To date, discussions of the benefits to telcos of NFV and SDN have mainly focused on reducing operating and capital costs, while the impact on future telco revenues has been somewhat sketchy. In order to fill this gap, this report outlines a comprehensive set of potential new "telco cloud" services, and forecasts associated revenue growth.
The telecoms industry is embracing network virtualisation and software defined networking, which are designed to both cut costs and enable greater agility. Whilst most operators have focused on the operating and capital cost benefits of virtualisation, few have attempted to define the range of potential new services that could be enabled by these new technologies and even fewer have attempted to forecast the associated revenue growth.
This report outlines:
- Why and how network functions virtualisation (NFV), software defined networking (SDN) and distributed compute capabilities could generate new revenue growth for telcos.
- The potential new services enabled by these technologies.
- The revenue growth that a telco might hope to achieve.
This report does not discuss the cost, technical, organisational, market or regulatory challenges operators will need to overcome in making the transition to SDN and NFV. STL Partners (STL) also acknowledges that operators are still a long way from developing and launching some of the new services discussed in this paper, not least because they require capabilities that do not exist today. Nevertheless, by mapping the opportunity landscape for operators, this report should help to pave the way to fully capturing the transformative potential of SDN and NFV.
To sense-check our findings, STL has tested the proposed service concepts with the industry. The new services identified and modelled by STL were shared with approximately 25 telecoms operators. Hewlett Packard Enterprise (HPE) kindly commissioned and supported this research and testing programme.
However, STL wrote this report independently, and the views and conclusions contained herein are those of STL.
The end of growth in telecoms…?
Most telecoms operators are facing significant competitive pressure from rival operators and players in adjacent sectors. Increased competition among telcos and Internet players has driven down voice and messaging revenues. Whilst demand for data services is increasing, STL forecasts that revenue growth in this segment will not offset the decline in voice and messaging revenue (see Figure 5).
Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market
Source: STL Partners analysis
Figure 5 shows STL forecasts for revenues over a six-year horizon for an illustrative converged telco operating in an advanced market. The telco, its market characteristics and the modelling mechanics are described in detail later in this report.
We believe that existing ‘digital’ businesses (representing consumer digital services, such as IPTV and managed services for enterprises) will not grow significantly on an organic basis over the next six years (unless operators are able to radically transform their business). Note, this forecast is for a converged telco (mobile and fixed) addressing both enterprise and consumer segments; we anticipate that revenues could face a steeper decline for non-converged, consumer-only or enterprise-only players.
Given that telcos’ cost structures are quite rigid, with high capex and opex requirements to manage infrastructure, the ongoing decline in core service revenue will continue to put significant pressure on the core business. As revenues decline, margins fall and telcos’ ability to invest in innovation is curbed, making it even harder to find new sources of revenue.
New technologies can be a catalyst for telco transformation
However, STL believes that new technologies have the potential to both streamline the telco cost structure and spur growth. In particular, network functions virtualisation (NFV) and software-defined networking (SDN) offer many potential benefits for telcos.
Virtualisation has the potential to generate significant cost savings for telcos. Whilst the process of managing a transition to NFV and SDN may be fraught with challenges and be costly, it should eventually lead to:
- A reduction in capex – NFV will lead to the adoption of generic common-off-the-shelf (COTS) hardware. This hardware will be lower cost, able to serve multiple functions and will be more readily re-usable. Furthermore, operators will be less tied to vendors’ proprietary platforms, as functions will be more openly interchangeable. This will increase competition in the hardware and software markets, leading to an overall reduction in capital investment.
- Reduction of opex through automation. Again, as services will be delivered via software there will be less cost associated with the on-going management and maintenance of the network infrastructure. The network will be more-centrally managed, allowing more efficient sharing of resources, such as space, power and cooling systems.
- Product lifecycle management improvements through more integrated development and operations (devops)
In addition to cost savings, virtualisation can also allow operators to become more agile. This agility arises from two factors:
- The nature of the new infrastructure
- The change in cost structure
As the new infrastructure will be software-centric, as opposed to hardware-centric, greater levels of automation will be possible. This new software-defined, programmable infrastructure could also increase flexibility in the creation, management and provisioning of services in a way that is not possible with today’s infrastructure, leading to greater agility.
Virtualisation will also change the telco cost structure, potentially allowing operators to be less risk-averse and thereby become more innovative. Figure 6 below shows how virtualisation can impact the operating model of a telco. Through virtualisation, an infrastructure player becomes more like a platform or product player, with less capital tied-up in infrastructure (and the management of that infrastructure) and more available to spend on marketing and innovation.
Redefining the cost structure could help spur transformation across the business, as processes and culture begin to revolve less around fixed infrastructure investment and more-around software and innovation.
Figure 6: Virtualisation can redefine the cost structure of a telco
Source: STL Partners analysis
This topic is explored in detail in the recent Executive Briefings: Problem: Telecoms technology inhibits operator business model change (Part 1) and Solution: Transforming to the Telco Cloud Service Provider (Part 2).
- Executive Summary
- The end of growth in telecoms…?
- New technologies can be a catalyst for telco transformation
- Defining ‘Telco Cloud’
- How Telco Cloud enables revenue-growth opportunities for telcos
- Connect services
- Perform services
- Capture, Analyse & Control services
- Digital Agility services
- Telco Cloud Services
- Service Overview: Revenue vs. Ease of Implementation
- 15 Service types defined (section on each)
- The Revenue Opportunity
- Model overview
- Sizing the revenue potential from Telco Cloud services
- Timeline for new service launch
- Breaking down the revenues
- Customer experience benefits
- Modelling Assumptions & Mechanics
- Service Descriptions: Index of Icons
- Figure 1: Defining Telco Cloud
- Figure 2: Overview of Telco Cloud categories and services
- Figure 3: Telco Cloud could boost revenues X% higher than the base case
- Figure 4: Breakdown of Telco Cloud revenues in 2021
- Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market
- Figure 6: Virtualisation can redefine the cost structure of a telco
- Figure 7: Defining Telco Cloud
- Figure 8: Telco Cloud Service Categories
- Figure 9: Telco Cloud will enable immersive live VR experiences
- Figure 10: Telco Cloud can enable two-way communication in real-time
- Figure 11: Overview of Telco Cloud categories and services
- Figure 12: Telco Cloud Services: Revenue versus ease of implementation
- Figure 13: Telco X – Base case shows declining revenues
- Figure 14: Telco X – Telco Cloud services increase monthly revenues by X% on the base case by Dec 2021
- Figure 15: Telco X – Timeline of Telco Cloud service launch dates
- Figure 16: Telco X (converged) – Net new revenue by service category (Dec 2021)
- Figure 17: Telco Y (mobile only) – Net new revenue by service category (Dec 2021)
- Figure 18 Telco Z (fixed only) – Net new revenue by service category (Dec 2021)
- Figure 19: Modelling Mechanics