Are operators really at a crossroads? They’ve suffered through continuous profit-per-bit pressure on traditional network services for over a decade. Improving that means enhancing revenue per bit, reducing cost per bit, or maybe both, and the choice operators make will have a major impact on the revenues vendors can expect, and which vendors can expect them. It will also impact just what technology innovations we can expect and in what area those innovations could be expected. In short, it could mean a lot, and while we’ve been stumbling around on this crossroads issue seemingly forever, I think there are some clear signals emerging.
Light Reading offered us a good starting point with an analysis of the recent AT&T deals with Microsoft and Google. Those deals represent telco/cloud relationships, and obviously some new-thought on the part of AT&T. So it’s far to ask whether these deals are cost-driven, revenue-driven, or both. I agree with some of the points, but not all.
The article says that “many feel as though the telecom industry has outsourced innovation to others – most notably the West Coast technology giants, including the hyperscalers. These companies tend to adopt new technology more quickly than the telcos…but I don’t know that we should expect them to innovate on the services front any more efficiently than the telcos, who have the knowledge the others don’t.” The problem with this statement is that it presumes that “the services front” lies in areas where telcos have knowledge, and I don’t think that’s true.
Pushing bits is pushing bits at the technical level. If they go from “A” to “B” the method of transport matters only insofar as it relates to cost. Yes, we’ve talked about elastic bandwidth and stuff like that, but while those discussions are decades old, they’ve never discovered any really new and useful strategy. What’s valuable to the user in this space is what’s cheaper, and what’s cheaper to the user isn’t going to improve profit per bit for the supplier. The fact is that the service front, or perhaps “frontier” is really at a higher layer than today’s services, and it’s value that’s added there that could generate new revenue. For that, the cloud providers surely have more knowledge than the telcos do.
The two AT&T relationships with public cloud providers seem aimed at both sides of the profit-per-bit equation; cost and revenue. Microsoft’s deal seems aimed at creating hosted 5G service elements on the public cloud, in combination with an unspecified amount of telco-provided edge hosting. Google’s seems to focus on applications that would build on those 5G connection services, which clearly live at that higher layer we always hear about. The question with regard to Microsoft is whether costs are controlled in the long term, and with regard to Google whether revenues are first, credible, and second, generated for the telcos or the cloud providers.
Cost management through outsourcing 5G hosting to the public cloud is a trade of “first-cost” deployment of resources against longer-term costs created by the difference between what they’d pay a public cloud provider and what they could obtain from their own infrastructure. We could expect that operators would pay about 25% more for cloud provider services versus what their own cost would be. In the short term, when operators like AT&T would have to deploy a couple hundred metro data centers, the cash flow would likely be better using public cloud.
Most of the operators deploying 5G are doing so within their home regions, meaning that they have a market geography that corresponds to the physical distribution of facilities. Larger operators in competitive areas like the US, EU, and parts of Asia have market geographies that extend beyond the limits of their normal facilities. AT&T is obviously one; they have a home region in the western/southern US but a wireless presence throughout the country. It would be expensive to deploy data center hosting resources for edge computing and 5G over even an operator’s own region, much less their likely larger market geography. Getting started with the public cloud makes sense.
Over time, the balance shifts; my model says that by 2026 or so, relative cash flow for the public cloud position would slip behind the do-it-yourself choice, and the gap would widen continuously. Two factors could counterbalance this seeming long-term loss. First, nearly everyone (including most of the people I talk with in the telco world) think the telcos don’t know how to do their own telco cloud hosting of 5G. Recall that AT&T has probably made as much or more progress in that space as any operator, and it’s their cloud deals we’re talking about. Second, there’s no reason why telcos couldn’t claw back their 5G hosting when they had sufficient volume of deployment and had acquired enough skill to justify it. AT&T’s deal with Microsoft plants telco-oriented skills in Microsoft’s cloud organization, but software progress in edge hosting of 5G elements would surely develop broadly over time.
That telcos don’t understand the cloud is important here, because most of the arguments against the partnerships between telcos and cloud providers are based on the assumption that the telcos are surrendering their future. That argument is weak if the telcos can’t develop what’s needed to assure their future in the first place, and as I’ve noted, that’s a view widely held even within the telcos themselves. The biggest problem the telcos have had is the notion that they’re special, that generalized cloud features can’t be harnessed to support their needs. Baloney.
Telcos (and their vendors) have resisted using general, open, technology for ages, and it’s pretty clear now that there was no technical justification for their intransigence. There’s no reason why open cloud technology can’t be pressed into service, but I do agree that there are issues related to telco hosting of services that aren’t optimally addressed in mainstream cloud-think. That’s where having a transfer of technology from AT&T to Microsoft could help. It’s like AT&T tossing the ball to Microsoft and saying “Score with this!” Since Microsoft, of all cloud providers, has already acquired a dose of telco-think via its 5G acquisitions (like my favorite, Metaswitch), they have a quicker path to enlightenment.
But Microsoft doesn’t have the same skill in evolving an MEC position, which is why I think the Google deal is smart. Google is the force behind Kubernetes, Istio, the largest core network use of SDN, and a bunch of other application-level innovations. If there is a reality to exploiting edge computing, I’d expect Google’s cloud-native supremacy would let them discover it first. Since AT&T needs speed here to increase the revenue/cost spread again, Google is the smart choice.
There is still one cost-side question, though, and that’s back to capex and opex. All network operators, but especially the telcos, will need to link their network operations tools with their service/business operations framework, the OSS/BSS in the telco world. That means that both 5G hosting (the Microsoft side) and MEC exploitation (the Google side) will require that. Will the two cloud providers cooperate to create a common framework? Hardly. Will one accept the framework of the other? Only if AT&T and other operators demand it. Thus, we still need a management framework for 5G/MEC (which current standards don’t really define, only connect with). AT&T’s vision of management, ONAP, is flawed, so getting some realistic input from some source is essential, or the short-term cost-management goals critical to this whole evolution to the cloud won’t be met.
All of this is important because telcos are not at a crossroads at all, they’re really at the junction of two lanes that go the same place in the end. There is no long-term profit-per-bit strategy that doesn’t include both a transformation in costs and a transformation in revenues. Future revenue-generating services will have to be very cost-effective to actually contribute to profits, and since these services will be more OTT-like, telcos can’t allow their core business to fall to a loss leader while competing with players who don’t have those losses to cover. The telcos can leverage and exploit cloud provider expertise in the near term, but they need to wean themselves off it in the long term.