Bell Labs Consulting

Who will capture the new value

in the 5G Future X Network era?
Quantifying winning strategies for new value creation and capture

White paper

This paper examines new economic paradigms as the network becomes the nexus
of value and what it means for communications service providers transforming into
digital value providers. Bell Labs Consulting has quantified the effectiveness of various
strategic decisions, including architecture choices, business model strategies and pace of
transformation, using techno-economic models and game theory. Our findings quantify
the potential outcomes and impact of each selected approach to automation and the end-
to-end 5G technology transformation — indicating how they contribute to market success.
Bell Labs Consulting

Contents

1 Introduction 3
2 Reassessing strategic business value 3
2.1 CSP challenge: Exploding traffic, declining profitability 3
2.2 CSP imperative 1: Plan for foundational shifts in network architectures 6
2.3 CSP imperative 2: Maximize digital value through business model changes 9
3 Predicting market winners using a game theory approach 10
3.1 Scenario 1: Three incumbent CSPs with different 5G/
Future X Network strategies 13
3.2 Scenario 2: Two incumbents and a new entrant with
different 5G adoption strategies 15
4 Conclusions 17
Acknowledgements 17
Appendix 17
A.1 Cournot-Nash model details 17
A.2 Cost model 18
A.3 Derivation of cost coefficients 18
A.4 Price model 18
A.5 Service provider profit at market equilibrium 18
A.6 Price elasticity of demand in the developed markets 18
About the authors 19
Abbreviations 20

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1 Introduction
Imagine a world where the laws of business survival are being redefined, and competitive market models
are re-assembled with the advent of the 4th industrial revolution. We will see the rise of machines and
a new era of control and automation, resulting in an advanced breed of digital enterprise and consumer
services that optimize how we live and work. The ICT industry is embracing 5G as a crucial enabler that will
allow network operators1 to address emerging needs. However, to fully capitalize on the opportunities,
network operators need a fundamental shift in their business models — along with transformation from
a communication service provider (CSP) to a new digital value provider.
To assess the value of these changes, Bell Labs Consulting has built techno-economic models that
quantify the potential outcomes and impact of automation and the 5G end-to-end technology
transformation. Our models predict that, while network traffic will continue to grow at a brisk pace, CSPs
can reduce their overall TCO and significantly improve their time to market by adopting a pre-integrated,
end-to-end automated network solution. Our models also indicate that CSPs can increase their overall
profitability by providing digital value services on top of their traditional connectivity services.
The architecture choices, business model strategies and pace of transformation will determine the
future of CSPs and their market success. In this paper, we discuss the challenges, opportunities and cost
implications of strategic decisions. Using “economic game theory” formulations, we compare the relative
market position of CSPs with differing levels of aggressiveness in deploying an end-to-end, pre-integrated
automated network and offering digital value services. We also model possibilities for future profit shaping
in a competitive market.

2 Reassessing strategic business value

CSPs urgently need to make strategic decisions as their conventional modes of operation are challenged
by digital transformation, 5G and automation. The changes and choices ahead need to be assessed by
considering the following current challenges and two core imperatives, which will serve as the basis for
predicting market competitive models and future winners.
CSP challenges: Exploding traffic, declining profitability and value shift to digital services
CSP imperative 1: Plan for foundational shifts in network architectures
CSP imperative 2: Maximize digital value through business model changes

2.1 CSP challenge: Exploding traffic, declining profitability

Traffic carried by CSPs has increased massively over the past decade. Mobile data traffic grew from
4 PB/month in 2006 to 7,201 PB/month in 2016 — a 1800x increase. Global IP traffic grew 24x to 1.1 ZB
during the same period. Traffic will continue to grow with increased use of smart devices, content-rich
immersive applications and high-resolution video streaming on the consumer side. On the enterprise
side, use of immersive applications is increasing, and massive adoption of IoT and industrial automation
will enable new services and spur new data demand, as these connected things communicate with cloud-
based applications and systems for the purposes of monitoring, storage, data analysis and control.

1 A communications service provider is defined as a network operator that owns its own network and provides communication and connectivity services to its
customers.

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Bell Labs Consulting projects that there will be a 25x to 82x increase in wireless data demand by 2025
and a 7x to 15x increase in global IP traffic (Figure 1).2 Yet operators have not been able to fully monetize
this growth (Figure 2), because declining voice ARPU is not offset by a concomitant increase in data ARPU.
Revenue growth, where it has occurred, has primarily resulted from increased adoption of mobile phones
and smartphones.

Figure 1. Global IP traffic growth and wireless data demand 2016-2025

Global IP traffic Wireless data daily demand

16 70

15 ZB
60

12
50
Disruptive
Zetabytes

40
Exabytes

8
30 82x
7 ZB Disruptive

20
4

Conservative 10 28x
Conservative
1 ZB
0 0
2016 2025 2016 2019 2022 2025

Figure 2. Mobile voice and data ARPU trends in major markets

US Japan Western Europe

$60 $60 $60
CAGR: -5.0% CAGR: -8.1%
$50 $50 $50

$40 $40 $40

CAGR: -1.7%
$30 $30 $30

$20 $20 $20

$10 $10 $10

$0 $0 $0
2007 2010 2013 2016 2007 2010 2013 2016 2007 2010 2013 2016

Data Voice Overall

Source: Pyramid Research, Bell Labs Consulting Analysis

The other challenge CSPs face is the value shift over the last decade from connectivity services to content.
Platform companies3 have emerged as a formidable force offering a variety of content-rich applications
and value-added services. As a result, the traditional CSP connectivity-centric business model has seen
diminishing value capture, reflected in the flat or declining CSP share of GDP (Figure 3).

2 “Future of Network Traffic: Anticipating disruptive shifts in traffic evolution that will reshape communications industry,” internal whitepaper, Nokia Bell Labs, 2018.
3 “Platform companies” is a term used by Accenture in their paper, “Platform-Technology-Vision-Trend 2016.” These technology companies are considered to be
“born digital” organizations that heavily leverage their platforms.

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Figure 3. CSP and platform company revenues share of GDP

CSP revenue/GDP Platform company revenue/GDP ratio

6.0% 4.0%

Japan (CAGR: 3.0%)

5.0%
3.0%

4.0% US (CAGR: 21%)

Singapore (CAGR: -2.8%)
South Korea (CAGR: -1.4%) 2.0%

3.0%

US (CAGR: 1.3%)
1.0%
2.0%
Europe (CAGR: -2.5%) China (CAGR: 38%)
China (CAGR: -4.2%)

1.0% 0%
2007 2009 2011 2013 2015 2017 2007 2009 2011 2013 2015 2017

Data for top 40 operators, Source: Capital IQ, Bell Labs Consulting Analysis

The fact that CSPs need to continuously invest in connectivity capacity without an accompanying topline
revenue growth results in low return on capital (ROC). A Bell Labs Consulting analysis indicates that the ROC
of the top 10 platform companies4 on an average was 2x times the ROC of the top 10 CSPs5 in the 2012-
2016 time frame (Figure 4).

Figure 4. CSP and platform company ROC* comparison

Platform companies vs. CSPs (Top 10 in each category by 2016 revenues)

25%

20%
ROC (4-year average)

15%

2016 platform companies

average ROC: 15.4%
10%

2016 CSP average ROC: 6%

5%

0%
-20% -10% 0% 10% 20% 30% 40% 50% 60%

Revenue growth (4-year CAGR)

Platform company CSP

*CAGR and ROC calculated over the 2012-2016 period.

Data source: Capital IQ, Bell Labs Consulting analysis

4 Top 10 platform companies by 2016 revenues: Apple, Amazon, Google, Facebook, Tencent, Alibaba, Priceline, Baidu, eBay and Netflix.
5 Top 10 CSPs by 2016 revenues: AT&T, Verizon, China Mobile, DTAG, Softbank, Vodafone, America Móvil, China Telecom and Telefonica.

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But CSPs can only invest in new capacity and service offers if there is an adequate return on investment.
Therefore, the vicious cycle of increased investment demand and declining profit will continue unless
operating models are refreshed. A fundamental shift in the underlying network and operations
infrastructure, as well as business models, is required that will put them on a path to sustained profitability
in an evolving dynamic market.

2.2 CSP imperative 1: Plan for foundational shifts in network architectures

In the web era, CSPs have increasingly served applications that are capacity intensive. However, in the
future, different types of demands will be placed on their networks. The nature of applications will range
from simple low-power sensors to mission-critical applications with very stringent latency and reliability
requirements. 5G network standards are targeted toward supporting enhanced Mobile Broadband (eMBB),
ultra-Reliable Low Latency Connectivity (URLLC) and massive Machine Type Connectivity (mMTC). Nokia
Bell Labs vision of the Future X Network6 for the 5G era (Figure 5) provides an essential value framework
for the future. It is driven by networks, systems and platforms that support the required dynamic scale,
flexibility, bandwidth and latency performance, as well as automation, programmability, security and
operational efficiency.

Figure 5. The Future X Network architecture for future value creation

Web enterprise Dynamic

& vertical apps 8 data security
7 Digital value
platforms External data sources
• New trust framework
• Ecosystem sharing
• Mass edge monitoring
6 Augmented Analytics Machine
learning
cognition systems
Open APIs
Dynamic Management Dynamic Multi-
5 Programmable
customer & orchestration network operator
network OS services optimization federation
SDN NFV

4 Universal Common data layer

adaptive core Access-agnostic Modular, decomposed
converged core network functions

Self-optimized
coverage and 3 Smart network fabric Short waves
capacity and wires
Long
fibers

Software defined,
Emerging Massive Converged Access
0 devices
1 scale
2 edge cloud
end-to-end
remote
and sensors access

6 “The Future X Network Architecture: A vision for the 5G Era,” Nokia Bell Labs white paper, 2018.

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The architecture is comprised of nine domains that work together to enable the “automation of everything,”
in the new digital economy. Specifically, for CSPs, it supports the following network requirements:
• Seemingly infinite capacity, which provides the capability to offer very low single-digit, milli-second-level
latency services, and the ability to scale up easily to handle millions of devices
• Local delivery combined with global reach enabling global-local value chains
• Human cognitive operations that intelligently predict, automate and augment human decisions, tasks
and operations, translating them into network action and actuation
• Ability to provide context-dependent personalized protection at scale
A critical aspect of the Future X Network is the ability to create customized “network slices,” where
instances of virtual network resources and applications can be tailored to specific customer needs on
demand. This enables CSPs to generate new revenues through customized industrial automation and
enterprise services while maximizing utilization of their network resources.
The transformation to the Future X Network architecture requires investments in not only network
and automated operations infrastructure but also new skills to run and manage the highly automated
environment. CSPs need to understand the overall cost implications of this transformation and explore
strategies that can lower their costs. Bell Labs Consulting has developed a series of models to assess the
total cost of ownership (TCO) implications of transforming from today’s static, manually provisioned and
operated network environment to a highly automated intelligent network that enables dynamic network
slicing. In addition, we have evaluated the impact of different vendor strategies on the ability to achieve
an optimal TCO.
2.2.1 Future X Network: Cost implications of automation
The typical network transformation journey from a physical, static and monolithic network to one that is
virtual, dynamic and optimally sliced is shown in Figure 6.7 CSPs are gradually starting to deploy virtual
network functions and the required NFV infrastructure and management platforms. During this phase, the
overall TCO will increase due to transformation costs and the need to have two parallel platforms (physical
and virtual) running in the initial virtualized network. As more of the network gets virtualized, CSPs will be
able to provide some customized network slices at a premium to customers (manually sliced network).
However, since the full end-to-end network transformation is not complete, these slices are static with
relatively manual or limited dynamic orchestration. This results in increased TCO that may, in part, be
offset by higher revenues. In the end state, the increasing level of automation will lead to greater TCO
savings through automated sliced network (ASN) management, the last step of the transformation.
While the TCO behavior follows this general curve, the actual TCO values are dependent on the specific
virtualization and slicing strategies adopted by the CSP. An aggressive SDN/NFV migration plan, for
example, will increase the amplitude of the cost curve by increasing the cost penalties incurred at the
intermediate stages. However, it will also lead to a faster realization of ASN and its associated TCO benefits.

7 “Future X Cost Economics: A network operator’s TCO journey through virtualization, automation and network slicing,” Bell Labs Consulting white paper, 2018.

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Figure 6. TCO journey through virtualization, automation and network slicing

TCO +30%
TCO
Manually sliced
Static and
network limited scale

TCO +19% 4K,VR

Initial virtualized
network

Automated sliced
Physical
network Dynamic and
CSP network large scale
Virtualizing network ZT NSM

Physical network

4K,VR
Degree of network Level of Zero-touch network
transformation automation and service automation

TCO -32%

2.2.2 Future X Network: Need for pre-integrated end-to-end solution

To optimize the TCO, a paradigm shift is required when moving away from network elements with tightly
coupled and integrated hardware and software to a virtualized architecture comprised of multiple
disaggregated and orchestrated elements. It is important to keep in mind that while different network
functions and applications can be procured from different providers, the operational cost and complexity
of integrating myriad elements to work seamlessly together and to manage different lifecycles on an
ongoing basis can be a monumental task.
In fact, a recent Bell Labs Consulting analysis indicates that initial capital expenditures and recurring
operations and lifecycle management costs can be significantly higher for field-integrated solutions
involving products from multiple suppliers. In contrast, a pre-integrated solution tuned and optimized
for performance will result in lower deployment and lifecycle costs, as well as higher asset utilization.
Moreover, with a pre-integrated solution, the overall fulfillment, service assurance and vendor
management costs will be lower. Consequently, CSPs will also gain a significant time-to-market advantage
because of decreased vendor selection time, lower design customization time and lower deployment time.
Figure 7 shows how the TCO and time to market (TTM) change with the number of vendors in a Future
X Network deployed by a converged CSP service in a representative mid-sized metropolitan region with
a population of 16 million. The model assumes that the CSP has both 4G and 5G networks to provide
adequate wireless coverage and capacity. In addition, the operator has a GPON network providing FTTH
connectivity to 2 million households. The CSP is also assumed to have a cloud-RAN architecture with
distributed edge clouds optimally placed for efficient processing of user-plane functions, along with a
centralized core cloud to provide management and control-plane processing together with end-to-end
service orchestration, cloud orchestration and SDN control functions.

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Figure 7. Single vendor pre-integrated solution vs. CSP integrated multi-vendor solution

Change in total cost of ownership Change in time to market (TTM)

Number of vendors Number of vendors

To 1 2 3 4 5 To 1 2 3 4 5
From From

1 Increasing TCO 1 Increasing TTM

Number of vendors

Number of vendors
2 2

3 -26% -9% 0% +9% +16% 3 -47% -18% 0% +17% +35%

4 4

5 Decreasing TCO 5 Decreasing TTM

Single vendor pre-integrated solution

As the number of vendors in each domain decreases, there is a reduction in TCO and TTM. For example,
the TCO of a network with a single-vendor, pre-integrated solution is 26% lower and the TTM is 47% lower
than those of a baseline network with a three-vendor, field-integrated solution.
The increased complexity of multi-vendor solutions not only results in greater integration effort and higher
TCO during the intermediate stages, but also results in a longer time required to realize the efficiencies of
the ASN and diminishes its gains.

2.3 CSP imperative 2: Maximize digital value through business model changes
With the emergence of cloud-based digital services and the flattening or decline in connectivity service
revenues, CSPs need a new business model. Specifically, they must move from their traditional consumer
and connectivity-centric focus to a digital value focus that targets both consumers and enterprises.
The consumer of the future will demand contextualized video, smart home services, highly interactive
gaming applications and high-resolution immersive content all delivered from the cloud. With the Future
X Network, network operators will be able to deploy enabling platforms in edge clouds to offer these new
services on demand. On the enterprise and industrial front, industries are at varying stages of their digital
evolution. However, all “physical” industry sectors will be massively transformed by gaining the ability
to become automated and to exist independent of physical space and infrastructure — essentially to
become virtualized. But the stringent requirements of mission-critical operations technologies (OT) will put
unprecedented demands on latency, performance, reliability and security.
The Future X Network will allow CSPs to tap into this new value opportunity and to deliver a new breed
of cross-sector services with superior performance on demand. Its “hyper-scale distributed cloud
architecture,” with functions and applications placed in edge cloud nodes, will enable networks to provide
high bandwidth and/or ultra-low latency (~1 ms) for highly interactive and time-critical applications.
This will be possible using dedicated secure slices with on-demand instantiation of multi-component
application services to any customer, whether consumer or enterprise/industrial.

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As industries transform, their conventional operations and OT must change. This means modifying current
business models, shifting investments and diverting capital to support new requirements. In some cases, it
may even require complete abandonment of legacy methods to enhance sector productivity and economic
output. As a result, industries have two choices: They can use a traditional “in house” approach based
on proprietary solutions, or they can use a trusted partner to drive their transformation and automation
needs. The latter option represents a significant opportunity for CSPs who can leverage their connectivity
services to offer enterprises additional value-added services, as well as (network-derived) analytics and
security platforms and applications. Bell Labs Consulting analysis estimates that enterprise/industrial
market opportunity will expand from ~$500B today to $2T by 2028, if CSPs become full digital service
providers (DSP). Seventy-five percent of this new value will be due to enabling digital platforms, platform
hosting and value-added applications, while 25% of the increase will be due to growth in traditional as well
as secure connectivity services (Figure 8).

Figure 8. New value creation of the Future X Network

4X greater revenue potential due to Future X Network

$2 trillion

$694B

$157B Contextual
services,
$187B Value-added storage and
applications edge-hosted
Digital value and analytics vertical-specific
$309B platforms services applications
$575B hosting
Ubiquitous and service
secure digital creation
connectivity
services

Verticals market current Verticals revenue potential with

spend on connectivity Future X Network (2028)

The critical issue for CSPs is to optimize the TCO outlay to realize this new value creation. In the next
section, we examine the strategies CSPs can employ to maximize success in a dynamic, competitive market.

3 Predicting market winners using a game theory approach

Market evolution is hard to predict when existing paradigms are changing, and new business models are
emerging. The emergence of virtualization and cloud technologies, unlicensed and shared spectrum, and
new 5G network architectures have lowered the barriers to entry. Now platform players and digital value
players have an opportunity to potentially compete with CSPs by providing edge cloud infrastructure and
services — and even the required connectivity services. Conversely, CSPs can leverage the same suite of
technologies and architectural options to access new value pools.

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CSPs aiming to thrive in this emerging market environment need to select investments that not only
lower costs but also support emerging service needs. As CSPs embrace the Future X Network architecture
and migrate more customers (and traffic) onto these networks, the network cash cost/GB8,9 of traffic is
expected to come down significantly. Figure 9 shows the results of a Bell Labs Consulting study, which
projected the network cash cost/GB evolution for CSPs in three developed markets.

Figure 9. CSP network cash cost trajectory in developed economies

SDN/NFV
6

Edge cloud
5

5G
4
2025 WE D-AP NAR
5G devices 27% 27% 39%
$/GB

3 5G traffic 31% 29% 41%

(Fixed Wireless Access

is not included)
2

Source: Bell Labs Consulting

0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

North America (NAR) Western Europe (WE) Developed Asia (D-AP)

Source: Bell Labs Consulting

The cost decrease for individual CSPs depends on three factors:

• How fast they adopt newer architectures
• How quickly they migrate their customers to the newer networks
• Their end-to-end network build-out strategy (single integrated vs. multi-vendor field integrated)
With the Future X Network, CSPs can build on strong relationships with their customers as a trusted
connectivity provider and provide new value platform and services as just described. But they will also
need to partner with, or acquire, industry and application-specific solution providers. The additional value
that can be gained by CSPs will depend on how aggressively they pursue this strategy and the nature of
the acquisitions and/or partnerships they establish.
To better understand the potential dynamics in this nascent market, Bell Labs Consulting has applied a
game theory approach using a three-player Cournot-Nash model. In most global markets, the nature of
competition can be regarded as an oligopoly with typically three to four dominant service providers. With
the emerging new business models offering digital services, such an oligopoly model is likely to persist.
However, it is also likely that new partnerships will emerge between traditional CSPs and industry- and
application-specific service providers.

8 Network cash cost/GB = (amortized incremental CapEx/incremental traffic) + (total OpEx/total traffic).
9 Based on network evolution plans, projected growth in traffic and a mix of traffic in different generations of networks, we expect the overall network cash cost/GB to
drop by around 80% in 8 years.

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The oligopolistic approach assumes that none of the CSPs are in a market-dominating position, hence the
attempts by each operator to maximize profits will be suboptimal. In such a scenario, the market can reach
an equilibrium where the profitability of each CSP is determined by the equilibrium market price and the
cost efficiency of the respective CSPs. The modeling framework for the oligopolistic game theory is shown
in Figure 10 and is described in more detail in the Appendix.

Figure 10. Modeling framework for the oligopolistic game theory

Total market
demand

Firm 1
cost/MB Oligopoly model
Price elasticity
Cost Market price of demand
Firm N function function
cost/MB

Firm 1 quantity Firm N quantity

and profits and profits

The analysis compares the following plausible strategies that may be considered by the primary CSPs in
a given market:
• Speed of adoption of Future X Network: Faster migration to a more automated platform allows
significant service differentiation with respect to service reliability, latency, throughput and compliance
with the requirements of emerging digital services.
• Deployment of a single pre-integrated solution: End-to-end automation efficiency of 5G and cloud-
based networks is significantly enhanced with a pre-integrated platform supported by an intelligent,
automated DevOps methodology, resulting in lower TCO and time to market.
• Digital value platform strategy: Aggressive pursuit of a digital value platform strategy through
integration of industrial and application platforms with own and/or partner assets enables new digital
services and higher digital value capture.
In a hypothetical market competition scenario, the game-theory approach identifies the winning strategy
based on the derived equilibrium market shares, price and profits in each period for each player.
Specifically, the three-player game considers two scenarios:
• Three incumbent CSPs with different strategies for deploying a Future X Network and digital services
and platforms
• Two incumbent CSPs facing a new digital value player with considerable digital assets (stakes in parallel
digital businesses) entering the market with a Future X Network solution in a mature market.
Our analysis of these scenarios is described in the following sections.

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3.1 Scenario 1: Three incumbent CSPs with different 5G/Future X Network strategies
We assume the incumbent CSPs have both 3G and 4G networks and have started deploying a 5G Future X
Network. However, since they are primarily in the connectivity business, they must enter into partnerships
with other ecosystem players to access new value. Their strategies can vary depending on their ability to
embrace change and take measured risks. This analysis considers the three types of CSPs typically found
in many markets:
• Dominant incumbent: The CSP currently has a leadership position and is confident in its market
position. In some markets the dominant player is somewhat conservative and slow to embrace change
while in others they take an aggressive approach to maintain their dominant position. In our analysis we
look at both scenarios, one in which the dominant incumbent takes a moderate strategy and another in
which the dominant incumbent takes an aggressive strategy.
• Cautious incumbent: The CSP is currently in second position in the market and is willing to take
moderate risks to maintain its current position, but it will typically adopt new technologies and business
models only when they become “standard.”
• Aggressive challenger: This CSP is currently in last position in the market and needs to take market
share to increase return on investment and therefore is willing to adopt new technologies and business
models as a “first mover.”
Table 1 summarizes the different operator strategies and cost-evolution forecasts.

Table 1. Competitive attributes of CSPs in scenario 1

CSP (network Initial market Future X Network Future X DSP strategy Effective cost/GB
operator) share deployment Network build
Aggressive 23% Aggressive Pre-integrated Considerable digital value services. $2.37 (2019) –>
challenger (2025: 70% on 5G) Max revenue uplift: ~14% $0.38 (2028)
Cautious 28% Slow Field-integrated Limited digital value services. $2.21 (2019) –>
incumbent (2025: 22% on 5G) Max revenue uplift: ~7% $0.53 (2028)
Dominant 49% Moderate Field-integrated Considerable digital value services. $2.32 (2019) –>
incumbent (2025: 27% on 5G) Max revenue uplift: ~14% $0.48 (2028)
(1a: Moderate)
Dominant 49% Aggressive Pre-integrated Substantial digital value services. $2.29 (2019) –>
incumbent (2025: 70% on 5G) Max revenue uplift: ~22% $0.35 (2028)
(1B: Aggressive)

The main drivers of the gaming model are the cost/GB and price-demand elasticity. Faster Future X Network
deployment will lead to faster cost/GB declines, and CSPs will see even larger declines in cost/GB if they
deploy an end-to-end pre-integrated solution. The profit associated with the new digital value services
is captured as a cost offset for modeling purposes and will result in lower “effective cost/GB” for those
operators. As markets become saturated, they become inelastic (i.e., price-demand elasticity ~1) and further
reductions in price/GB result in higher traffic but not enough to increase total revenues. This phenomenon
explains the flattening of the CSP revenues from mobile services. Figure 11 shows the price decline and
traffic increase over a nine-year interval for markets in North America, Western Europe and Japan.

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Figure 11. Mobile data traffic growth, price and revenue trends in major economies, 2009-2017

Mobile data price and traffic Mobile operator service revenues

25,000 900 250
800
20,000 700 200
Price $M/PB

Traffic PB/year
600
15,000 150
500

$B
400
10,000 100
300

5,000 200 50
100
0 0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017

North America (NAR) Western Europe (WE) Japan

Source: BLC analysis of GSMA data

Putting this all together in the scenario where the dominant incumbent takes a moderate strategy,
Figure 12a shows that:
• The aggressive challenger who deploys 5G early using a pre-integrated build approach gains the
necessary platform capabilities needed to launch digital services faster and increase gross margin
percentage. This approach will increase its profit market share from about 23% to 57% in 10 years.
• The dominant incumbent will lose its dominant position due to its moderate strategy and will end up
with a 23% profit market share in 10 years.
• The cautious incumbent will see erosion in profit market share due to its inability to fully leverage the
Future X Network.
• Even though the dominant and cautious incumbents lose market share, their overall profit improves
over the 10-year period, primarily due to better unit margins. This increase is indicative of the
differential benefit of deploying more advanced and cost-effective infrastructure technology that can
support services with higher margins, as CSPs migrate their legacy services to the more-advanced
connectivity platform.

Figure 12a. Gross profit* evolution in three-player market, dominant incumbent with moderate strategy

16,000

12,000
Profit, $M

8,000

4,000

0
0 2 4 6 8 10 12
Year
Dominant incumbent (moderate) Cautious incumbent Aggressive challenger

*Gross profit only and does not include non-network-related expenses such as SG&A, R&D, etc.

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On the other hand, the dominant incumbent could aggressively pursue a Future X Network strategy and
use its dominant position to establish the right partnerships with different players in the digital value
ecosystem to maximize the value extracted from digital value services. In that scenario (Figure 12b), the
dominant incumbent can improve its profit market share from about 49% to 52%, despite the challenge
posed by the aggressive challenger, and will see a 3.6x increase in its gross profit over 10 years. The
aggressive challenger will also see significant profit share increase but end up with a 47% profit market
share. The cautious incumbent, however, will see its profit share drop rapidly due to its conservative
strategy and will be marginalized.

Figure 12b. Gross profit* evolution in three-player market, dominant incumbent with aggressive strategy

16,000

12,000
Profit, $M

8,000

4,000

0
0 2 4 6 8 10 12
Year

Dominant incumbent (aggressive) Cautious incumbent Aggressive challenger

*Gross profit only and does not include non-network-related expenses such as SG&A, R&D, etc.

3.2 Scenario 2: Two incumbents and a new entrant with different 5G adoption strategies
In this scenario, two incumbent CSPs are facing a new entrant who is already an established digital value
player. One of the incumbents takes a moderate strategy with respect to Future X Network rollout and
digital value play, and the other takes an aggressive strategy. The new entrant is not saddled with a legacy
network and adopts the Future X Network from the start. That is, it begins with a very efficient, agile and
scalable network that is optimized for performance. The new entrant’s network cost/GB, after the initial
startup cost, will be much lower than the incumbents’ who must deal with multi-generational networks,
parallel platforms and the problems and issues of transformation.

Table 2. Competitive attributes of CSPs in scenario 2

CSP Initial market Future X Network Future X Network DSP strategy Effective
share deployment build cost/GB
Moderate 47% Moderate Field-integrated Limited digital value services. $2.33 (2019) –>
incumbent (2025: 27% on 5G) Max revenue uplift: ~7% $0.53 (2028)
Aggressive 53% Aggressive Field-integrated Moderate digital value services. $2.13 (2019) –>
incumbent (2025: 70% on 5G) Max revenue uplift: ~14% $0.43 (2028)
New entrant — Aggressive Field-integrated/ Substantial digital value services. $1.51 (2019) –>
(100% 5G from Y1) Pre-integrated Max revenue uplift: ~22% $0.32 (2028)/
$1.19 (2019) –>
$0.25 (2028)

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The new entrant will have to invest in new infrastructure initially but will eventually begin to dominate. The
two incumbents will see their overall network cost/GB drop as they start migrating customers from their
less efficient 3G and 4G networks to the 5G Future X Network. However, the new entrant will always operate
at a much lower overall cost point. Moreover, the digital value player enters the market with a strong digital
value proposition, which it uses to capture associated connectivity business. As a result, the new entrant
can get more value out of the digital value play from the start when compared to incumbent CSPs, who
must first set up the right partnerships and establish themselves as digital service providers.
Figure 13 shows two possible strategies for the new entrant and the implications of each approach. Figure
13a shows that, with a multi-vendor field-integrated strategy, the new entrant achieves the dominant
position in year 8. But by employing a pre-integrated solution with additional cost savings and deployment
efficiencies, the digital value player can assume market profitability leadership two and half years earlier
(Figure 13b).
Figure 13. Gross profit* evolution in a two-player market with a new entrant
13a. New entrant with multi-vendor field integrated solution

20,000
New entrant becomes
dominant in year 8
15,000

10,000
Profit, $M

5,000

0
New DSP value capture 0 2 4 6 8 10 12
offset by initial capital Year
investment for coverage (5,000)

(10,000)

Moderate incumbent Aggressive incumbent New entrant, field-integrated

*Gross profit only and does not include non-network-related expenses such as SG&A, R&D, etc.

13b. New entrant with single pre-integrated, end-to-end solution

30,000

25,000

20,000
New entrant becomes
dominant in year 5
15,000
Profit, $M

10,000

5,000

0
New DSP value capture 0 2 4 6 8 10 12
(5,000)
offset by initial capital Year
investment for coverage
(10,000)

Moderate incumbent Aggressive incumbent New entrant, field-integrated

*Gross profit only and does not include non-network-related expenses such as SG&A, R&D, etc.

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4 Conclusions
In this paper, we examined the potential new value creation for CSPs, as they look to become DSPs. To
maximize new value creation, they must carefully define their market strategy relative to the competition,
in terms of network platform evolution, business models and partnerships and/or acquisitions. The
speed and efficiency with which CSPs evolve to a Future X Network architecture, with high levels of
pre-integration, virtualization, distributed cloud infrastructure and dynamic end-to-end automation
— together with a willingness to embrace new business models — will directly determine their ultimate
market position and their long-term financial outcomes.

Acknowledgements
Thanks to Chris Jones for his valuable comments and insights that helped shape the paper. This paper also
leverages multiple studies by the Bell Labs Consulting team.

Appendix
A.1 Cournot-Nash model details
The Cournot-Nash model is based on economic game-theory formulation in a quantity-supplied
competition where each firm attempts to optimize its respective profits. In such a formulation, each firm
has its own cost model, while price is determined by the market, based on the total quantity supplied. The
cost function for each player is a function of quantity provided, and a market price is a function of the total
quantity offered by all players in the market.

Figure A1. Modeling framework for the oligopoly game theory

Total market
demand

Firm 1
cost/MB Oligopoly model
Price elasticity
Cost Market price of demand
Firm N function function
cost/MB

Firm 1 quantity Firm N quantity

and profits and profits

The output from the model is the equilibrium quantity of traffic that can be supplied by each service
provider. From these quantities, one can compute the market price and the profits for each market player.
In this analysis, we have used linear cost functions and an elastic supply curve as the representation
between quantity and price.

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A.2 Cost model

This is a function representing the cost for a player to supply a given quantity of goods. We assume linear
cost functions to represent the service provider costs to deliver a fixed quantity of data. The cost function
for firm i is as follows:
Ci(qi) = b0,i + b1,iqi
(1)
b0,i represents the deployment cost associated with the rollout of a given technology, e.g., 4G for service
provider i. b1,i represents the incremental cost of supplying a unit of data traffic, e.g., petabytes, and it is
derived from the amortized CapEx and traffic-driven OpEx associated with supplying the unit traffic. The
cost model reflects the differentiation between service providers.

A.3 Derivation of cost coefficients

The cost coefficients in equation 1 are derived using a benchmarking method developed by Bell Labs
Consulting. The coefficient b1,i is termed network cash cost and is based on the sum of amortized network
capacity investment (i.e., CapEx) and the annual traffic-driven network operation expense (i.e., network
OpEx). The coefficient b0,i represents the investment related to the addition of network radio sites.

A.4 Price model

The price function is based on an elastic supply curve and function of total traffic supplied by all network
operators in the market, as follows:
Q (— 1ε )
P(Q) = ( Q0 ) (2)
Where Q=Σqi, and ε is the market price elasticity of demand for mobile data, and Q0 is a calibration.

A.5 Service provider profit at market equilibrium

The market price is established by the total traffic supplied, and each service provider will attempt to
maximize its profit by adjusting its supplies. This will lead to a zero-sum game where equilibrium quantities
will be established, and an equilibrium market price is calculated. The profit of each service provider at
market equilibrium is:
π *i (Q*) = qiP(Q*) – Ci(qi*) (3)
Derivation methods for the equilibrium values are provided by Bell Labs research.10

A.6 Price elasticity of demand in the developed markets

Using empirical market data, the price elasticity of demand can be derived as shown in Figure A2. By taking
the natural logarithms of traffic and market price in (2), the price elasticity of demand will be the negative
of the slope,
ln(Q)

= –ε ln(P) + ln (Qo) (4)

10 “Theoretical and Numerical Analysis of the Stackelberg and Nash Games”, Milan Bradonjic and Marty Reiman, Bell Labs Research, Nokia, January 16, 2015.

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Figure A2 is based on mobile market data from Japan, North America and Western Europe. The price
elasticities for these markets are 1.005, 1.0241 and 0.9435, respectively. The results demonstrate that
mobile data markets are relatively inelastic. For the competitive analysis in this paper, the Japanese market
data have been used.

Figure A2. Price elasticity of demand for CSP mobile services in advanced economies

12

10

y = 1.0241x + 12.274
R2 = 0.9996
y = 0.9435x + 10.9
8
R2 = 0.9992
LN (traffic)

4
y = 1.0054x + 11.172
R2 = 0.9997
2

0
0 2 4 6 8
LN (price)

North America Western Europe Japan

Source: GSMA intelligence, BLC analysis, Cisco VNI

About the authors

Abdol Saleh is a Principal and Distinguished Member of Technical Staff with Bell Labs Consulting, located
in Murray Hill, New Jersey. His main domains of focus are application of analytics and machine learning
techniques, as well as quantitative analysis of telecom areas of interest. The main areas include network
automation, industry econometrics, customer choice and experience analytics, and analysis of competitive
telecommunication markets. Abdol has a PhD in IE/OR from Lehigh University.
Subra Prakash is Partner and Group Leader, Economics and New Business Models Practice in Bell Labs
Consulting. His main areas of focus are future trends forecasting, macroeconomics, economics of
emerging technologies and emerging services and new business models. He has a PhD from Texas A&M
University and an MBA from Columbia University.
Fuad Siddiqui is Senior Partner at Bell Labs Consulting with a focus on business strategy and future
value creation. He brings more than 20 years of global experience, shaping the industry growth agenda
and advising ICT sector clients on market diversification strategies, enabled by the next technological
revolution. He is focused on studying new business models around automation and has authored the
“Future of Enterprise” chapter of Bell Labs Future X Network, where he argues how competitiveness and
value vectors are impacted, as disruptive innovation is re-imagined for the digital, AI era.

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Abbreviations
4G 4th generation of cellular mobile communications
5G 5th generation, the latest generation of cellular mobile communications.
ARPU average revenue per user
ASN automated sliced network
CapEx capital expenditure
CSP communication service provider
DevOps a software development methodology that combines software development (Dev)
with information technology operations (Ops) to shorten the systems development
life cycle.
eMBB enhanced mobile broadband
FTTH fiber to the home
Future X Network An architectural framework for the 5G-enabled next-generation network to support
the delivery of performance-optimized digital services and content
GB gigabytes
GDP gross domestic products
GPON Gigabit Passive Optical Networks
ICT information and communication technology
MB megabytes
mMTC massive machine-type communications
NFV network function virtualization
OpEx operations expenditure
PB petabyte
RAN radio access network
ROC return on capital
SDN software defined networking
TCO total cost of ownership
TTM time to market
URLLC ultra-reliable low-latency communication
ZB zetabytes

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