth. Investors demand it, executives strive for it, and employees must deliver it. Not too many successful CEOs have thought, "Gee, we really sell enough product. Why bother for more?" And mobile carriers are fighting for the same customers. The argument that the pie is big enough to share doesn't cut it for these guys. who are all vying for the biggest slice.
Their pricing models work a lot like gas stations on opposite corners: their prices are always roughly the same, and move in unison. One guy cuts it by 2 cents a gallon, the other has to follow. So services is where the differentiation - and advanced pricing - comes in to play.
Refer back to the gas station example. One gas station offers a free car wash when you fill up - that's something worth a few cents a gallon. The other comes back with full service and a look under the hood from a mechanic when you stop in. Each is forced to innovate (albeit in a nice old economy way) to compete for customers.
And the same rings true for operators. Differentiation must occur in some way for them to win customers. Collusion in a saturated market with incredibly heightened investor expectation just won't be possible. And if there's to be any movement forward at all in the 3G world, network sharing may offer the best hopes.
Carlo Longino is a freelance writer based in Austin, Texas. His previous experience includes work for The Wall Street Journal, Dow Jones Newswires, and Hoover's Online.