Insight June 24, 2009, 2:20PM EST

Share Mobile Networks, Seduce Customers

For mobile operators, owning and running a network is much less important these days than luring subscribers with sexy devices and services

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Earlier this year, as the number of mobile-phone users worldwide approached 4 billion and as GSM—the dominant global mobile standard—headed into its third decade, two of the world's largest operators forged a landmark business agreement. Going forward, Spain's Telefónica (TEF) and Britain's Vodafone (VOD) plan to share parts of their mobile networks.

The news made headlines around the world because it marked a dramatic shift in telco strategy. On the one hand, the Telefónica/Vodafone deal was an acknowledgement that the cost of building and running state-of-the-art mobile networks has grown beyond the ability even of giants to shoulder alone. At the same time, the partnership signaled an implicit recognition that the network has become a commodity, that it is no longer a source of meaningful market differentiation for mobile providers.

The significance of this shift can't be underestimated. Since the days of Alexander Graham Bell, owning and operating networks has been a sine qua non for phone companies. To a large degree, telcos have framed their identity through their physical infrastructure of switches, fiber optics, local loops, and cellular base stations. Yet this mindset is increasingly at odds with that of customers, who tend to view telcos through the lens of services, prices, and support. The Telefónica/Vodafone deal will allow both companies to focus less on infrastructure and more on service innovation.

Partner Swapping

Network sharing isn't new. In Sweden, Telenor (TEL.F) and Hutchison's 3 launched a joint venture called 3GIS in 2001 to roll out and operate 3G services. A few months earlier, when Swedish operator TeliaSonera (TLSN.ST) was denied a 3G license, it formed a joint venture with Tele2 (TEL2A.ST) called SUNAB that built and operates a 3G network used by both companies.

Yet while the partnerships bring cost savings, it's also clear that network sharing isn't always easy or straightforward. The Swedish companies that shared 3G infrastructure aren't planning to continue their existing partnerships in the transition to next-generation 4G networks that use so-called Long Term Evolution (LTE) technology. In a new partnership, Tele2 and Telenor are teaming up in a joint venture called Net4Mobility that is building an LTE network slated to launch toward the end of next year.

As the Net4Mobility venture suggests, the cost of rolling out LTE and the growing demand for mobile broadband mean that operators will have no choice but to share networks. The amount of fiber needed corresponds directly with the required capacity. That means increased backhaul costs, which can become unsustainable for any operator looking to stand alone.

The growing fiber backbone also means that the mobile network, up until the last mile, will look increasingly like a fixed one. The fixed-network operators made this journey 10 years ago when Internet and fixed broadband started to take off. They are thus well positioned to be key suppliers of backhaul capacity to mobile broadband operators when LTE starts to roll out.

Fear of Sharing

How should mobile operators adapt to the shift to common coverage and quality—and why didn't they do so before financial necessity drove them into the arms of competitors? The "why not sooner" answer is reasonably straightforward: The network has historically been the operator's biggest asset. Share it, and there's a danger of subsidizing a weaker, less successful competitor.