Why and how to go telco cloud native: AT&T, DISH and Rakuten

The telco business is being disaggregated

Telcos are facing a situation in which the elements that have traditionally made up and produced their core business are being ‘disaggregated’: broken up into their component parts and recombined in different ways, while some of the elements of the telco business are increasingly being provided by players from other industry verticals.

By the same token, telcos face the pressure – and the opportunity – to combine connectivity with other capabilities as part of new vertical-specific offerings.

Telco disaggregation primarily affects three interrelated aspects of the telco business:

  1. Technology:
    • ‘Vertical’ disaggregation: separating out of network functions previously delivered by dedicated, physical equipment into software running on commodity computing hardware (NFV, virtualisation)
    • ‘Horizontal’ disaggregation: breaking up of network functions themselves into their component parts – at both the software and hardware levels; and re-engineering, recombining and redistributing of those component parts (geographically and architecturally) to meet the needs of new use cases. In respect of software, this typically involves cloud-native network functions (CNFs) and containerisation
    • Open RAN is an example of both types of disaggregation: vertical disaggregation through separation of baseband processing software and hardware; and horizontal disaggregation by breaking out the baseband function into centralised and distributed units (CU and DU), along with a separate, programmable controller (RAN Intelligent Controller, or RIC), where all of these can in theory be provided by different vendors, and interface with radios that can also be provided by third-party vendors.
  2. Organisational structure and operating model: Breaking up of organisational hierarchies, departmental siloes, and waterfall development processes focused on the core connectivity business. As telcos face the need to develop new vertical- and client-specific services and use cases beyond the increasingly commoditised, low-margin connectivity business, these structures are being – or need to be – replaced by more multi-disciplinary teams taking end-to-end responsibility for product development and operations (e.g. DevOps), go-to-market, profitability, and technology.

Transformation from the vertical telco to the disaggregated telco

3. Value chain and business model: Breaking up of the traditional model whereby telcos owned – or at least had end-to-end operational oversight over – . This is not to deny that telcos have always relied on third party-owned or outsourced infrastructure and services, such as wholesale networks, interconnect services or vendor outsourcing. However, these discrete elements have always been welded into an end-to-end, network-based services offering under the auspices of the telco’s BSS and OSS. These ensured that the telco took overall responsibility for end-to-end service design, delivery, assurance and billing.

    • The theory behind this traditional model is that all the customer’s connectivity needs should be met by leveraging the end-to-end telco network / service offering. In practice, the end-to-end characteristics have not always been fully controlled or owned by the service provider.
    • In the new, further disaggregated value chain, different parts of the now more software-, IT- and cloud-based technology stack are increasingly provided by other types of player, including from other industry verticals. Telcos must compete to play within these new markets, and have no automatic right to deliver even just the connectivity elements.

All of these aspects of disaggregation can be seen as manifestations of a fundamental shift where telecoms is evolving from a utility communications and connectivity business to a component of distributed computing. The core business of telecoms is becoming the processing and delivery of distributed computing workloads, and the enablement of ubiquitous computing.

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Telco disaggregation is a by-product of computerisation

Telco industry disaggregation is part of a broader evolution in the domains of technology, business, the economy, and society. This evolution comprises ‘computerisation’. Computing analyses and breaks up material processes and systems into a set of logical and functional sub-components, enabling processes and products to be re-engineered, optimised, recombined in different ways, managed, and executed more efficiently and automatically.

In essence, ‘telco disaggregation’ is a term that describes a moment in time at which telecoms technology, organisations, value chains and processes are being broken up into their component parts and re-engineered, under the impact of computerisation and its synonyms: digitisation, softwarisation, virtualisation and cloud.

This is part of a new wave of societal computerisation / digitisation, which at STL Partners we call the Coordination Age. At a high level, this can be described as ‘cross-domain computerisation’: separating out processes, services and functions from multiple areas of technology, the economy and society – and optimising, recombining and automating them (i.e. coordinating them), so that they can better deliver on social, economic and environmental needs and goals. In other words, this enables scarce resources to be used more efficiently and sustainably in pursuit of individual and social needs.

NFV has computerised the network; telco cloud native subordinates it to computing

In respect of the telecoms industry in particular, one could argue that the first wave of virtualisation (NFV and SDN), which unfolded during the 2010s, represented the computerisation and digitisation of telecoms networking. The focus of this was internal to the telecoms industry in the first instance, rather than connected to other social and technology domains and goals. It was about taking legacy, physical networking processes and functions, and redesigning and reimplementing them in software.

Then, the second wave of virtualisation (cloud-native – which is happening now) is what enables telecoms networking to play a part in the second wave of societal computerisation more broadly (the Coordination Age). This is because the different layers and elements of telecoms networks (services, network functions and infrastructure) are redefined, instantiated in software, broken up into their component parts, redistributed (logically and physically), and reassembled as a function of an increasing variety of cross-domain and cross-vertical use cases that are enabled and delivered, ultimately, by computerisation. Telecoms is disaggregated by, subordinated to, and defined and controlled by computing.

In summary, we can say that telecoms networks and operations are going through disaggregation now because this forms part of a broader societal transformation in which physical processes, functions and systems are being brought under the control of computing / IT, in pursuit of broader human, societal, economic and environmental goals.

In practice, this also means that telcos are facing increasing competition from many new types of actor, such as:

  • Computing, IT and cloud players
  • More specialist and agile networking providers
  • And vertical-market actors – delivering connectivity in support of vertical-specific, Coordination Age use cases.

 

Table of contents

  • Executive Summary
    • Three critical success factors for Coordination Age telcos
    • What capabilities will remain distinctively ‘telco’?
    • Our take on three pioneering cloud-native telcos
  • Introduction
    • The telco business is being disaggregated
    • Telco disaggregation is a by-product of computerisation
  • The disaggregated telco landscape: Where’s the value for telcos?
    • Is there anything left that is distinctively ‘telco’?
    • The ‘core’ telecoms business has evolved from delivering ubiquitous communications to enabling ubiquitous computing
    • Six telco-specific roles for telecoms remain in play
  • Radical telco disaggregation in action: AT&T, DISH and Rakuten
    • Servco, netco or infraco – or a patchwork of all three?
    • AT&T Network Cloud sell-off: Desperation or strategic acuity?
    • DISH Networks: Building the hyperscale network
    • Rakuten Mobile: Ecommerce platform turned cloud-native telco, turned telco cloud platform provider
  • Conclusion

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The Telco Cloud Manifesto

Telco cloud: A key enabler of the Coordination Age

The Coordination Age is coming

As we have set out in our company manifesto, STL Partners believes that we are entering a new ‘Coordination Age’ in which technological developments will enable governments, enterprises, and consumers to coordinate their activities more effectively than ever before. The results of better and faster coordination will be game-changing for society as resources are distributed and used more effectively than ever before leading to substantial social, economic, and health benefits.

A critical component of the Coordination Age is the universal availability of flexible, fast, reliable, low-latency networks that support a myriad of applications which, in turn, enable a complex array of communications, decisions, transactions, and processes to be completed quickly and, in many cases, automatically without human intervention.  The network remains key: without it being fit for purpose the ability to match demand and supply real-time is impossible.

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How telecoms can define a new role

Historically, telecoms networks have been created using specialist dedicated (proprietary) hardware and software.  This has ensured networks are reliable and secure but has also stymied innovation – from operators and from third-parties – that have found leveraging network capabilities challenging.  In fact, innovation accelerated with the arrival of the Internet which enabled services to be decoupled from the network and run ‘over the top’.

But the Coordination Age requires more from the network than ever before – applications require the network to be flexible, accessible and support a range of technical and commercial options. Applications cannot run independently of the network but need to integrate with it. The network must be able to impart actionable insights and flex its speed, bandwidth, latency, security, business model and countless other variables quickly and autonomously to meet the needs of applications using it.

Telco cloud – the move to a network built on common off-the-shelf hardware and flexible interoperable software from best-of-breed suppliers that runs wherever it is needed – is the enabler of this future.

 

Table of Contents

  • Executive Summary
  • Telco cloud: A key enabler of the Coordination Age
    • The Coordination Age is coming
    • How telecoms can define a new role
  • Telco cloud: The growth enabler for the telecoms industry
    • Telecoms revenue growth has stalled, traffic has not
    • Telco cloud: A new approach to the network
    • …a fundamental shift in what it means to be an operator
    • …and the driver of future telecoms differentiation and growth
  • Realising the telco cloud vision
    • Moving to telco cloud is challenging
    • Different operator segments will take different paths

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Cloud native: Just another technology generation?

Cloud native networking: Telecoms’ latest adventure

As a term, cloud native has currency in telecoms networking. 5G has contributed to the recent industry-wide interest in adopting cloud native applications for networks. This is because the 5G standalone core networks (5G SA) that operators are now planning (and some have started deploying) are intended to run as software that is specified and architected following cloud native principles.

Within telecoms, thinking about cloud native tends to centre on the next phase of moving network functions into a software environment, building on lessons learned with NFV/SDN. Viewed from this perspective, cloud native is the next step in the telecoms industry technology evolution: from analogue to digital circuit-switched to digital IP to virtualised to cloud native.

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Telcos’ business model is reaching end-of-life

The rise of mobile telephony and fixed and mobile broadband means that telecoms operators have enjoyed 20 years of strong growth in all major markets. That growth has stalled. It happened in Japan and South Korea as early as 2005, in Europe from 2012 or so and, market by market, others have followed. STL Partners forecasts that, apart from Africa, all regions will see a compound annual growth rate (CAGR) below 3% for both fixed and mobile services for the next three years. Ignoring pandemic ‘blips’, we forecast a CAGR of less than 1% per annum globally. This amounts to a decline in real terms.

The telecoms industry is reaching the end of its last growth cycle

The telecoms industry’s response to this slowdown has been to continue to invest capital in better networks – fibre, 4G, 5G – to secure more customers by offering more for less. Unfortunately, as competitors also upgrade their networks, connectivity has become commoditised as value has shifted to the network-independent services that run over them.

In other words, the advantage that telcos had when only telecoms services could run on telecoms networks has gone: the defensive moat from owning fibre or spectrum has been breached. Future value comes from service innovation not from capital expenditure. The chart below sums the problem up: seven internet players generate around 65% of the revenue generated by 165 operators globally, but have a c. 50% bigger combined market capitalisation. This is because the capital markets believe that revenue and profit growth will accrue to these service innovators rather than telecoms operators.

Tech companies are more highly valued than telcos

Understand, then emulate the operating model

Operators have been aspiring to learn from technology firms so they can transform their operations and services. But changes have been slow, and it is difficult to point to many ‘poster child’ operators that successfully made a move beyond pure telecommunications. Partly this is due to a mismatch between corporate announcements and their investment policies. Too often we hear CEOs express a desire to change their organisations and that they intend to offer a host of exciting new services, only to see that aspiration not borne out when they allocate resources. Where other tech companies make substantial investments in R&D and product development, operators continue to invest miniscule amounts in service innovation (especially in comparison to what is poured into the network itself).

Telco vs tech-co investment models

STL Partners believes that many of the network-related activities that will enable operators to reduce capital expenditure, such as cloud-native networking, will also enable them to automate and integrate processes and systems so they are more flexible and agile at introducing new services. So, an agile software-oriented infrastructure will enable changes in business processes such as product development and product management, partnering, and customer care – if management prioritises investment and drives change in these areas. Cloud native business practices and software were developed by technology companies (and then widely adopted by enterprise IT functions) as a means to deliver greater innovation at scale whilst reducing the level of capital relative to revenue.

Our belief is that financial and operational developments need to happen in unison and operators need to move quickly and with urgency to a new operating model supported by cloud native practices and technology, or face sharp declines in ROI.

Table of Contents

  • Executive Summary
  • Table of Figures
  • Preface
  • Cloud native networking: Telecoms’ latest adventure
  • Telcos’ business model is reaching end-of-life
    • Understand, then emulate the operating model
    • The coordination age – a new role for telcos
    • 5G: Just another G?
    • Cloud native: Just another technology generation?
  • Different perspectives: Internal ability, timing …and what it means to be a network operator
    • Organisational readiness, skills and culture
    • Target operating model and ecosystem
    • Assembly versus Engineering
    • Wider perceptions across the business functions
    • Operator segment 1: Risk of complacency
    • Operator segment 2: Align for action
    • Operator segment 3: Urgent re-evaluation
    • Operator segment 4: Stay focused and on track
  • Appendix 1
    • Interviewee overview
  • Appendix 2
    • Defining Cloud Native
    • There is consensus on the meaning of cloud native software and applicability to networks
    • Agreement on the benefits: automation at scale for reliability and faster time to market
    • …and changing supplier relationships

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Commerce and connectivity: A match made in heaven?

Rakuten and Reliance: The exceptions or the rule?

Over the past decade, STL Partners has analysed how connectivity, commerce and content have become increasingly interdependent – as both shopping and entertainment go digital, telecoms networks have become key distribution channels for all kinds of consumer businesses. Equally, the growing availability of digital commerce and content are driving demand for connectivity both inside and outside the home.

To date, the top tier of consumer Internet players – Google, Apple, Amazon, Alibaba, Tencent and Facebook – have tended to focus on trying to dominate commerce and content, largely leaving the provision of connectivity to the conventional telecoms sector. But now some major players in the commerce market, such as Rakuten in Japan and Reliance in India, are pushing into connectivity, as well as content.

This report considers whether Rakuten’s and Reliance’s efforts to combine content, commerce and connectivity into a single package is a harbinger of things to come or the exceptions that will prove the longstanding rule that telecoms is a distinct activity with few synergies with adjacent sectors. The provision of connectivity has generally been regarded as a horizontal enabler for other forms of economic activity, rather than part of a vertically-integrated service stack.

This report also explores the extent to which new technologies, such as cloud-native networks and open radio access networks, and an increase in licence-exempt spectrum, are making it easier for companies in adjacent sectors to provide connectivity. Two chapters cover Google and Amazon’s connectivity strategies respectively, analysing the moves they have made to date and what they may do in future. The final section of this report draws some conclusions and then considers the implications for telcos.

This report builds on earlier STL Partners research, including:

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Mixing commerce and connectivity

Over the past decade, the smartphone has become an everyday shopping tool for billions of people, particularly in Asia. As a result, the smartphone display has become an important piece of real estate for the global players competing for supremacy in the digital commerce market. That real estate can be accessed via a number of avenues – through the handset’s operating system, a web browser, mobile app stores or through the connectivity layer itself.

As Google and Apple exercise a high degree of control over smartphone operating systems, popular web browsers and mobile app stores, other big digital commerce players, such as Amazon, Facebook and Walmart, risk being marginalised. One way to avoid that fate may be to play a bigger role in the provision of wireless connectivity as Reliance Industries is doing in India and Rakuten is doing in Japan.

For telcos, this is potentially a worrisome prospect. By rolling out its own greenfield mobile network, e-commerce, and financial services platform Rakuten has brought disruption and low prices to Japan’s mobile connectivity market, putting pressure on the incumbent operators. There is a clear danger that digital commerce platforms use the provision of mobile connectivity as a loss leader to drive to traffic to their other services.

Table of Contents

  • Executive Summary
  • Introduction
  • Mixing connectivity and commerce
    • Why Rakuten became a mobile network operator
    • Will Rakuten succeed in connectivity?
    • Why hasn’t Rakuten Mobile broken through?
    • Borrowing from the Amazon playbook
    • How will the hyperscalers react?
  • New technologies, new opportunities
    • Capacity expansion
    • Unlicensed and shared spectrum
    • Cloud-native networks and Open RAN attract new suppliers
    • Reprogrammable SIM cards
  • Google: Knee deep in connectivity waters
    • Google Fiber and Fi maintain a holding pattern
    • Google ramps up and ramps down public Wi-Fi
    • Google moves closer to (some) telcos
    • Google Cloud targets telcos
    • Big commitment to submarine/long distance infrastructure
    • Key takeaways: Vertical optimisation not integration
  • Amazon: A toe in the water
    • Amazon Sidewalk
    • Amazon and CBRS
    • Amazon’s long distance infrastructure
    • Takeaways: Control over connectivity has its attractions
  • Conclusions and implications for telcos in digital commerce/content
  • Index

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Growing B2B2X: Taking telcos beyond connectivity and 5G

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The telecoms industry is looking to revive growth

Telecoms operators have enjoyed 30 years of strong growth in all major markets. However, the core telecoms industry is showing signs of slowing. Connectivity revenue growth is declining and according to our research, annual growth in mobile operator revenues pre-COVID were converging to 1% across Asia Pacific, North America, and Western Europe. To help reverse this trend, telecoms operators’ have been investing in upgrading networks (fibre, 4G, 5G), enabling them to offer ever-increasing data speeds/plans to gain more customers and at least sustain ARPUs. However, this has resulted in the increasing commoditisation of connectivity as competitors also upgrade their networks. The costs to upgrade networks coupled with reducing margins from commoditisation have made it difficult for operators to invest in new revenue streams beyond core connectivity.

While connectivity remains an essential component in consumer and enterprises’ technology mix, on its own, it no longer solves our most pressing challenges. When the telecoms industry was first founded, over 150 years ago, operators were set up to solve the main challenge of the day, which was overcoming time and distance between people. Starting in the 1990s, alongside the creation of the internet and development of more powerful data networks, today’s global internet players set out to solve the next big challenge – affordable access to information and entertainment. Today, our biggest challenge is the need to make more efficient use of our resources, whether that’s time, assets, knowledge, raw material, etc. Achieving this requires not only connectivity and information, but also a high level of coordination across multiple organisations and systems to get it to the right place, at the right time. We therefore call this the Coordination Age.

Figure 1: New challenges for telecoms in the Coordination AgeThe coordination age overview

Source: STL Partners

In the Coordination Age, ‘things’ – machines, products, buildings, grids, processes – are increasingly connecting with each other as IoT and cloud-based applications become ubiquitous. This is creating an exponential increase in the volume of data available to drive development of advanced analytics and artificial intelligence, which combined with automation can improve productivity and resource efficiency. There are major socioeconomic challenges that society is facing that require better matching of supply and demand, which not only needs real-time communications and information exchange, but also insights and action.

In the Coordination Age, there is unlikely to be a single dominant coordinator for most ecosystems. While telecoms operators may not have all the capabilities and assets to play an important coordination role, especially compared to the Internet giants, they do have the advantage of being regulated and trusted in their local markets. This presents new opportunities for telecom operators in industries with stronger national boundaries. As such, there is a role for telcos to play in other parts of the value chain which will ultimately enable them to unlock new revenue growth (e.g. TELUS Health and Elisa Smart Factory).

New purpose, new role

The Coordination Age has added increased complexity and new B2B2X business model challenges for operators. They are no longer the monopolies of the past, but one of many important players in an increasingly ecosystem-based economy. This requires telcos to take a different approach: one with new purpose, culture, and ways of working. To move beyond purely connecting people and devices to enabling coordination, telcos will need a fundamental shift in vision. Management teams will need to embrace a new corporate purpose aligned with the outcomes their customers are looking for (i.e. greater resource efficiency), and drive this throughout their organisations.

Historically, operators have served all customers – consumers, small and medium-sized enterprises (SMEs), larger enterprises from all verticals and other operators – with a set of horizontal services (voice, messaging, connectivity).  If operators want to move beyond these services, then they will need to develop deep sector expertise. Indeed, telcos are increasingly seeking to play higher up the value chain and leveraging their core assets and capabilities provides an opportunity to do so.

However, in order to drive new revenues beyond connectivity and add value in other parts of the solution stack, telcos need to be able to select their battles carefully because they do not have the scale, expertise or resources to do it all.

Figure 2: Potential telco roles beyond traditional connectivity

Source: STL Partners

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Clearer on the vision, unclear on the execution

Many telcos have a relatively clear idea of where they want to drive new streams of revenue beyond traditional connectivity services. However, they face various technical, strategic and organisational challenges that have inhibited this vision from reaching fruition and have unanswered questions about how they can overcome these. This lack of clarity is further evident by the fact that some telcos have yet to set explicit revenue targets or KPIs for non-connectivity revenue, and those that have set clear quantifiable objectives struggle to define their execution plan or go-to-market strategy. Even operators that have been most successful in building new revenue streams, such as TELUS and Elisa, do not share targets or revenues for their new businesses publicly. This is likely to protect them from short-term demands of most telecoms shareholders, and because, even when profitable, they may not yet be seen as valuable enough to move the needle.

This report focuses not just on telco ambitions in driving B2B2X revenues beyond core connectivity and the different roles they want to play in the value chain, but more importantly on what strategies telcos are adopting to fulfil their ambitions. Within this research, we explore what is required to succeed from both a technological and organisational standpoint. Our findings are based on an interview programme with over 23 operators globally, conducted from June to August 2020. Our participant group spans across different operator types, geographies, and types of roles within the organisation, ensuring we gain insight into a range of unique perspectives.

In this report, we define B2B2X as a business model which supports the dynamic creation and delivery of new services by multiple parties (the Bs) for any type of end-customer (the X), whether they be enterprises or consumers. The complexity of the value chains within B2B2X models requires more openness and flexibility from party providers, given that any provider could be the first or second ‘B’ in the B2B2X acronym. This research is primarily focused on B2B2X strategies for serving enterprise customers.

In essence, our research is focused on answering the following key question: how can operators grow their B2B2X revenues when traditional core connectivity is in decline?

Table of Contents

  • Executive Summary
  • Introduction
    • The telecoms industry is looking to revive growth
    • New purpose, new role
    • Clearer on the vision, unclear on the execution
  • Beyond connectivity, but where to?
    • “Selling the service sandwich”
    • Horizontal play: Being the best application enabler
    • The vertical-specific digital services provider
    • There is no “best” approach: Some will work better for different operators in different situations
    • 5G is a trigger but not the only one
  • Accelerating the shift towards partnerships and ecosystems
    • Some operator ‘ecosystems’ look more like partnerships
    • Not all telcos define ‘ecosystems’ the same way
    • Most telcos focusing on ecosystems want to orchestrate and influence the proposition
    • Many see ecosystems as a key potential route but ecosystems come with new requirements
  • The market is ripe for telco ecosystems
    • The interest in network intelligence is not new but this time is different
    • Telcos can provide unique value by making their networks more accessible
    • But so far, telcos have not fully embraced this vision yet
  • Conclusions and recommendations

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5G: Bridging hype, reality and future promises

The 5G situation seems paradoxical

People in China and South Korea are buying 5G phones by the million, far more than initially expected, yet many western telcos are moving cautiously. Will your company also find demand? What’s the smart strategy while uncertainty remains? What actions are needed to lead in the 5G era? What questions must be answered?

New data requires new thinking. STL Partners 5G strategies: Lessons from the early movers presented the situation in late 2019, and in What will make or break 5G growth? we outlined the key drivers and inhibitors for 5G growth. This follow on report addresses what needs to happen next.

The report is informed by talks with executives of over three dozen companies and email contacts with many more, including 21 of the first 24 telcos who have deployed. This report covers considerations for the next three years (2020–2023) based on what we know today.

“Seize the 5G opportunity” says Ke Ruiwen, Chairman, China Telecom, and Chinese reports claimed 14 million sales by the end of 2019. Korea announced two million subscribers in July 2019 and by December 2019 approached five million. By early 2020, The Korean carriers were confident 30% of the market will be using 5G by the end of 2020. In the US, Verizon is selling 5G phones even in areas without 5G services,  With nine phone makers looking for market share, the price in China is US$285–$500 and falling, so the handset price barrier seems to be coming down fast.

Yet in many other markets, operators progress is significantly more tentative. So what is going on, and what should you do about it?

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5G technology works OK

22 of the first 24 operators to deploy are using mid-band radio frequencies.

Vodafone UK claims “5G will work at average speeds of 150–200 Mbps.” Speeds are typically 100 to 500 Mbps, rarely a gigabit. Latency is about 30 milliseconds, only about a third better than decent 4G. Mid-band reach is excellent. Sprint has demonstrated that simply upgrading existing base stations can provide substantial coverage.

5G has a draft business case now: people want to buy 5G phones. New use cases are mostly years away but the prospect of better mobile broadband is winning customers. The costs of radios, backhaul, and core are falling as five system vendors – Ericsson, Huawei, Nokia, Samsung, and ZTE – fight for market share. They’ve shipped over 600,000 radios. Many newcomers are gaining traction, for example Altiostar won a large contract from Rakuten and Mavenir is in trials with DT.

The high cost of 5G networks is an outdated myth. DT, Orange, Verizon, and AT&T are building 5G while cutting or keeping capex flat. Sprint’s results suggest a smart build can quickly reach half the country without a large increase in capital spending. Instead, the issue for operators is that it requires new spending with uncertain returns.

The technology works, mostly. Mid-band is performing as expected, with typical speeds of 100–500Mbps outdoors, though indoor performance is less clear yet. mmWave indoor is badly degraded. Some SDN, NFV, and other tools for automation have reached the field. However, 5G upstream is in limited use. Many carriers are combining 5G downstream with 4G upstream for now. However, each base station currently requires much more power than 4G bases, which leads to high opex. Dynamic spectrum sharing, which allows 5G to share unneeded 4G spectrum, is still in test. Many features of SDN and NFV are not yet ready.

So what should companies do? The next sections review go-to-market lessons, status on forward-looking applications, and technical considerations.

Early go-to-market lessons

Don’t oversell 5G

The continuing publicity for 5G is proving powerful, but variable. Because some customers are already convinced they want 5G, marketing and advertising do not always need to emphasise the value of 5G. For those customers, make clear why your company’s offering is the best compared to rivals’. However, the draw of 5G is not universal. Many remain sceptical, especially if their past experience with 4G has been lacklustre. They – and also a minority swayed by alarmist anti-5G rhetoric – will need far more nuanced and persuasive marketing.

Operators should be wary of overclaiming. 5G speed, although impressive, currently has few practical applications that don’t already work well over decent 4G. Fixed home broadband is a possible exception here. As the objective advantages of 5G in the near future are likely to be limited, operators should not hype features that are unrealistic today, no matter how glamorous. If you don’t have concrete selling propositions, do image advertising or use happy customer testimonials.

Table of Contents

  • Executive Summary
  • Introduction
    • 5G technology works OK
  • Early go-to-market lessons
    • Don’t oversell 5G
    • Price to match the experience
    • Deliver a valuable product
    • Concerns about new competition
    • Prepare for possible demand increases
    • The interdependencies of edge and 5G
  • Potential new applications
    • Large now and likely to grow in the 5G era
    • Near-term applications with possible major impact for 5G
    • Mid- and long-term 5G demand drivers
  • Technology choices, in summary
    • Backhaul and transport networks
    • When will 5G SA cores be needed (or available)?
    • 5G security? Nothing is perfect
    • Telco cloud: NFV, SDN, cloud native cores, and beyond
    • AI and automation in 5G
    • Power and heat

Telco Cloud: Why it hasn’t delivered, and what must change for 5G

Related Webinar – 5G Telco Clouds: Where we are and where we are headed

This research report will be expanded upon on our upcoming webinar 5G Telco Clouds: Where we are and where we are headed. In this webinar we will argue that 5G will only pay if telcos find a way to make telco clouds work. We will look to address the following key questions:

  • Why have telcos struggled to realise the telco cloud promise?
  • What do telcos need to do to unlock the key benefits?
  • Why is now the time for telcos to try again?

Join us on April 8th 16:00 – 17:00 GMT by using this registration link.

Telco cloud: big promises, undelivered

A network running in the cloud

Back in the early 2010s, the idea that a telecoms operator could run its network in the cloud was earth-shattering. Telecoms networks were complicated and highly-bespoke, and therefore expensive to build, and operate. What if we could find a way to run networks on common, shared resources – like the cloud computing companies do with IT applications? This would be beneficial in a whole host of ways, mostly related to flexibility and efficiency. The industry was sold.

In 2012, ETSI started the ball rolling when it unveiled the Network Functions Virtualisation (NFV) whitepaper, which borrowed the IT world’s concept of server-virtualisation and gave it a networking spin. Network functions would cease to be tied to dedicated pieces of equipment, and instead would run inside “virtual machines” (VMs) hosted on generic computing equipment. In essence, network functions would become software apps, known as virtual network functions (VNFs).

Because the software (the VNF) is not tied to hardware, operators would have much more flexibility over how their network is deployed. As long as we figure out a suitable way to control and configure the apps, we should be able to scale deployments up and down to meet requirements at a given time. And as long as we have enough high-volume servers, switches and storage devices connected together, it’s as simple as spinning up a new instance of the VNF – much simpler than before, when we needed to procure and deploy dedicated pieces of equipment with hefty price tags attached.

An additional benefit of moving to a software model is that operators have a far greater degree of control than before over where network functions physically reside. NFV infrastructure can directly replace old-school networking equipment in the operator’s central offices and points of presence, but the software can in theory run anywhere – in the operator’s private centralised data centre, in a datacentre managed by someone else, or even in a public hyperscale cloud. With a bit of re-engineering, it would be possible to distribute resources throughout a network, perhaps placing traffic-intensive user functions in a hub closer to the user, so that less traffic needs to go back and forth to the central control point. The key is that operators are free to choose, and shift workloads around, dependent on what they need to achieve.

The telco cloud promise

Somewhere along the way, we began talking about the telco cloud. This is a term that means many things to many people. At its most basic level, it refers specifically to the data centre resources supporting a carrier-grade telecoms network: hardware and software infrastructure, with NFV as the underlying technology. But over time, the term has started to also be associated with cloud business practices – that is to say, the innovation-focussed business model of successful cloud computing companies

Figure 2: Telco cloud defined: New technology and new ways of working

Telco cloud: Virtualised & programmable infrastructure together with cloud business practices

Source: STL Partners

In this model, telco infrastructure becomes a flexible technology platform which can be leveraged to enable new ways of working across an operator’s business. Operations become easier to automate. Product development and testing becomes more straightforward – and can happen more quickly than before. With less need for high capital spend on equipment, there is more potential for shorter, success-based funding cycles which promote innovation.

Much has been written about the vast potential of such a telco cloud, by analysts and marketers alike. Indeed, STL Partners has been partial to the same. For this reason, we will avoid a thorough investigation here. Instead, we will use a simplified framework which covers the four major buckets of value which telco cloud is supposed to help us unlock:

Figure 3: The telco cloud promise: Major buckets of value to be unlocked

Four buckets of value from telco cloud: Openness; Flexibility, visibility & control; Performance at scale; Agile service introduction

Source: STL Partners

These four buckets cover the most commonly-cited expectations of telcos moving to the cloud. Swallowed within them all, to some extent, is a fifth expectation: cost savings, which have been promised as a side-effect. These expectations have their origin in what the analyst and vendor community has promised – and so, in theory, they should be realistic and achievable.

The less-exciting reality

At STL Partners, we track the progress of telco cloud primarily through our NFV Deployment Tracker, a comprehensive database of live deployments of telco cloud technologies (NFV, SDN and beyond) in telecoms networks across the planet. The emphasis is on live rather than those running in testbeds or as proofs of concept, since we believe this is a fairer reflection of how mature the industry really is in this regard.

What we find is that, after a slow start, telcos have really taken to telco cloud since 2017, where we have seen a surge in deployments:

Figure 4: Total live deployments of telco cloud technology, 2015-2019
Includes NFVi, VNF, SDN deployments running in live production networks, globally

Telco cloud deployments have risen substantially over the past few years

Source: STL Partners NFV Deployment Tracker

All of the major operator groups around the world are now running telco clouds, as well as a significant long tail of smaller players. As we have explained previously, the primary driving force in that surge has been the move to virtualise mobile core networks in response to data traffic growth, and in preparation for roll-out of 5G networks. To date, most of it is based on NFV: taking existing physical core network functions (components of the Evolved Packet Core or the IP Multimedia Subsystem, in most cases) and running them in virtual machines. No operator has completely decommissioned legacy network infrastructure, but in many cases these deployments are already very ambitious, supporting 50% or more of a mobile operator’s total network traffic.

Yet, despite a surge in deployments, operators we work with are increasingly frustrated in the results. The technology works, but we are a long way from unlocking the value promised in Figure 2. Solutions to date are far from open and vendor-neutral. The ability to monitor, optimise and modify systems is far from ubiquitous. Performance is acceptable, but nothing to write home about, and not yet proven at mass scale. Examples of truly innovative services built on telco cloud platforms are few and far between.

We are continually asked: will telco cloud really deliver? And what needs to change for that to happen?

The problem: flawed approaches to deployment

Learning from those on the front line

The STL Partners hypothesis is that telco cloud, in and of itself, is not the problem. From a theoretical standpoint, there is no reason that virtualised and programmable network and IT infrastructure cannot be a platform for delivering the telco cloud promise. Instead, we believe that the reason it has not yet delivered is linked to how the technology has been deployed, both in terms of the technical architecture, and how the telco has organised itself to operate it.

To test this hypothesis, we conducted primary research with fifteen telecoms operators at different stages in their telco cloud journey. We asked them about their deployments to date, how they have been delivered, the challenges encountered, how successful they have been, and how they see things unfolding in the future.

Our sample includes individuals leading telco cloud deployment at a range of mobile, fixed and converged network operators of all shapes and sizes, and in all regions of the world. Titles vary widely, but include Chief Technology Officers, Heads of Technology Exploration and Chief Network Architects. Our criteria were that individuals needed to be knee-deep in their organisation’s NFV deployments, not just from a strategic standpoint, but also close to the operational complexities of making it happen.

What we found is that most telco cloud deployments to date fall into two categories, driven by the operator’s starting point in making the decision to proceed:

Figure 5: Two starting points for deploying telco cloud

Function-first "we need to virtualise XYZ" vs platform-first "we want to build a cloud platform"

Source: STL Partners

The operators we spoke to were split between these two camps. What we found is that the starting points greatly affect how the technology is deployed. In the coming pages, we will explain both in more detail.

Table of contents

  • Executive Summary
  • Telco cloud: big promises, undelivered
    • A network running in the cloud
    • The telco cloud promise
    • The less-exciting reality
  • The problem: flawed approaches to deployment
    • Learning from those on the front line
    • A function-first approach to telco cloud
    • A platform-first approach to telco cloud
  • The solution: change, collaboration and integration
    • Multi-vendor telco cloud is preferred
    • The internal transformation problem
    • The need to foster collaboration and integration
    • Standards versus blueprints
    • Insufficient management and orchestration solutions
    • Vendor partnerships and pre-integration
  • Conclusions: A better telco cloud is possible, and 5G makes it an urgent priority

NFV Deployment Tracker: North American data and trends

Introduction

NFV in North America – how is virtualisation moving forward in telcos against global benchmarks?

Welcome to the sixth edition of the ‘NFV Deployment Tracker’

This report is the sixth analytical report in the NFV Deployment Tracker series and is intended as an accompaniment to the updated Tracker Excel spreadsheet.

This extended update covers seven months of deployments worldwide, from October 2018 to April 2019. The update also includes an improved spreadsheet format: a more user-friendly, clearer lay-out and a regional toggle in the ‘Aggregate data by region’ worksheet, which provides much quicker access to the data on each region separately.

The present analytical report provides an update on deployments and trends in the North American market (US, Canada and the Caribbean) since the last report focusing on that region (December 2017).

Scope, definitions and importance of the data

We include in the Tracker only verified, live deployments of NFV or SDN technology powering commercial services. The information is taken mainly from public-domain sources, such as press releases by operators or vendors, or reports in reputable trade media. However, a small portion of the data also derives from confidential conversations we have had with telcos. In these instances, the deployments are included in the aggregate, anonymised worksheets in the spreadsheet, but not in the detailed dataset listing deployments by operator and geography, and by vendor where known.

Our definition of a ‘deployment’, including how we break deployments down into their component parts, is provided in the ‘Explanatory notes’ worksheet, in the accompanying Excel document.

NFV in North America in global context

We have gathered data on 120 live, commercial deployments of NFV and SDN in North America between 2011 and April 2019. These were completed by 33 mainly Tier-One telcos and telco group subsidiaries: 24 based in the US, four in Canada, one Caribbean, three European (Colt, T-Mobile and Vodafone), and one Latin American (América Móvil). The data includes information on 217 known Virtual Network Functions (VNFs), functional sub-components and supporting infrastructure elements that have formed part of these deployments.

This makes North America the third-largest NFV/SDN market worldwide, as is illustrated by the comparison with other regions in the chart below.

Total NFV/SDN deployments by region, 2011 to April 2019

total NFV deployments by region North America Africa Asia-Pacific Europe Middle East

Source: STL Partners

Deployments of NFV in North America account for around 24% of the global total of 486 live deployments (or 492 deployments counting deployments spanning multiple regions as one deployment for each region). Europe is very marginally ahead on 163 deployments versus 161 for Asia-Pacific: both equating to around 33% of the total.

The NFV North America Deployment Tracker contains the following data, to May 2019:

  • Global aggregate data
  • Deployments by primary purpose
  • Leading VNFs and functional components
  • Leading operators
  • Leading vendors
  • Leading vendors by primary purpose
  • Above data points broken down by region
  • North America
  • Asia-Pacific
  • Europe
  • Latin America
  • Middle East
  • Africa
  • Detailed dataset on individual deployments

 

Contents of the accompanying analytical report:

  • Executive Summary
  • Introduction
  • Welcome to the sixth edition of the ‘NFV Deployment Tracker’
  • Scope, definitions and importance of the data
  • Analysis of NFV in North America
  • The North American market in global context
  • SD-WAN and core network functions are the leading categories
  • 5G is driving core network virtualisation
  • Vendor trends: Open source and operator self-builds outpace vendors
  • Operator trends: Verizon and AT&T are the clear leaders
  • Conclusion: Slow-down in enterprise platform deployments while 5G provides new impetus

Three new telco business models: Soft-net, Cloud-net, Compute-net

Introduction

This report outlines three new telecoms business models that builds on previous research where we have outlined our vision of an emerging third age of telecoms called the Coordination Age. This is based on a global need to improve the efficiency of resource utilisation is manifesting in industries and individuals as a desire to “make the world work better”. We discuss this concept in detail in the following reports:

We believe that three new business models for telcos are emerging as part of the Coordination Age.

  • The Soft-Net: the core business remains connectivity, but the softwarisation of the network through SDN / NFV enables the network to adapt and scale to support new, advanced connectivity services. This includes third-party digital and networked-compute services that depend on the physical network connectivity the Soft-Net provides.
  • The Cloud-Net: also connectivity-focused, but with the production, delivery and consumption of services increasingly effected via the cloud (i.e. cloud-native). SDN and virtualisation enable capacity and services to be spun up, managed and delivered on demand over any physical network and device.
  • The Compute-Net: the core business is to provide distributed, networked, compute- and software-based services, often for specific enterprise verticals. These depend on SDN and NFV to deliver the ultra-fast, low-latency compute, throughput and routing capabilities required.

The three new models represent distinct strategic options for telcos looking to either: optimise and evolve their existing connectivity business; create new value from cloud-based, ‘horizontal’ platforms; or expand into new vertical markets – or a combination of all three approaches. This is illustrated here:

Interdependence between the three future telco business models

Source: STL Partners

In other words:

  • The Soft-Net operates the physical and virtualised infrastructure that delivers flexible, advanced connectivity in support of Cloud-Net and Compute-Net services (as well as well as legacy communications and connectivity services, delivered in a more scalable and cost-effective way)
  • The Cloud-Net delivers flexible, on-demand connectivity over hybrid infrastructure (including that owned by multiple Soft-Nets) in support of the increasingly complex and variable networking requirements of globally distributed, digital enterprises
  • The Compute-Net delivers vertically focused, compute-enabled processes and outcomes across all areas of industry and society. In doing so, it relies on networking and cloud platform services supplied by the Soft-Net and Cloud-Net, which may or may not be vertically integrated as part of its own organisation.

The three telecoms business models link to NFV / SDN strategies

One of the distinguishing features of these models is the different modes of telco engagement in NFV and SDN they are potentially driven by. In previous analyses, we have identified three pathways towards NFV and SDN deployment. This is how they link to the three business models:

Figure 1: The three future telco business models and corresponding NFV pathways

Source: STL Partners, NFV / SDN deployment pathways: Three telco futures

In the rest of this report, we define these telecoms business models in more detail and illustrate how they present a pragmatic framework for telcos to focus their technology investments and develop valuable new Coordination Age services.

Contents:

  • Executive Summary
  • Introduction
  • Three telco futures and Telco 2.0
  • Chapter 1: Three telecoms business models for the Coordination Age
  • Three new business models: but why ‘telco’?
  • Business model analysis: Telcos’ vs competitors’ strengths
  • Relationship between the Soft-Net, Cloud-Net and Compute-Net business models
  • Chapter 2: Roles of the Soft-Net, Cloud-Net and Compute-Net in a ‘driverless car-as-a-service’ ecosystem
  • A driverless car-as-a-service business involves coordination of data, processes and events across a broad supply chain
  • Soft-Nets provide the mainly wireless connectivity
  • Cloud-Nets provide the hybrid, on-demand wide-area networking
  • Compute-Nets design and coordinate the ecosystem
  • Conclusions
  • The Coordination Age: A new purpose for telecoms, and three models for realising it
  • Key takeaways for telcos

Figures:

  1. The three future telco business models and corresponding NFV pathways
  2. The Telco 2.0 infrastructure and service stack
  3. Interdependence between the three future telco business models
  4. Two examples of the three new business models
  5. The three new business models overview
  6. Telcos face some fierce competition as they move up the stack
  7. Telco expansion across the three business models
  8. Advantages and disadvantages of vertical integration
  9. Mapping the Soft-Net, Cloud-Net and Compute-Net roles in a driverless car environment
  10. Types of data and corresponding compute-based services in a driverless car-as-a-service ecosystem