There were a lot of articles yesterday in Light Reading on various aspects of the telco cloud, perhaps leading up to a theme for their coming event. We had the “strategic imperative” piece, some more technical pieces, and the view that the cloud was essential for hosting NFV. Operators are in fact “wanting what they’ve got” (to quote one article, referencing operator envy of the OTT cloud positions), but the real question is how they’d get there.
It’s fairly easy for Amazon, Facebook, Google, and Microsoft to deploy cloud infrastructure. Three of the four sell cloud services, and the other (Facebook) is a social-media-content player. The telcos, in the main, do not sell much in the way of cloud services and they have no social-media content presence to speak of. The point is that the over-the-top business model is great if you’re an OTT, but if you have to build and sustain networks, network infrastructure is likely to dominate your technology planning.
For operators to get to the cloud, there are two possible pathways. First, they could use cloud technology to host network features. That’s the NFV story, but it could be broadened to include things that haven’t been a historical focus for NFV, like the hosting of router instances. Second, they could host something above the traditional network, meaning have an OTT component to their business. Which of these could get them to a credible cloud position? The answer would depend on a combination of “first cost” and return on investment (ROI).
First cost is a term that’s lived a long time in the operator world. If you were to graph the cash flow associated with a new service that required an infrastructure investment, you’d see a curve that went downward like the dipping piece of a sine wave, then returned to cross the zero line and eventually head upward to plateau at the cash flow level that reflected full exploitation of the market opportunity. That first downward dip is “first cost”, and it reflects the fact that to make a service credible you have to deploy a certain amount of infrastructure before you have any real sales to create a return. Too much first cost means a higher risk. Suppose it doesn’t turn around?
ROI is the more familiar measure of credible investment. Most companies set a target ROI for their capital projects, and CIO approval of most projects will depend on establishing a credible strategy to earn that ROI fairly quickly. The more revenue you can generate, and the faster you can generate it, the better the ROI. Similarly, the lower the “I” or investment part, the better the ROI will look at constant revenue.
Any operator will judge our two pathways to the cloud based on these financial factors, and if the approach can’t measure up, it’s unlikely it will get CIO or CEO buy-in. So the question for carrier cloud isn’t how we can get there (any way that generates the proper ROI) but rather which of the pathways has credible destinations that could generate results—and quickly.
There are six possible drivers that break down into the pathways that I’ve noted. The first is virtual devices, which is the NFV route. Second is virtualized ad and video delivery, a combination of caching and ad targeting. Third is 5G transformation, the potentially massive shift in mobile technology accompanying 5G deployment. Number four is network operator public cloud services, implying operators would get into the cloud business. Five is contextual services, the creation and hosting of personalization features that arise with the increases in social-media impact, and six is the Internet of Things (IoT). The first three of these are at least partially aimed at our network-technology-hosting pathway, and the last three at the OTT above-traditional-network pathway.
My modeling of the opportunity, based on techniques evolved from operator surveys that started in 1989, has assigned probable opportunity sizes and exploitation rates for all six of our drivers, which means we can assign them to the two pathways as well. How does it look? Let’s see.
According to the way operators have historically made service/infrastructure decisions, the first question we’d need to ask is whether any of our drivers created less than 10% of the available opportunity in a given year. Operators don’t always jump on the driver with the greatest opportunity, but they rarely dip down to something that has less than a 10% rate of exploiting opportunity. In 2018 and 2019, that logic says that neither NFV nor contextual/social service features have a chance of driving carrier cloud. These drivers could exploit cloud deployments that something else justified, but they’d not be able to go it alone.
What has the best chance of driving carrier cloud in the 2018/2019 timeframe is advertising and video delivery, which controls about 55% of the opportunity in those years. Second is the 5G modernization opportunity. What makes these good drivers is the combination of the fact that there are already demonstrable opportunities, they require little in the way of proactive service marketing, and they have significant growth potential over five years.
But, you might ask, isn’t it true that both these drivers are NFV-dependent? No, it’s not. They require hosting things, but not hosting of specific in-line network features. Even IMS/EPC features that are cloud-hosted would look more like cloud applications than virtual functions, and the orchestration and management complexity of NFV couldn’t really be justified for them.
The biggest shift in demand focus comes in 2020. That year we see an uptick in 5G interest, combined with a significant jump in IoT-related opportunity. However, the largest opportunity contributor will still be the advertising and video delivery, which will almost double its service revenue potential year over year. 5G and IoT have significant potential, but the problem of first cost and effective positioning and marketing is likely to make them under-perform in the real world. I expect the realization of opportunity to continue to favor ad/video.
IoT and 5G start to combine with ad/video and contextual services in 2022, according to my latest model iteration, or they should. The challenge for the industry, and forecasters of the industry, is that the convergence presumes operators would recognize a need to shift to a middle ground between connection services that dominate their revenue today, and OTT services that their rivals seem to have locked up. Network feature hosting creates what are essentially “feature services” from which traditional network services can be composed. Feature services could also be the basis of OTT services, and so they’re where operators might gain traction.
Let’s go back to first-cost and ROI. Operators, as former utilities, typically approve projects whose first cost and ROI would be unfavorable to the OTTs. That’s what keeps the latter out of the network service business. Things like IoT, ad/video personalization and optimization, and contextual services are all examples of feature elements that could be composed into both traditional and OTT services, but that could require considerable infrastructure deployment. That makes them less attractive to OTTs, and operators could step in and provide the features rather than trying to compete with the OTTs for the higher-level services—many of which the OTTs already dominate.
IoT is the best example of this. Instead of focusing on IoT as an opportunity to sell 5G service to sensors, operators should be thinking about how to develop sensor data into features. Operators, with a lower ROI target than the OTTs and more experience with massive pre-positioning deployments, are in a better position to develop useful intelligence from sensors, deliver useful insights based on correlations of mobile user behavior patterns. The opportunities are here now, they won’t last forever, and whether operators take them up or don’t will be the thing that determines whether they compete with OTTs in the cloud, or just continue to press their noses to the cloud-candy-store window.