There is a growing consensus among telcos, analysts and equipment suppliers that data, now the predominant traffic across telecommunications networks, presents an opportunity to generate profits to compensate for less than robust voice revenues. However, the reality is that revenues from voice traffic subsidise the cost of providing data services, which are growing at a high rate.
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 to see data traffic grow by more than 50% in this year, but data revenues will grow by less than 10%. Voice services still drive 80% of carrier revenues, even though data represents a disproportionate 55% of the traffic mix. Data margins are small and falling 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 consensus among service providers 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.
Suppliers that provide network equipment to these carriers clearly have a vested interest in their return to economic health. Most traditional network equipment providers have been quick to develop suggestions, even entire marketing programmes, to drive new types of data services onto the network.
The mantra they preach is that boosting demand for data is the best way to generate revenues in a depressed market.
Although new, customised data services are a critical component in a healthy portfolio of carrier offerings, it is useless to drive up demand if the traffic increase ends up having a detrimental impact on the bottom line.
Priming a network for increased data volume by incrementally adding static voice, or legacy, solutions does not make it data-profitable. Indeed, the cost of delivering data services over today's telecoms infrastructure can be as high as 40% of total outgoings.
The reason for these inordinate operating expenses is the inherent limitations built into legacy network equipment and network management architectures. Inventory management is still based on decades old, 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 These records are often outdated and may contain errors.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 manually intensive, slow process that may take weeks or months to complete. It goes without saying that this process is also a burden for the carriers' end-users.
The solution is to make the network itself smarter and automate these processes by adding intelligence to the network. Some of the world's largest and most progressive service providers, including AT&T, Sprint and Telmex, have already begun deploying such intelligent optical network systems. Essentially, what these carriers are doing is 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 are able to immediately restore order to data profit margins that are out of balance with the traffic mix.
Distributed intelligence-based 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 new, customised data services and allows telecoms operators to capitalise on the huge data opportunity and drastically improve service levels for the end-user.
Gary Smith is chief executive of optical network specialist Ciena