How Public Cloud Can Spur Innovation in Telecoms

There are well documented examples within the last two decades of industries that have successfully embraced public cloud benefits, including government and cybersecurity domains. Telecommunications (telecoms) is one of the last industries to make a concerted effort to utilize public cloud platforms. Increasingly, there is a growing recognition that communications service providers (CSPs) must adopt public cloud innovation and efficiencies to compete effectively in the digital economy. CSPs can benefit from public cloud efficiency because they can consolidate much more functionality with less equipment. So better economics, business agility, and lower implementation risk are all key drivers for public cloud to potentially propel innovation in the industry.

Investment that drives public cloud adoption in other industries typically comes from venture capital (VC) backing. For example, industries like biotechnology, pharmaceutical, and financial services have long been attractive domains for VC investment. Telecoms does not necessarily feature at the top of the rankings for VC funding. That, coupled with an already challenging investment landscape for innovative startup companies, means that the telecom industry does not have the external catalysts that typically drive new growth and innovation. Against that backdrop, cloud adoption in telecoms is not a matter of if, but rather, a matter of how adoption unfolds and when; in other words, it is about the pace with which CSPs move their operations to public cloud platforms.

Public cloud adoption in telecoms is advancing significantly, but with different levels of maturity and at different timescales. Large-scale implementation is contingent on CSPs’ infrastructure readiness, ability to obtain—and retain—the talent to effectively utilize cloud platforms, and whether new value is introduced. Tier-1 CSPs such as Orange, AT&T, and Telefónica among many others, already utilize public cloud to generate net new value. In fact, as noted in ABI Research’s Telefónica is an UnTelco Example to Follow (IN-5180), Telefónica already generates more than EU€5 billion a year from its digital services that include Big Data, Security, and Cloud. The rest of the CSP market may need some time to truly capture the benefit of cloud.

But adoption pace notwithstanding, ABI Research believes that, by and large, the utility of public cloud starts around the edges with things like analytics, reporting, Artificial Intelligence/Machine Learning processing. Next, CSPs gradually move wholesale to the cloud platform, including specialized telecom-specific functions like OSS and cellular core networks. To that end, public cloud deployments constitute an evolutionary path toward a core cloud stack that includes resources (infrastructure), platforms, and applications to support CSPs with three interrelated strands:

• Technology Evolution: The public cloud is a key enabler for a more ‘digital’ telecom ecosystem. Leading CSPs are investing significantly in public cloud platforms and DevOps patterns of software development to achieve business agility and better price points by virtue of eliminating third-party hardware and software expense.
• Operational Changes: Cloud efficiencies enable CSPs to propel service convergence by intelligently fusing today’s siloed internal departments. Furthermore, cloud technologies enable CSPs to embrace a new mindset that is more conducive to operating global software-centric platforms.
• Service Evolution: An additional key reason behind cloud adoption is the need to accelerate their digital transformation and improve existing business models. With 5G as a growth enabler, CSPs can competitively offer new business to business (B2B) services with an agility that can only be provided by inexpensive access to public cloud compute power.

The challenge with digital transformations is the paradox of embracing a transformative technology but simultaneously allowing brownfield implementations to dictate how. When this happens, brownfield processes limit the future deployment architecture(s) to the lowest common denominator(s). This does not constitute transformation; this is incremental improvement. To avoid falling into this trap, the industry at large must embrace the utility of the public cloud by fully committing to it. Even a micro decision to move a particular application in the cloud is a step in the right path. So is the ability to identify and optimize institutional processes as the industry embraces cloud-based commercial models.

Public cloud constitutes a new technology for telecoms. Consequently, there is a risk attached for the industry. On the one hand, CSP should learn how to best consume cloud platforms. Vendors, on the other hand, must come to grips with how to sell cloud products. For example, with existing capital expenditure (CAPEX) models, vendors have one stress point: winning the deal. The business risk of implementing the technology rests largely with CSPs. With cloud however, the risk in the purchase decision shifts from buyer (customer) towards the supplier. That is because in cloud models (the operating expenses (OPEX)), there is no upfront payment. The “contract” pot is empty. What the supplier has earned is a chance to fill it with “gold” over the years ahead. The potential revenue might accrue in the future. To allay the risk in question, broadly speaking, there are three considerations for vendors (e.g., Ericsson, Huawei, Nokia, and Sunlight) as they seek to embrace cloud-based commercial models:

• Separate Product from Services: A gradual shift to cloud-based platforms gives rise to commercial arrangements that do not have the inherent stickiness that cross-product sales in telecoms do. Consequently, a commercial model wherein service economics is bundled with product economics may not be effective. Vendors that do not separate the two may be highly vulnerable in a highly competitive market.
• Build a Services Business: CSPs’ continued efforts to cloudify their operations paves the way for a new consulting and integration business in the market’s high end. In addition to services tied to products bearing vendors’ own logos, CSPs seek vendors that literally take over all aspects of the technology, from building applications and defining architectures to managing some of their workloads.
• Identify Key Dimensions of OPEX Models: OPEX models are characterized by different economics. For example, OPEX offerings are associated with microtransactions typically based on smaller average unit prices. Further, the simplicity of accessing OPEX offerings means that switching costs are low; there is not much holding a customer to a specific supplier. Volume and average selling prices remain critical pillars to OPEX models. Successful suppliers must institute a commercial structure that drives these aspects in a proactive and systematic fashion.

To conclude, there is by now a consensus that public cloud adoption holds the potential to spur unprecedented innovation in telecoms. But this adoption is a journey, not a “flip of the switch” event. The industry at large cannot pretend to redo what cloud providers have been able to build with worldwide scale. For vendors and CSPs to succeed, they must create the right culture and environment to integrate public cloud platforms into their existing operations. Equally important, when assessing public cloud as a technology, decision makers should consider the benefits articulated in this report but should not believe that cloud is the sole answer to new value creation. Market entities that understand how to integrate cloud platforms into telecoms with novel commercial models, and the partners that facilitate it, will be the big winners.