1. Telecoms software professional services multi-client briefing: moving to a more sustainable ICT industry using professional services Presenter: Glen Ragoonanan 7 December 2011 Webinar

2. 2 © Analysys Mason Limited 2011 Contents Executive summary Market strategy perspective Market share and forecast Recommendations Market definition

3. 3 © Analysys Mason Limited 2011 Opex increased as CSPs met the scale of the increase in subscribers with more outsourcing and turnkey projects Figure 1: Telecoms market financials, worldwide, 2007–2010 [Source: Analysys Mason, 2011] Figure 2: Year-on-year growth in telecoms market financials, worldwide, 2007–2010 [Source: Analysys Mason, 2011] Opex increased in 2007–2010 to meet the demand of more subscribers to new services, notably of more 3G subscribers in India and China. Worldwide, CSPs’ net revenue grew proportionally with subscriber growth, thus ARPU remained flat. Capex savings from 2009 were invested in 2010, as CSPs implemented new technologies to increase competitiveness. However, growth in capex was mainly in the fourth quarter of 2010 and has continued into 2011.

4. 4 © Analysys Mason Limited 2011 Total revenue: USD11.57 billion Telecoms software professional services market share summary, 2010 Analysys Mason forecasts that the worldwide telecoms software professional services (TSPS) market will grow from USD47.9 billion in 2010 to USD65.4 billion in 2015, at a 6.4% CAGR. Total revenue: USD4.66 billion Total revenue: USD4.98 billion Total revenue: USD17.33 billion Total revenue: USD9.31 billion 11% Year-on-year growth rate: 7% 18% 3% 8% 10%

5. 5 © Analysys Mason Limited 2011 Worldwide, the telecoms software professional services market is forecast to grow at a CAGR of 6.4% in 2011–2015 Analysys Mason forecasts that the worldwide telecoms software professional services (TSPS) market will grow from USD47.9 billion in 2010 to USD65.4 billion in 2015, at a CAGR of 6.4%. Cost reduction is driving strong growth in TSPS, as CSPs move from traditional ‘operate and build’ options to outsourcing and hosting. CSPs’ need to increase revenue for investments to stay competitive is another strong, long-term driver for the TSPS market. New services from new technology and systems will enable this driver. In 2011, transformation, new technology projects and managed services will drive TSPS growth. In 2012, TSPS spend is expected to be more cautious. From 2013, radio access network maturity (LTE, femtocells and Wi-Fi) will drive associated TSPS, coupled with cost-reduction transformations and new services and business models that will further competition and develop new revenue streams. Pricing pressure from supplier competition is a growing inhibitor in the TSPS market. Figure 3: TSPS revenue, worldwide, 2010–2015 [Source: Analysys Mason, 2011]

6. 6 © Analysys Mason Limited 2011 Market drivers and inhibitors Figure 4: Drivers and inhibitors in the worldwide telecoms software professional services market [Source: Analysys Mason, 2011] Cost reduction CSPs’ need to increase revenue New technologies Competition between CSPs Transformation Multi-vendor complexities Risk management Competitive TSPS pricing New business models Drivers CSPs’ desire to retain control Marginalising services COTS product maturity Scepticism about vendor neutrality Perpetual legacy Inhibitors

7. 7 © Analysys Mason Limited 2011 Contents Executive summary Market strategy perspective Market share and forecast Recommendations Market definition

8. 8 © Analysys Mason Limited 2011 Infrastructure solution categories Figure 5: Infrastructure solution categories [Source: Analysys Mason, 2011] Service fulfilment Inventory management Service activation Discovery Service fulfilment Inventory management Service activation Discovery Service assurance Fault management Performance management Service management Service assurance Fault management Performance management Service management Network operations centre (NOC) Network management system (NMS) EMS Mobile Business services Residential broadband PSTN Professional services Business consulting Design consulting Product-related services Systems integration Custom development Outsourced operations Hosted managed services Software CLI management Network data aggregation Configuration Multiple interfaces Hardware and equipment Switching and routing Evolved packet core Mobile RAN Optical transport Product-related services as part of a software or hardware deployment Installation Configuration Customisation Lifecycle management GSM, CDMA, UMTS, LTE IP VPN, Ethernet xDSL, cable DWDM, GPON, FTTx Legacy, circuit switching NGA End users

9. 9 © Analysys Mason Limited 2011 Customer careBilling Telecoms software market segmentation Figure 6: Telecoms software market segments [Source: Analysys Mason, 2011] Service assurance Service management Fault and event management Performance monitoring Workforce automation Probe systems Service delivery platforms Real-time charging Mobile content management and delivery Telecoms application servers Mobile device management Partner and interconnect Business optimisation Mediation Rating and pricing Customer interaction Customer relationship management Subscriber management Order management Inventory management Activation Engineering tools Service fulfilment Network management systems Mobile Residential broadband Business data services PSTN Professional services Business consulting Design consulting Product-related services Systems integration Custom development Outsourced operations Hosted managed services

10. 10 © Analysys Mason Limited 2011 Contents Executive summary Market strategy perspective Market share and forecast Recommendations Market definition

11. 11 © Analysys Mason Limited 2011 Telecoms software professional services: worldwide market shares 2010 CSPs focused on reducing costs and staying competitive, which increased TSPS spend in 2010 Economic uncertainty CSPs spent tactically on services such as billing consolidation in order to increase efficiency. CSPs continued to focus on opex reduction, which increased outsourced network management contracts. TSPS is under price pressure to accommodate CSPs’ need to reduce costs. Headcount reduction in CSPs drove TSPS in developed markets, particularly in Europe. Accenture was the biggest winners in Europe in 2010. Increase in M&A activity Vendors’ M&A activity focused on increasing customer numbers, TSPS capabilities and local presence. For example, Ericsson acquired Telcordia, increasing its products and services in NA, and Tridge Group and Optimi, increasing its presence and capacity in Europe. High margins in the TSPS market are driving vendors’ M&A activity, gradually leading to industry consolidation Atos acquired Siemens IT Solutions and is launching a new cloud service offering from this acquisition. New technology deployments CSPs invested in competitive mobile (3G/HSPA and LTE) and residential (optical NGA: GPON, FTTx) broadband infrastructure. This boosted TSPS, particularly SI. New technology deployment and management provided outsourced network management TSPS opportunities. CSPs accelerated the delivery of mobile broadband data services with hosted app stores and SDP in order to acquire subscribers, increase revenue and recover spectrum licence investments (e.g. India: 3G, USA: LTE). Core versus non-core CSP business functions CSPs are using TSPS for non-core processes and operations providing the TSPS are low-cost and comply with CSPs’ SLAs. Network management became a non- core activity in 2010. CSPs are restructuring their business to differentiate their core business functions from those that are non-core. Core business functions and strategic targets benefit from outsourcing non-core activities. Small new entrants identify few core functions.

12. Commercial in confidence 18683-223 Services are at the top of the telecoms vendor value chain because of high revenue margins End-user devices $$$$$$$ Multivendor APIs Telecoms vendor value chain Hardware $ Services $$$ Software $$ End-user devices (laptops, smartphones, tablets, dongles, set-up boxes, DSL gateways, femotcells) Virtualisation Security Single vendor applications HA Operating System (OS) Third party Vendor-specific APIs Multivendor applications Design Deployment Integration Product Support Solution support Managed services App modules Middleware Consulting Increasing revenue margin Source: Analysys Mason Management SAN Network (mobile, IP, optical) equipment, storage, servers, etc.        Servers NGA ATCA

13. Commercial in confidence 18683-223 The burst of recovery in 2010 is a knee-jerk tactical reaction by CSPs to cost and organisational restructuring CSPs have invested in new technologies and outsourcing contracts to address two agendas simultaneously: cost reduction and increase in competitiveness to increase revenue. New technology projects were primarily to compete with or respond to competitors, particularly LTE roll-out in Australia, Singapore and the USA. This is reflected in the increase in capex and opex in 2010. For TSPS, numerous multi-year managed-service contracts will provide CSPs and suppliers, respectively, with predictable opex and revenue. The volume of such multi-year managed-service contracts being awarded year-on-year is uncertain. CSP spend in the fourth quarter of 2010 has continued into 2011, however the uncertain economic climate in the fourth quarter of 2011 could lead CSPs to regress into cautious spending in 2012. CSPs will require more stringent business cases before investing, not solely the availability of technology. Invest Recover investment Assess/evaluate new opportunities Figure 7: Simplified investment lifecycle for a typical CSP [Source: Analysys Mason, 2011]

14. Commercial in confidence 18683-223 TSPS could break the mould of the traditional ‘business as usual’ telecoms industry – a scenario analysis [1] This scenario analysis model will be based on three types of CSP: Reactive CSPs  largely in a ‘business as usual’ mode  reactive to competitors’ investments and positioning  concentrating on traditional services  little outsourcing – keep control of assets and operations post implementation. Progressive (semi-active) CSPs  progressively, but cautiously, explore new business models  have longer business-planning and decision- making cycles  use TSPS to accelerate new service launches and to transfer risk of complex projects and operations  use outsourcing and hosting to reduce costs, but retain some control. Proactive CSPs  proactively evolve to new business models, taking advantage of new opportunities to increase revenue  balance assessment of market opportunities, business planning and realisation of revenue according to business plans  use smart outsourcing and hosting of trials and non-essential assets and processes to reduce costs  use TSPS and revenue-sharing models to accelerate delivery of new services and improve efficiency in order to increase revenue.

15. Commercial in confidence 18683-223 TSPS could break the mould of the traditional ‘business as usual’ telecoms industry – a scenario analysis [2] Costs and revenue diverging Opex contained Capex predictable Costs and revenue converging Opex increasing Capex uncertain Costs exceeding revenue Opex increasing Capex uncertain Three types of CSP models over the next 15–20 years All start from the same baseline traditional telecoms model Increasing use of TSPS Proactive CSPs Progressive CSPs Reactive CSPs The forecast in this report assumes that the majority of CSPs will be ‘progressive (semi-active)’ for the next five years Note: ‘costs’ refers to CSPs’ total costs (capex + opex) Time RevenueCostsOpexCapex Time USD Figure 8: Scenario analysis model [Source: Analysys Mason, 2011]

16. 16 © Analysys Mason Limited 2011 Forces controlling the evolution of service layer infrastructure Control or constrain change Embrace and drive change Legacy systems and services: minimise cost and change 10–20-year lifetime – ageing hardware and software platforms Essential to legacy services used by established customer base: supports current but declining revenue Tied to legacy network infrastructure Regulatory constraints Telecoms infrastructure, and systems Billing Customer care OSSSDP Future strategy: minimise pain of future legacy Reduce number of platforms and suppliers Select industry standards and technologies Police a group-wide architecture New services and business models: agility and flexibility are everything Double-sided business models Mobile data and Internet services Social networking Location and personalisation New technologies and processes: agility and flexibility are everything Time to market Customer insight Cost reduction Agility and flexibility Group strategy? Increase revenue Operational excellence Service leadership and innovation New revenue streams Figure 9: Telecoms software evolution [Source: Analysys Mason, 2011] Build / Own Host Operate Outsource MobileFTTxFMC IMS DWH Virtualisation, NFC, security, …

17. 17 © Analysys Mason Limited 2011 Contents Executive summary Market strategy perspective Market share and forecast Recommendations Market definition

18. 18 © Analysys Mason Limited 2011 Market summary by sub-segment [1] Figure 10: TSPS revenue by sub-segment, worldwide, 2010 – with market summaries [Source: Analysys Mason, 2011] Systems integration (revenue: USD12.3 billion) SI projects to enable new technologies, upgrades and transformation to reduce opex drove this sub-segment. Global CSIs continue to lead this sub-segment, followed by NEMs. Hewlett-Packard and IBM offer SI services, based on their multi-vendor skills, partnerships and certifications. CSPs will always have multi-vendor environments, owing to organic evolution leading to silos. Product-related services (revenue: USD8.9 billion) Vendors win these high-value specialist product-related projects owing to their IPR. ISVs led this market, with product-based professional services offerings (their core business model). Amdocs was again the most-successful vendor in terms of combining its product and service portfolios. Oracle is the only other ISV that is aggressively pushing into the TSPS market with ‘pre-integrated’ solutions. Outsourced operations (revenue: USD12.3 billion) Only marginally behind the SI sub-segment in 2010 (~USD64 million difference). CSPs’ focus on reducing opex significantly increased the size of this sub-segment. NEMs continued to lead this sub-segment, followed by global CSIs. The significant increase in spend in this sub-segment is attracting other suppliers. Hosted managed services (revenue: USD5.3 billion) Growth in this sub-segment was low as forecast because CSPs regard outsourcing as lower risk than hosting. Hosted app stores, SaaS (billing, interconnect) and cloud storage require no initial capital. They drove growth by reducing CSPs’ costs. NEMs again led this segment, followed by global CSIs and ISVs. 4% 7% 34% 4%

19. 19 © Analysys Mason Limited 2011 Market summary by sub-segment [2] Figure 11: TSPS revenue by sub-segment, worldwide, 2010 – with market summaries [Source: Analysys Mason, 2011] Design consulting (revenue: USD3.9 billion) NEMs again led this sub-segment, followed by global CSIs. Design consulting is typically bundled into the project management framework of technology projects. Suppliers are devaluing this service in order to attain larger SI and managed services contracts. ISVs perform product-focused design consulting. Custom development (revenue: USD2.6 billion) This sub-segment had a boost in 2010 from customisation and legacy integration in a number of departmental COTS transformation projects. Global CSIs again led this sub-segment, performing custom development for risk-averse CSPs and gaining significant revenue with application development management (ADM) services. Low-cost resources are typically used. Business consulting (revenue: USD2.5 billion) Global CSIs again led this sub-segment, with their independence and technology-neutral approach to business transformation. This sub-segment declined as CSPs focused on internal restructuring in order to reduce costs. This service is visible to senior CSP decision makers and influences CSP strategic planning and investments. –5% 2% 34%

20. 20 © Analysys Mason Limited 2011 Systems integration, outsourced operations and hosted managed services remain the high-growth segments Figure 12: TSPS revenue by sub-segment, worldwide, 2010–2015 [Source: Analysys Mason, 2011] Business consulting will grow the least as vendors continue to devalue these services and CSPs focus on tactical cost-reduction projects and managed services. New technologies (LTE, FTTx, cloud, M2M and m-payments) and transformation projects to deliver new services and reduce cost will drive design consulting growth. Product maturity will increase flexibility and streamlined implementation projects will drive growth in product-related services. CSPs’ multi-vendor and legacy integration challenges will continue to drive systems integration in the longer term. Custom development growth will slow as CSPs migrate to COTS products and their legacy dependencies decrease. Opex reduction and risk transfer will continue to be strong outsourced operations drivers. No capex risk, and new services and business models, will drive hosted managed services.

21. 21 © Analysys Mason Limited 2011 Contents Executive summary Market strategy perspective Market share and forecast Recommendations Market definition

22. 22 © Analysys Mason Limited 2011 Recommendations for CSPs CSPs should consider:  balancing tactical (cost reduction) and strategic (evolving value chains and digital economy paradigm) TSPS planning and investments to make cost more predictable and support new services investments to support the growing market demand from digital consumers.  developing and owning their own long-term transformation programmes using structured continuous service improvement programmes (CSIP) that capitalises on suppliers’ knowledge and skills to drive measureable, phased transformation projects in the long-term programme. 1  replacing home-grown or customised systems with COTS solutions to reduce go-to-market time and operational complexities.  outsourcing functions non-core functions unlikely to provide competitive differentiation, and provides flexibility for the CSP to drive to scale to market demand and consumer growth.  establishing risk-sharing partnerships with suppliers for strategic ventures such as offering cloud, mpayment, mhealth, M2M or security services.  hosted managed services for new services (such as cloud, M2M, mpayment, mhealth) to eliminate capex, reduce opex reduce time-to-market and transfer the risk to the supplier.  building managed services partners (MSPs) with preferred (Tier 1) and auxiliary (Tier 2) suppliers to streamline supplier management and procurement.  evaluating the value of TSPS that augments core business functions and the competitive value of outsourced non-core functions that complements core functions. 1 The transformation projects referred to here is mainly driven by departmental transformational projects, such as billing consolidation or migration, which are part of larger, long-term transformation programmes, such as BT’s 21CN initiative.

23. 23 © Analysys Mason Limited 2011 Recommendations for all supplier types Suppliers should:  focus on cost reduction (current priority), new services and new business models in developed markets  focus on time-to-market and managing growth in emerging markets, particularly APAC and CALA  aim for long-term outsourced operations and hosted managed services because they provide predictable revenue streams regardless of economic instability  perform evaluations at the end of projects and managed service contracts in order to learn valuable lessons and help improve service offerings and performance KPIs  provide TSPS that transfer CSPs’ perceived risks to the supplier  aim to penetrate global Tier 1 CSPs to provide a means of entry into emerging markets, as such CSPs expand their operations in these regions  aim to be trusted MSPs rather than just suppliers  increase localisation of resources and assets in order to reduce cost and counter increasing price pressure from competing suppliers (particularly Huawei, Infosys, TCS, Tech Mahindra, Wipro and ZTE), as they attempt to accommodate CSPs’ cost­-reduction objectives  consider strategic acquisitions in order to absorb competitors and gain a competitive advantage  consider strategic partnerships with other suppliers that do not compete with their core skills  develop TSPS offerings that roadmaps CSPs’ existing business to support new business models such as cloud, e-commerce, M2M, mpayment and mhealth services.

24. 24 © Analysys Mason Limited 2011 Glen Ragoonanan Glen.Ragoonanan@analysysmason.com Analysys Mason Limited Bush House, North West Wing Aldwych, London WC2B 4PJ, UK Tel: +44 (0)845 600 5244 Fax: +44 (0)20 7395 9001 www.analysysmason.com

25. 25 © Analysys Mason Limited 2011 Contents Annex Detailed market definitions NMS market overview

26. 26 © Analysys Mason Limited 2011 Overall NMS market summary: the prolonged effects of the economic downturn continue to impact the market The network equipment manufacturers’ (NEMs’) network management systems (NMS) market generated USD4.4 billion in revenue in 2010, up by 3% from USD4.3 billion in 2009. The residential broadband market segment grew by 42% year-on-year, while the mobile segment declined by 5%. The business services market segment grew by 3%. Ericsson continues to lead this market, but retained, rather than increased, its market share. Alcatel-Lucent continues to hold on to second place, thanks to its xPON and backhaul solutions. Huawei retains third place. Like other NEMs in this market, its revenue growth is beginning to normalise at a 6% year-on-year rate. China’s national broadband roll-out accounted for most of Huawei’s residential broadband revenue growth. NSN remains in fourth place. Its professional services business continues to outpace its equipment business. Figure 13: NMS market shares by revenue, worldwide, 2010 1 [Source: Analysys Mason, 2011] 1 Significant vendors in the ‘other’ category include: NEC, Motorola, Juniper Networks, GENBAND, Tellabs, Ciena, ECI Telecom and Tekelec. The NMS market grew by 3%. This is less than the 5% growth we forecasted last year, primarily because of the prolonged effects of the recession.

27. 27 © Analysys Mason Limited 2011 Overall NMS market 3-year summary: ZTE entered the top six in 2010 as Nortel departed the telecoms market The NMS market grew by 3%. This is lower than the 5% growth we forecasted last year, primarily because uncertainty surrounding the recovery from recession is delaying most CSPs’ infrastructure investments. Most NEMs had a fairly flat year in terms of revenue in 2010. Ericsson’s NMS revenue grew by only 1% in 2010, despite its acquisition of Nortel businesses, as revenue continued to decline in Europe, the Middle East and Africa (EMEA) overall. Huawei again led the residential broadband and business services segments. Alcatel-Lucent is marginally behind, but achieved revenue growth in the mobile and residential broadband segments. ZTE’s year-on-year revenue growth continues to be strong. It grew by 26% in 2010, largely thanks to gains in the mobile market segment in EMEA. Cisco achieved 21% year-on-year revenue growth because of increasing ASR take-up for IP-NGNs and the large femtocell deal with AT&T in 2010. Figure 14: NMS market shares by revenue, worldwide, 2008–2010 [Source: Analysys Mason, 2011]

28. 28 © Analysys Mason Limited 2011 Other significant NEMs strategic directions Ciena and GENBAND grew inorganically as a result of their Nortel acquisitions. Ciena’s revenue almost doubled (it increased by 93% in 2010). NEC’s PASOLINK has been the cornerstone of its success in this market. It has also benefitted from its movement towards a unified multi-technology NMS (MS5000), which harmonises its hardware (NEC) and software (NetCracker) arms. The revenue growth in Motorola’s mobile business slowed following NSN’s announcement in July 2010 that it intended to acquire the business. This drove Motorola to focus on its fixed telecoms business, which specialises in optical and DOCSIS access technologies and IPTV. Motorola Mobility’s recent announcement that it intends to acquire Dreampark demonstrates its focus on IPTV as part of its broadband portfolio. Juniper Networks’ revenue grew as a result of its success in the North American market and effective partnerships with other NEMs and ISVs, such as NSN and IBM. Cisco continues to be a direct competitor to Juniper. Tellabs and ECI Telecom are focusing on mobile broadband infrastructure. Tekelec’s legacy assets continue to support its revenue, but its acquisitions of Camiant and Blueslice Networks are driving an increase in next-generation initiatives to support these fast-growing policy management solutions.

29. 29 © Analysys Mason Limited 2011 Factors that affected the NEMs NMS market in 2010 Figure 15: Conceptual NEMs revenue trend, worldwide, 1Q 2010–4Q 2010 [Source: Analysys Mason, 2011] CSPs delayed infrastructure investment decisions in the third quarter of 2010 because of uncertainty surrounding the economic recovery. CSPs focused on optimising their infrastructure to reduce capex and opex (particularly in Western Europe). NEMs announced fewer infrastructure contracts in 2010 than in 2009. Spending returned in the fourth quarter, which enabled the NMS market to achieve 3% net growth in 2010. Several Tier 1 CSPs awarded multi-year fixed and mobile network projects in the fourth quarter, such as Bharti Airtel’s expansion in Africa and Sprint’s ‘Network Vision’ project in the USA. CSPs focused on residential broadband in 2010, while delaying mobile investments. Mobile broadband was a growth area for NMS – particularly in NA. CSPs are investing in 3G and HSPA/HSPA+ networks, LTE trials, and some femtocell trials and deployments. Notable infrastructure investment areas were:  NGA contracts, such as national broadband networks in Australia (Alcatel-Lucent) and China (Alcatel-Lucent and Huawei)  IP-NGN upgrades  mobile broadband  optical submarine backbone and transport  new technologies, such as VDSL2, femtocell and LTE trials and deployments.

30. 30 © Analysys Mason Limited 2011 NMS market summary by region, 2008–2010: EMEA’s share continues to be squeezed as the APAC market grows Figure 16: NMS revenue by region, worldwide, 2008–2010 [Source: Analysys Mason, 2011] Regional summary for 2010:  spending increased in NA – for example, Verizon invested in an aggressive LTE roll-out in 39 markets  Western Europe, which accounts for two-thirds of EMEA’s telecoms spending, continued to be undermined by the recession  spending continued to grow in APAC – China and India account for the most spending in the region  CALA achieved 3% revenue growth, compared with our 4% forecasted growth. Regional outlook for 2011:  we expect the modest growth in spending reported in all regions during the fourth quarter of 2010 to continue in 2011  spending will continue to be cautious in EMEA, while CSPs in the USA will push forward with mobile broadband investments  spending will continue to grow in APAC’s emerging markets  CSPs in developed APAC markets such as Japan and New Zealand will make some infrastructure investments late in 2011 to rebuild following natural disasters  spending in CALA will grow slowly, but will be constrained slightly by the delayed effects of the economic downturn. Key: APAC = the Asia–Pacific region; CALA = Central and Latin America; EMEA = Europe, the Middle East and Africa; NA = North America.

31. 31 © Analysys Mason Limited 2011 The economics of supporting traffic demands will drive multiple fixed and mobile network investments The volume of mobile traffic per connection will grow at a 37% CAGR in developed markets during the next five years, from 182MB per month in 2011 to 892MB per month in 2016. Several CSPs in developed markets have dropped flat-rate mobile data tariffs, recognising that they jeopardise the sustainability of their business. However, end users are increasingly using Wi-Fi hotspots in order to inexpensively gain a better mobile broadband experience. This will drive communications service providers (CSPs) to invest in unified multi-technology network management systems (NMS), to manage:  small-cell technologies: femtocells and Wi-Fi  high-capacity transport networks for data offloading: IP, metro-Ethernet, FTTx, VDSL2 and macrocells (LTE and HSPA+)  low-cost (rural) access and transport: fixed wireless (WiMAX), microwave backhaul and xDSL). Figure 17: Comparison of the network economics of mobile networks [Source: Analysys Mason, 2011] Time Traffic volume Network cost Revenue Dominated by data Network costs outstrip revenue Dominated by voice Fixed-mobile convergence is an evolving reality with unified multi-technology NMS more prevalent.

32. 32 © Analysys Mason Limited 2011 Worldwide NMS forecast, 2011–2015: new technologies will inject growth into this very mature OSS market The worldwide NMS market is forecast to grow from USD4.4 billion in 2010 to USD6.0 billion in 2015, at a 6.4% CAGR. LTE roll-outs are the major driver for investments in mobile NMS. They will drive accelerated growth in North America (NA) and developed Asia–Pacific (APAC) markets until 2013, and a sustained, lower growth rate later in the forecast period. Growth will return to the NMS market as a result of economic recovery and deployments of new network technologies and IP services. European CSPs continue to have cost controls in place, which will restrict investments in network equipment and NMS during the next year. Packet technologies, IP services and cloud investments will drive growth in business services NMS and residential broadband NMS markets. PSTN and legacy services will continue to decline, but will have sustained maintenance revenue during the next two years as VoLTE matures. Figure 18: NMS revenue, worldwide, 2010–2015 [Source: Analysys Mason, 2011]

33. 33 © Analysys Mason Limited 2011 Drivers and inhibitors in the NMS market Figure 19: Drivers and inhibitors in the NMS market [Source: Analysys Mason, 2011] Growth in connected devices Increase in demand for mobile services and new technologies Regulatory actions encouraging competition Spectrum scarcity Infrastructure consolidation – FMC and cloud Cost reduction by retiring legacy networks Drivers Pricing pressure Slow economic recovery Increase in network sharing Inhibitors

34. 34 © Analysys Mason Limited 2011 Recommendations for CSPs CSPs should consider:  moving to unified, multi-technology NMS as part of their NGN or OSS transformations.  the risks and rewards of extending the life of legacy NMS and hardware while transforming other parts of the business.  network optimisation and policy management options to curb network growth investment rather than allow traffic to grow exponentially and become unmanageable.  the value of the NMS vendor-specific data that may be lost through the use of inefficient, customised, non-standard NBI, because such data can enable them to provide a better quality of service for end users – particularly in competitive markets.  enhancing the flexibility and interoperability of their NMS in order to improve efficiency and thus reduce operational cost, resolution times, provisioning times and network auditing times.  the ability of their established NMS to integrate with other network and IT management systems in order to provide a comprehensive cloud management solution for delivering, monitoring and managing IaaS cloud services.

35. 35 © Analysys Mason Limited 2011 Recommendations for NEMs NEMs should:  enhance established mobile NMS to enable them to manage multiple RAN technologies, including LTE with self-organisation network (SON) capabilities, because CSPs will expand 3G networks with HSPA/HSPA+ in order to provide mobile broadband services.  continue to use a unified multi-technology approach to NMS as fixed and mobile technologies converge, and offer CSPs options to normalise mobile and fixed broadband traffic across their networks. In addition, unified multi-technology NMS can protect and/or increase NEMs hardware sales.  work more closely with ISV partners to develop standards-based northbound interfaces (NBIs) to service assurance and service fulfilment OSS in order to provide CSPs with better end-to-end provisioning, QoE monitoring and service management. Alcatel-Lucent’s certified 5620 SAM-O standard NBI OSS adapters, which interface with Tier 1 ISV OSS, are leading in this area to date.  consider the growing importance of policy management in helping CSPs to maximise their IP infrastructure capacity, and thus the proportional importance of IP NMS managing the PCEF and interfaces with policy servers (Gx) and charging systems (Gy and Gz).  consider the risks and rewards of extending legacy (circuit-switched) technology and NMS.  not expect telecoms spending in Europe to recover from the recession as quickly as in other regions.  target the growth in emerging markets (particularly in APAC) to gain increased and sustainable business.  align the role of NMS to effectively support IaaS cloud management.

36. 36 © Analysys Mason Limited 2011 Contents Annex Detailed market definitions NMS market overview

37. 37 © Analysys Mason Limited 2011 Definitions of telecoms software professional services [1] Table 1a: Definitions of telecoms software professional services and its sub-segments [Source: Analysys Mason, 2011] Segment or sub-segment Definition Telecoms software professional services Specialist services that CSPs use for transformation projects (such as optimisation, re-engineering and restructuring), and for operations and support. Our definition of telecoms software professional services includes only those services that support telecoms­ specific software (such as OSS, BSS and SDPs). It excludes: services that are not telecoms-specific, such as network integration and outsourced IT (enterprise IT), or relate to non-telecoms-specific software (such as ERP or financials). services supplied from equipment manufacturers, such as product engineering and testing. the installation, training and lifecycle management services related to telecoms equipment deployments (also known as network roll-outs), including post-implementation support services We exclude such hardware- specific services because they are specific to NEMs and do not apply to ISVs or CSIs. We sub-divide telecoms software professional services into the following seven categories. We acknowledge that in turnkey projects several of these service sub-segments can be consolidated in a single transformation project or managed service contract. Business consulting Business consulting provides advisory services in the areas of business process, workflows, organisation issues and strategic planning, such as how to enter a market or how to package a service. This includes, but is not limited to: transformational strategy; business case development and ROI modelling; business process re- engineering and optimisation; organisation restructuring and optimisation, as well as change management; assisting CSPs to develop new products and services to deliver to their subscribers, ranging from tariffs to value- added services; go-to-market strategies; regulatory compliance review and reporting requirements; and marketing and campaign strategies.

38. 38 © Analysys Mason Limited 2011 Definitions of telecoms software professional services [2] Table 1b: Definitions of telecoms software professional services and its sub-segments [Source: Analysys Mason, 2011] Sub-segmentDefinition Design consulting Design consulting provides advisory design services prior to a telecoms network, software and/or systems implementation in the areas of OSS, BSS and SDP architecture, network planning and optimisation and data or information models. These services typically contribute developing requirements for procuring the systems and software needed. This category includes, but is not limited to: network planning and optimisation designs for both fixed and mobile networks; OSS, BSS and SDP, and integrated architectural design; developing technical requirement for tender documents; high-level migration plans and roadmapping; analysis of established systems; data modelling; high-level interface definitions and designs. Product- related services Product-related services are the installation, training and lifecycle management services related to a specific telecoms software deployment. This category also includes professional services related specifically to a supplier’s own product and is the exact product-related services definition we use in other telecoms software reports. Services related to third-party products are part of the systems integration sub-segment. We exclude support services for hardware products, to ensures that only telecoms software professional services are compared for all suppliers. Custom development Custom development refers to telecoms software that is written specifically for an individual CSP, typically as a result of their ownership of legacy and proprietary systems, software or interfaces. It includes any development that requires coding to meet an unusual requirement, such as the development of a customised application store on an SDP or Microsoft.NET platform, an API for interfacing with legacy or proprietary systems, and data migration scripts. This is internal development that is typically performed by large CSPs – a market that we will quantify separately from the market in which suppliers currently participate. This includes some ADM.

39. 39 © Analysys Mason Limited 2011 Definitions of telecoms software professional services [3] Table 1c: Definitions of telecoms software professional services and its sub-segments [Source: Analysys Mason, 2011] Sub-segmentDefinition Systems integration Systems integration concerns the services required to manage and deliver major telecoms software projects in the OSS, BSS and applications areas to meet CSPs’ specific requirements. These are services that are beyond the boundaries of a single product or suite (which is covered in the product-related services segment), and involve other systems in the CSP environment in order to meet the project’s requirements. This category includes, but is not limited to: integration with third-party (other vendor or proprietary) data sources, systems and interfaces. data loading and migration. customisation and configurations of software extensions and modules (without coding) to provide customised software features and capabilities, such as network equipment adapters, point-to-point interfaces and EAI Integration. detailed requirements, technical specification and detailed design. integration testing, not normal unit and functional system testing. project management services. Services related to third-party products (not owned by the supplier) are included in this systems integration sub- segment. Systems integrations continue to drive coherent system architecture across the various telecoms software segments (OSS, BSS and SDP). We will separate the systems integration services into the various software segments in a separate report.

40. 40 © Analysys Mason Limited 2011 Definitions of telecoms software professional services [4] Table 1d: Definitions of telecoms software professional services and its sub-segments [Source: Analysys Mason, 2011] Sub-segmentDefinition Outsourced operations Outsourced operations are the professional or specialist services provided by external suppliers’ human resources to operate and maintain a CSP’s assets, which can include all related operational responsibilities. This involves the transfer of operations from a CSP to external suppliers. In this scenario, the assets (systems and software) are owned and reside in the CSP’s environment and the supplier manages the network from a CSP co- located site or other local or regional (for example, regional NOC) site. This includes business process outsourcing (BPO). Such services typically include responsibility for onsite operations and related activities in a particular country or region. Billing and customer care outsourcing services are included, where the CSP owns the systems. Planning, optimisation and design elements of managed-service contracts are considered in the respective other categories. Hosted managed services Hosted managed services are managed and provided by the supplier using its own infrastructure in its NOCs. The NOCs will typically provide multi-vendor and multi-domain (mobile, fixed and content or media) management. This differs from outsourced operations, whereby the supplier is responsible for the systems and software in addition to the human resources that are performing the remote management from the supplier’s NOC. This sub- segment excludes field and onsite operations, which form part of the outsourced operations sub-segment. This category includes billing, customer care, network management and SDPs and services (including software- as-a-service (SaaS)).

41. 41 © Analysys Mason Limited 2011 Definitions of supplier types Table 2: Definitions of telecoms software professional service supplier types [Source: Analysys Mason, 2011] Supplier typeDefinition Network equipment manufacturers (NEMs) NEMs are vendors that develop and implement core and access telecoms network equipment, as well as devices such as routers, switches, CPE, MPLS switches, DSLAMs, multiplexers, optical devices, mobile switches and base stations. NEMs also develop telecoms software for all of the equipment that they develop. Independent software vendors (ISVs) ISVs are vendors that develop telecoms software independent of the network and IT equipment. ISVs’ businesses are focused on providing licences for their software products and additional services, such as maintenance. IT suppliers IT suppliers are manufacturers of IT equipment (such as PCs, laptops, servers, SANs and NASs), which also develop telecoms software independent of network and IT equipment, like ISVs. Global consulting and systems integrators (CSIs) Global CSIs do not develop any hardware or software for commercial resale, and have a notable presence in all major geographical regions. ‘Pure-play’ systems integrators (such as Accenture) account for the majority of suppliers in this category, but it also includes pure-play consultants (such as KPMG). Regional consulting and systems integrators (CSIs) Regional CSIs do not develop any hardware or software for commercial resale, lack a notable presence in all major geographical regions, and generate less than USD800 million in annual revenue from telecoms software professional services. Such suppliers also tend to have a low regional price point.

42. 42 © Analysys Mason Limited 2011 Industry and TSPS factors influencing possible change in the telecoms landscape [1] Strong labour laws in parts of Europe are being countered by rebadging of CSP staff to outsourced suppliers. This provides a way for CSPs to optimise their organisations without legal implications. Sprint can break the mould of the desire of CSPs in the USA to retain control to move to more cost effective operations, with its Ericsson managed-services contract and Network Vision transformation (Alcatel-Lucent and Ericsson). LightSquared’s fifteen-year deal with Sprint will see, over the first eleven years, about USD9 billion paid to Sprint to build and operate (very probably outsourced) LightSquared’s nationwide wholesale LTE network. Sprint will also receive an estimated USD4.5 billion in credit to use LightSquared’s network. This is a huge shift in US CSP operations. Voice revenue is declining. Monetising data services is increasingly difficult because of growing competition between CSPs with similar data services. This is slowly driving up capex and opex, and thus squeezing margins. Exorbitant spectrum costs, coupled with rigorous regulation, are inhibiting CSPs’ revenue growth. New technologies are becoming difficult for CSPs to roll out on their own and most LTE and optical NGA projects are being deployed using an infrastructure sharing or wholesale model. CSPs still seek revenue growth from greater subscriber numbers. Having more subscribers does increase revenue, but is also increasing opex in proportion. This is not the case for competing over-the-top and Internet players that use cloud architecture. More than 90% of over-the-top and Internet players use automated ordering, billing and self-care, and outsourcing of non-core activities (payments and ordering are also outsourced by some).

43. 43 © Analysys Mason Limited 2011 Industry and TSPS factors influencing possible change in the telecoms landscape [2] There is increased interest from investors in successful MVNO and data centre businesses, which are primarily outsourced and hosted models. KPNI’s MVNE platform (Magnum) is being delivered by Huawei in a managed-services model and allowed the successful launch of its Ortel Mobile branded MVNO in Spain in four and a half months. NA and Western Europe are expected to lead changes in the telecoms industry landscape. However, CSPs in CALA and developing APAC are using TSPS to accelerate innovation and change in their traditional telecoms businesses and could be poised to outpace NA and Western Europe with this approach. India has the fastest 3G roll-out worldwide to date and is rolling out LTE in some cities, while the UK has yet to trial LTE. Cloud computing can provide both cost reductions and new revenue streams for CSPs, but requires them to change their business models. Verizon’s USD1.4 billion acquisition of Terremark will increase its revenue and corporate customer prospects, but it has not yet made any announcement of using Terremark’s cloud architecture and business model to enhance its ‘business as usual’ model. Telefónica’s cloud initiatives are targeting cost reduction to combat year-on-year opex increase. CSPs’ investments in new technologies and services are still mostly reactive – in response to competitors. Suppliers are opening up to risk- and revenue- sharing TSPS models to encourage CSPs (by deferring capex spend) to move to new business models, as a more cost-effective option to develop new revenue streams. Suppliers are involved in cross vertical M&A and partnerships to ramp up their capability to deliver and support new business models.

44. 44 © Analysys Mason Limited 2011 NMS overview Our definition of NMS includes the following software products:  element management systems (EMSs), which interface directly to a particular type of network equipment and provide an NBI and basic network management functions  domain managers and NMS, which interface with the EMS to provide network management functions for different types of element in a given technology domain. NMS solutions reside between the OSS applications and the network elements in a given domain, and are typically single-vendor solutions. We include licence, maintenance and support revenue that NEMs derive from the sale of network management software to manage their equipment. In addition to the NBI, NMS provide a GUI to support some of the basic network management capabilities, such as configuration, fault management, accounting, performance and security management in a single-vendor domain. Figure 20: Interfaces supported by NMS [Source: Analysys Mason, 2011] NOC Service fulfilment Inventory management Service activation Discovery Service assurance Fault management Performance management Service management EMS Northbound Southbound GUI Vendor 1Vendor 2Vendor 3

45. 45 © Analysys Mason Limited 2011 NMS segment definitions Table 3: NMS market segment definitions [Source: Analysys Mason, 2011] SegmentDefinition Network management systems (NMS) NMS enable basic element management and network management for the NEMs’ equipment and support northbound interfaces (NBI) to multi-vendor service assurance and service fulfilment systems. Mobile NMSMobile NMS solutions can manage circuit-switched, packet-switched and radio technology infrastructure. They provide the core OSS infrastructure for operating and managing mobile network switching and network elements. This includes domain managers and EMS for packet technology. Femtocell deployments that aim to increase mobile coverage are covered in this segment. Business data services NMS Business data services NMS provide high service-level metrics to large enterprise customers with complex network service configurations and customisations. These are typically IP network services, such as Internet access, hosting services, IP VPN, Ethernet, managed IT services and wholesale carrier services. These NMS solutions include both GUI and CLI management, which can be managed either centrally or distributed. Residential broadband NMS Residential broadband NMS manage residential network infrastructure. They provide an NBI, and service assurance and service fulfilment systems for automating service activation and configuration processes. These NMS are evolving to support the new residential broadband (IP) service offerings that are becoming mainstream propositions, such as IPTV and residential VoIP. Femtocell deployments that compete with fixed broadband, and are not intended to improve mobile coverage, are covered in this segment. PSTN NMSLegacy systems from equipment vendors meet the network management requirements for legacy PSTN equipment and fixed circuit-switching technology. Most CSPs will keep them until they retire their PSTN equipment and move to convergent NGN as a natural network evolution. Product-related services Product-related services are the bundled installation, configuration and customisation services that are required as part of the deployment of the network elements (hardware) and NMS solutions (software).