5G standalone (SA) core: Why and how telcos should keep going

Major 5G Standalone deployments are experiencing delays…

There is a widespread opinion among telco industry watchers that deployments of the 5G Standalone (SA) core are taking longer than originally expected. It is certainly the case that some of the world’s leading operators, and telco cloud innovators, are taking their time over these deployments, as illustrated below:

  • AT&T: Has no current, publicly announced deadline for launching its 5G SA core, which was originally expected to be deployed in mid-2021.
  • Deutsche Telekom: Launched an SA core in Germany on a trial basis in September 2022, having previously acknowledged that SA was taking longer than originally expected. In Europe, the only other opco that is advancing towards commercial deployment is Magenta Telekom in Austria. In 2021, the company cited various delay factors, such as 5G SA not being technically mature enough to fulfil customers’ expectations (on speed and latency), and a lack of consumer devices supporting 5G SA.
  • Rakuten Mobile: Was expected to launch an SA core co-developed with NEC in 2021. But at the time of writing, this had still not launched.
  • SK Telecom: Was originally expected to launch a Samsung-provided SA core in 2020. However, in November 2021, it was announced that SK Telecom would deploy an Ericsson converged Non-standalone (NSA) / SA core. By the time of writing, this had still not taken place.
  • Telefónica: Has carried out extensive tests and pilots of 5G SA to support different use cases but has no publicly announced timetable for launching the technology commercially.
  • Verizon: Originally planned to launch its SA core at the end of 2021. But this was pushed back to 2022; and recent pronouncements by the company indicate a launch of commercial services over the SA core only in 2023.
  • Vodafone: Has launched SA in Germany only, not in any of its other markets; and even then, nationwide SA coverage is not expected until 2025. An SA core is, however, expected to be launched in Portugal in the near future, although no definite deadline has been announced. A ‘commercial pilot’ in three UK cities, launched in June 2021, had still not resulted in a full commercial deployment by the time of writing.

…but other MNOs are making rapid progress

In contrast to the above catalogue of delay, several other leading operators have made considerable progress with their standalone deployments:

  • DISH: Launched its SA core- and open RAN-based network in the US, operated entirely over the AWS cloud, in May 2022. The initial population coverage of the network was required to be 20%. This is supposed to rise to 70% by June 2023.
  • Orange: Proceeding with a Europe-wide roll-out, with six markets expected to go live with SA cores in 2023.
  • Saudi Telecom Company (STC): Has launched SA services in two international markets, Kuwait (May 2021) and Bahrain (May 2022). Preparations for a launch in Saudi Arabia were ongoing at the time of writing.
  • Telekom Austria Group (A1): Rolling out SA cores across four markets in Central Europe (Bulgaria, Croatia, Serbia and Slovenia), although no announcement has been made regarding a similar deployment in its home market of Austria. In June 2022, A1 also carried out a PoC of end-to-end, SA core-enabled network slicing, in partnership with Amdocs.
  • T-Mobile US: Has reportedly migrated all of its mobile broadband traffic over to its SA core, which was launched back in 2020. It also launched one of the world’s first voice-over-New Radio (VoNR) services, run over the SA core, in parts of two cities in June 2022.
  • Zain (Kuwait): Launched SA in Saudi Arabia in February 2022, while a deployment in its home market was ongoing at the time of writing.
  • There are also a number of trials, and prospective and actual deployments, of SA cores over the public cloud in Europe. These are serving the macro network, not edge or private-networking use cases. The most notable examples include Magenta Telekom (Deutsche Telekom’s Austrian subsidiary, partnering with Google Cloud); Swisscom (partnering with AWS); and Working Group Two (wgtwo) – a Cisco and Telenor spin-off – that offers a multi-tenant, cloud-native 5G core delivered to third-party MNOs and MVNOs via the AWS cloud.
  • The three established Chinese MNOs are all making rapid progress with their 5G SA roll-outs, having launched in either 2020 (China Telecom and China Unicom) or 2021 (China Mobile). The country’s newly launched, fourth national player, Broadnet, is also rolling out SA. However, it is not publicly known what share of the country’s reported 848 million-odd 5G subscribers (at March 2022) were connected to SA cores.
  • At least eight other APAC operators had launched 5G SA-based services by July 2022, including KT in South Korea, NTT Docomo and SoftBank in Japan and Smart in the Philippines.

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Many standalone deployments in the offing – but few fixed deadlines

So, 5G standalone deployments are definitely a mixed bag: leading operators in APAC, Europe, the Middle East and North America are deploying and have launched at scale, while other leading players in the same regions have delayed launches, including some of the telcos that have helped drive telco cloud as a whole over the past few years, e.g. AT&T, Deutsche Telekom, Rakuten, Telefónica and Vodafone.

In the July 2022 update to our Telco Cloud Deployment Tracker, which contained a ‘deep dive’ on 5G core roll-outs, we presented an optimistic picture of 5G SA deployments. We pointed out that the number of SA and converged NSA / SA cores. We expect to be launched in 2022 outnumbered the total of NSA deployments. However, as illustrated in the figure below, SA and converged NSA/SA cores are still the minority of all 5G cores (29% in total).

We should also point out that some of the SA and converged NSA / SA deployments shown in the figure below are still in progress and some will continue to be so in 2023. In other words, the launch of these core networks has been announced and we have therefore logged them in our tracker, but we expect that the corresponding deployments will be completed in the remainder of 2022 or in 2023, based on a reasonable, typical gap between when the deployments are publicly announced and the time it normally takes to complete them. If, however, more of these predicted deployments are delayed as per the roll-outs of some of leading players listed above, then we will need to revise down our 2022 and 2023 totals.

Global 5G core networks by type, 2018 to 2023

 

Source: STL Partners

Table of contents

  • Executive Summary
  • Introduction
    • Major 5G Standalone deployments are experiencing delays
    • …but other MNOs are making rapid progress
    • Many SA deployments in the offing – but few fixed deadlines
  • What is holding up deployments?
    • Mass-market use cases are not yet mature
    • Enterprise use cases exploiting an SA core are not established
    • Business model and ROI uncertainty for 5G SA
    • Uncertainty about the role of hyperscalers
    • Coordination of investments in 5G SA with those in open RAN
    • MNO process and organisation must evolve to exploit 5G SA
  • 5G SA progress will unlock opportunities
    • Build out coverage to improve ‘commodity’ services
    • Be first to roll out 5G SA in the national market
    • For brownfield deployments, incrementally evolve towards SA
    • Greenfield deployments
    • Carefully elaborate deployment models on hyperscale cloud
    • Work through process and organisational change
  • Conclusion: 5G SA will enable transformation

    Related research

    Previous STL Partners reports aligned to this topic include:

  • Telco Cloud Deployment Tracker: 5G core deep dive
  • Telco cloud: short-term pain, long-term gain
  • Telco Cloud Deployment Tracker: 5G standalone and RAN

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Pursuing hyperscale economics

The promise of hyperscale economics

Managing demands and disruption

As telecoms operators move to more advanced, data intensive services enabled by 5G, fibre to the X (FTTX) and other value-added services, they are looking to build the capabilities to support the growing demands on the network. However, in most cases, telco operators are expanding their own capabilities in such a way that results in their costs increasing in line with their capabilities.

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This is becoming an increasingly pressing issue given the commoditisation of traditional connectivity services and changing competitive dynamics from within and outside the telecoms industry. Telcos are facing stagnating or declining ARPUs within the telecoms sector as price becomes the competitive weapon and service differentiation of connectivity services diminishes.A

The competitive landscape within the telecoms industry is also becoming much more dynamic, with differences in progress made by telecoms operators adopting cloud-native technologies from a new ecosystem of vendors. At the same time, the rate of innovation is accelerating and revenue shares are being eroded due to the changes in the competitive landscape and the emergence of new competitors, including:

  • Greenfield operators like DISH and Rakuten;
  • More software-centric digital enterprise service providers that provide advanced innovative applications and services;
  • Content and SaaS players and the hyperscale cloud providers, such as AWS, Microsoft and Google, as well as the likes of Netflix and Disney.

We are in another transition period in the telco space. We’ve made a lot of mess in the past, but now everyone is talking about cloud-native and containers which gives us an opportunity to start over based on the lessons we‘ve learned.

VP Cloudified Production, European converged operator 1

Even for incumbents or established challengers in more closed and stable markets where connectivity revenues are still growing, there is still a risk of complacency for these telcos. Markets with limited historic competition and high barriers to entry can be prone to major systemic shocks or sudden unexpected changes to the market environment such as government policy, new 5G entrants or regulatory changes that mandate for structural separation.

Source:  Company accounts, stock market data; STL Partners analysis

Note: The data for the Telecoms industry covers 165 global telecoms operators

Telecoms industry seeking hyperscaler growth

The telecoms industry’s response to threats has traditionally been to invest in better networks to differentiate but networks have become increasingly commoditised. Telcos can no longer extract value from services that exclusively run on telecoms networks. In other words, the defensive moat has been breached and owning fibre or spectrum is not sufficient to provide an advantage. The value has now shifted from capital expenditure to the network-independent services that run over networks. The capital markets therefore believe it is the service innovators – content and SaaS players and internet giants such as Amazon, Microsoft or Apple – that will capture future revenue and profit growth, rather than telecoms operators. However, with 5G, edge computing and telco cloud, there has been a resurgence in interest in more integration between applications and the networks they run over to leverage greater network intelligence and insight to deliver enhanced outcomes.

Defining telcos’ roles in the Coordination Age

Given that the need for connectivity is not going away but the value is not going to grow, telcos are now faced with the challenge of figuring out what their new role and purpose is within the Coordination Age, and how they can leverage their capabilities to provide unique value in a more ecosystem-centric B2B2X environment.

Success in the Coordination Age requires more from the network than ever before, with a greater need for applications to interface and integrate with the networks they run over and to serve not only customers but also new types of partners. This calls for the need to not only move to more flexible, cost-effective and scalable networks and operations, but also the need to deliver value higher up in the value chain to enable further differentiation and growth.

Telcos can either define themselves as a retail business selling mobile and last mile connectivity, or figure out how to work more closely with demanding partners and customers to provide greater value. It is not just about scale or volume, but about the competitive environment. At the end of the day, telcos need to prepare for the capabilities to do innovative things like dynamic slicing.

Group Executive, Product and Technology, Asia Pacific operator

Responding to the pace of change

The introduction of cloud-native technologies and the promise of software-centric networking has the potential to (again) significantly disrupt the market and change the pace of innovation. For example, the hyperscale cloud providers have already disrupted the IT industry and are seen simultaneously as a threat, potential partners and as a model example for operators to adopt. More significantly, they have been able to achieve significant growth whilst still maintaining their agile operations, culture and mindset.

With the hyperscalers now seeking to play a bigger role in the network, many telco operators are looking to understand how they should respond in light of this change of pace, otherwise run the risk of being relegated to being just the connectivity provider or the ‘dumb pipe’.

Our report seeks to address the following key question:

Can telecoms operators realistically pursue hyperscale economics by adopting some of the hyperscaler technologies and practices, and if so, how?

Our findings in this report are based on an interview programme with 14 key leaders from telecoms operators globally, conducted from June to August 2021. Our participant group spans across different regions, operator types and types of roles within the organisation.

Related research

Telco cloud: short-term pain, long-term gain

Telcos have invested in telco cloud for several years: Where’s the RoI?

Over a number of years – starting in around 2014, and gathering pace from 2016 onwards – telcos have invested a large amount of money and effort on the development and deployment of their ‘telco cloud’ infrastructure, virtualised network functions (VNFs), and associated operations: long enough to expect to see measurable returns. As we set out later in this report, operators initially hoped that virtualisation would make their networks cheaper to run, or at least that it would prevent the cost of scaling up their networks to meet surging demand from spiralling out of control. The assumption was that buying commercial off-the-shelf (COTS) hardware and running network functions as software over it would work out less costly than buying proprietary network appliances from the vendors. Therefore, all things being equal, virtualisation should have translated into lower opex and capex.

However, when scrutinising operators’ reported financials over the past six years, it is impossible to determine whether this has been the case or not:

  • First, the goalposts are constantly shifting in the telecoms world, especially in recent years when massive 5G and fibre roll-outs have translated into substantial capex increases for many operators. But this does not mean that what they buy is more (or less) expensive per unit, just that they need more of it.
  • Most virtualisation effort has gone into core networks, which do not represent a large proportion of an operator’s cost base. In fact, overall expenditure on the core is dwarfed by what needs to be spent on the fixed and mobile access networks. As a ballpark estimate, for example, the Radio Access Network (RAN) represents 60% of mobile network capex.
  • Finally, most large telco groups are integrated operators that report capex or opex (or both) for their fixed and mobile units as a whole; this makes it even more difficult to identify any cost savings related to mobile core or any other virtualisation.

For this reason, when STL Partners set out to assess the economic benefit of virtualisation in the first half of 2022, it quickly became apparent that the only way to do this would be through talking directly to telcos’ CTOs and principal network engineers, and to those selling virtualisation solutions to them. Accordingly, STL Partners carried out an intensive interview programme among leading operators and vendors to find out how they quantify the benefits, financial or otherwise, from telco cloud.

What emerged was a complex and nuanced picture: while telcos struggle to demonstrate RoI from their network cloudification activities to date, many other benefits have accrued, and telcos are growing in their conviction that further cloudification is essential to meet the business, innovation and technology challenges that lie ahead – many of which cannot (yet) be quantified.

The people we spoke to comprised senior, programme-leading engineers, executives and strategists from eight operators and five vendors.

The operators concerned included: four Tier-1 players, three Tier-2 and one Tier-3. These telcos were also evenly split across the three deployment pathways explained below: two Pathway 1 (single-vendor/full-stack); three Pathway 2 (vendor-supported best-of-breed); and three Pathway 3 (DIY best-of-breed).

Four of the vendors interviewed were leading global providers of telco cloud platforms, infrastructure and integration services, and one was a challenger vendor focused on the 5G Standalone (SA) core. The figure below represents the geographical distribution of our interviewees, both telcos and vendors. Although we lacked interviewees from the APAC region and did not gain access to any Chinese operators, we were able to gain some regional insight through interviewing a new entrant in one of the major Asian markets.

Geographical distribution of STL Partners’ telco cloud benefit survey

 

Source: STL Partners

Virtualisation will go through three phases, corresponding to three deployment pathways

This process of telco cloudification has already gone through two phases and is entering a third phase, as illustrated below and as decribed in our Telco Cloud Manifesto, published in March 2021:

Phases of telco cloudification

Source: STL Partners

Effectively, each of these phases represents an approximately three to five-year investment cycle. Telcos have begun these investments at different times: Tier-1 telcos are generally now in the midst of their Phase 2 investments. By contrast, Tier-2s and -3s, smaller MNOs, and Tier-1s in developing markets are generally still going through their initial, Phase 1 investments in virtualisation.

Given that the leading Tier-1 players are now well into their second virtualisation investment cycle, it seems reasonable to expect that they would be able to demonstrate a return on investment from the first phase. This is particularly apt in that telcos entered into the first phase – Network Functions Virtualisation (NFV) – with the specific goal of achieving quantifiable financial and operational benefits, such as:

  • Reduction in operational and capital expenditures (opex and capex), resulting from the ability to deliver and run NFs from software running on COTS hardware (cheaper per unit, but also more likely to attract economies of scale), rather than from expensive, dedicated equipment requiring ongoing, vendor-provided support, maintenance and upgrades
  • Greater scalability and resource efficiency, resulting from the ability to dynamically increase or decrease the capacity of network-function Virtual Machines (VMs), or to create new instances of them to meet fluctuating network capacity and throughput requirements, rather than having to purchase and maintain over-specified, redundant physical appliances and facilities to guarantee the same sort of capacity and resilience
  • Generation of new revenue streams, resulting from the ability that the software-centricity of virtualised networks provides to rapidly innovate and activate services that more closely address customer needs.

Problem: With a few exceptions, telcos cannot demonstrate RoI from virtualisation

Some of the leading telco advocates of virtualisation have claimed variously to have achieved capex and/or opex reductions, and increases in top-line revenues, thanks to their telco cloud investments. For example, in January 2022, it was reported that some technical modelling had vindicated the cost-reduction claims of Japanese greenfield, ‘cloud-native’ operator Rakuten Mobile: it showed that Rakuten’s capex per cell site was around 40% lower, and its opex 30% lower, than the MNO incumbents in the same market. Some of the savings derived from automation gains related to virtualisation, allowing cell sites to be activated and run remotely on practically a ‘plug and play’ basis.

Similarly, Vodafone claimed in 2020 that it had reduced the cost of its mobile cores by 50% by running them as VNFs on the VMware telco cloud platform.

The problem is that the few telcos that are willing to quantify the success of their virtualisation programmes in this way are those that have championed telco cloud most vocally. And these telcos have also gone further and deeper with cloudification than the greater mass of the industry, and are now pushing on with Phase 3 virtualisation: full cloud-native. This means that they are under a greater pressure to lay claim to positive RoI and are able to muster data points of different types that appear to demonstrate real benefits, without being explicit about the baseline underpinning their claims: what their costs and revenues would, or might, have been had they persisted with the old physical appliance-centric model.

But this is an unreal comparison. Virtualisation has arisen because telco networks need to do more, and different things, than the old appliance-dependent networks enabled them to do. In the colourful expression of one of the industry experts we interviewed as part of our research, this is like comparing a horse to a computer.

In the first part of this report, we discuss the reasons why telcos generally cannot unequivocally demonstrate RoI from their telco cloud investments to date. In the second part, we discuss the range of benefits, actual and prospective, that telcos and vendors have observed from network cloudification, broken down by the three main pathways that telcos are following, as referred to above.

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Table of Contents

  • Executive Summary
  • Telcos have invested in telco cloud for several years: Where’s the RoI?
    • Virtualisation will go through three phases, corresponding to three deployment pathways
    • Problem: With a few exceptions, telcos cannot demonstrate RoI from virtualisation
  • Why do operators struggle to demonstrate RoI from their telco cloud investments to date?
    • For some players, it is clear that NFV did not generate RoI
    • It has also proved impossible to measure any gains, even if achieved
  • Is virtualisation so important that RoI does not matter?
  • Short-term pain for long-term gain: Why telco cloud is mission-critical
    • Cost savings are achievable
    • Operational efficiencies also gather pace as telcos progress through the telco cloud phases
    • Virtualisation both drives and is driven by organisational and process change
    • Cloud-native and CI/CD are restructuring telcos’ business models and cost base
  • Conclusion: Telco cloud benefits are deferred but assured
  • Index

Related research

VNFs on public cloud: Opportunity, not threat

VNF deployments on the hyperscale cloud are just beginning

Numerous collaboration agreements between hyperscalers and leading telcos, but few live VNF deployments to date

The past three years have seen many major telcos concluding collaboration agreements with the leading hyperscalers. These have involved one or more of five business models for the telco-hyperscaler relationship that we discussed in a previous report, and which are illustrated below:

Five business models for telco-hyperscaler partnerships

Source: STL Partners

In this report, we focus more narrowly on the deployment, delivery and operation by and to telcos of virtualised and cloud-native network functions (VNFs / CNFs) over the hyperscale public cloud. To date, there have been few instances of telcos delivering live, commercial services on the public network via VNFs hosted on the public cloud. STL Partners’ Telco Cloud Deployment Tracker contains eight examples of this, as illustrated below:

Major telcos deploying VNFs in the public cloud

Source: STL Partners

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Telcos are looking to generate returns from their telco cloud investments and maintain control over their ‘core business’

The telcos in the above table are all of comparable stature and ambition to the likes of AT&T and DISH in the realm of telco cloud but have a diametrically opposite stance when it comes to VNF deployment on public cloud. They have decided against large-scale public cloud deployments for a variety of reasons, including:

  • They have invested a considerable amount of money, time and human resources on their private clouddeployments, and they want and need to utilise the asset and generate the RoI.
  • Related to this, they have generated a large amount of intellectual property (IP) as a result of their DIY cloud– and VNF-development work. Clearly, they wish to realise the business benefits they sought to achieve through these efforts, such as cost and resource efficiencies, automation gains, enhanced flexibility and agility, and opportunities for both connectivityand edge compute service innovation. Apart from the opportunity cost of not realising these gains, it is demoralising for some CTO departments to contemplate surrendering the fruit of this effort in favour of a hyperscaler’s comparable cloud infrastructure, orchestration and management tools.
  • In addition, telcos have an opportunity to monetise that IP by marketing it to other telcos. The Rakuten Communications Platform (RCP) marketed by Rakuten Symphony is an example of this: effectively, a telco providing a telco cloud platform on an NFaaS basis to third-party operators or enterprises – in competition to similar offerings that might be developed by hyperscalers. Accordingly, RCP will be hosted over private cloud facilities, not public cloud. But in theory, there is no reason why RCP could not in future be delivered over public cloud. In this case, Rakuten would be acting like any other vendor adapting its solutions to the hyperscale cloud.
  • In theory also, telcos could also offer their private telcoclouds as a platform, or wholesale or on-demand service, for third parties to source and run their own network functions (i.e. these would be hosted on the wholesale provider’s facilities, in contrast to the RCP, which is hosted on the client telco’s facilities). This would be a logical fit for telcos such as BT or Deutsche Telekom, which still operate as their respective countries’ communications backbone provider and primary wholesale provider

BT and Deutsche Telekom have also been among the telcos that have been most visibly hostile to the idea of running NFs powering their own public, mass-market services on the public and hyperscale cloud. And for most operators, this is the main concern making them cautious about deploying VNFs on the public cloud, let alone sourcing them from the cloud on an NFaaS basis: that this would be making the ‘core’ telco business and asset – the network – dependent on the technology roadmaps, operational competence and business priorities of the hyperscalers.

Table of contents

  • Executive Summary
  • Introduction: VNF deployments on the hyperscale cloud are just beginning
    • Numerous collaboration agreements between hyperscalers and leading telcos, but few live VNF deployments to date
    • DISH and AT&T: AWS vs Azure; vendor-supported vs DIY; NaaCP vs net compute
  • Other DIY or vendor-supported best-of-breed players are not hosting VNFs on public cloud
    • Telcos are looking to generate returns from their telco cloud investments and maintain control over their ‘core business’
    • The reluctance to deploy VNFs on the cloud reflects a persistent, legacy concept of the telco
  • But NaaCP will drive more VNF deployments on public cloud, and opportunities for telcos
    • Multiple models for NaaCP present prospects for greater integration of cloud-native networks and public cloud
  • Conclusion: Convergence of network and cloud is inevitable – but not telcos’ defeat
  • Appendix

Related Research

 

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Revisiting convergence: How to address the growth imperative

Introduction

Significant opportunity, high risk of complacency

The opportunity for communications service providers (CSPs) to provide greater value and innovative services to customers through new technology advancements is well-documented. For example, the network capabilities (and programmability) that 5G and cloud native bring is touted to change the way that CSPs address revenue opportunities with customers and partners in a more ecosystem-centric environment. The emergence of FTTx (fibre to the x) technology can optimise the use of operators’ assets in a way that delivers seamless connectivity to customers. These advancements allow CSPs to better serve customer needs in a more flexible, scalable, sustainable and agile way than ever before.

Part of the imperative to address this opportunity and vision stems from significant market disruption with new entrants and new types of ‘co-opetitors’, such as the hyperscale cloud providers and greenfield operators, that challenge operators’ existing business and operating models. As a result, CSPs face growing pressure to respond much faster to market and customer demands and enhance their capabilities in a way that does not inflate their cost base or undermine their net-zero goals.

Although CSPs have identified these green pastures for growth, there is still a considerable disconnect between the vision (and what is required to fulfil the ambition) and what capabilities CSPs have today to meet it. Today, CSPs are grappling with too much complexity, fragmentation and duplication within their networks, capabilities and systems. This not only means costs are too high, but it also poses a significant barrier to how they can accelerate the beat rate of innovation and serve new revenue-generating opportunities. This is a gap that CSPs need to close urgently or be at risk of their market shares and value eroding as a result of competition.

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The imperative that CSPs can no longer ignore

There is therefore a renewed urgency in building a stronger cost base, scalability, agility and innovation, which could soon become a matter of survival. CSPs are evaluating different strategies and means of making better (and smarter) use of their assets and capabilities in a more agile way and provide the services that customers and partners are increasingly demanding. One such strategy that CSPs have long pursued is network convergence. Although the concept is not new and has been consistently explored and sporadically pursued by operators over the years, the interest has now been reignited to address this imperative. The balance of forces between convergence and divergence has also shifted in favour of the latter in recent years. This has been driven by the adoption of cloud native technologies, which enables operators to deliver new innovative services on top of a common platform (versus siloed islands) and drive for more sustainability & efficiency in the network. This has brought convergence back up to the top of operators’ agendas.

Our report therefore looks to address the following questions:

  • Why and how are CSPs converging their networks to fulfil their growth ambitions?
  • What are the key challenges they face and how can they overcome them?

Evaluating the key drivers for convergence

Cost savings are a priority, but CSPs also want top line growth

The key drivers that CSPs are focused on as part of this renewed pursuit of network convergence are internal and external. Although most operators see capital investment savings and reduction of total cost of ownership (TCO) as an essential priority, the majority of interviewees we spoke to also emphasised the need to support greater innovation with customers and ecosystem development. We describe the main drivers we found through our research with operators below:

Four key drivers that CSPs are focused on

Source: STL Partners

Reducing TCO through network simplification and consolidation

Many operators we spoke to cited network simplification and convergence in addressing the need to ‘do more with less’ and the ability to drive economies of scale and serve market requirements. Convergence can address different disparate sub-systems and siloes that don’t interact with one another (e.g. performance management and inventory management, IP and optical). This fragmentation creates unnecessary complexity for network operations teams to run, manage and assure their networks and introduce potential human errors and associated costs. CSPs have an opportunity to move towards having common infrastructure and management toolset to serve multiple needs, reduce overall TCO and to achieve better control and ubiquitous visibility across their networks. This is particularly important for larger and/or multi-service, multi-country operators. The decommissioning of legacy services (in some cases with government support, for example with PSTN services) is a key opportunity for this.

One European operator described the importance of being able to serve fixed (residential), mobile (consumer), enterprise and wholesale customers with a single backbone and transport network. Inherent in this is greater efficiency, ease of management and less capital spend required to serve multiple types of customers. For example, our interviewee cited the economies of scale they have achieved by putting all of their traffic onto a single IP network that supports all types of customers. This includes greater efficiency and simplicity in not having to run separate IP networks for each type of customer group and less spend on IP routers and lower TCO overall as part of the consolidation.

Creating a sustainable platform for scale and massive data growth

New use cases are projected to increase network traffic and demands. Operators need to prepare for this volume expansion, support more types of fibre connections, provide more flexible capacity and address high performance demands (throughput, latency, error rates). Another European group operator described scale as the main driver for convergence, in being able to seamlessly support thousands of points within the network and offer their portfolio of services across their operations as one package to customers in a simpler way.

Operators need to consider how they can maximise the use of their infrastructure to serve increasingly demanding needs. For example, there is a significant need for CSPs to extract greater synergies from their access fibre: two operators we spoke to – one in North America, the other in Asia – are using fibre originally deployed for residential broadband (Gigabit Passive Optical Network, or GPON) to connect 5G cells. Operators are joining national governments and high-profile corporations in making ‘net-zero’ commitments which is leading them to actively identify and implement strategies that will dramatically reduce their own environmental footprint and play a more active role in reducing their customers’ carbon emissions.

Enabling greater control, resilience and automation

Implicit in these developments is the greater need for automation within the network to ensure not only the greatest cost efficient optimisation of network speeds and processing power, but also the ability to navigate greater network intricacy. One particular European operator we spoke to described the need to enable greater automation across the entire lifecycle, introduce CI/CD pipelines for more agile service development and provide much more granular information and visibility across the entire network. By simplifying and converging the network, operators, operators can address some of the inherent complexity and disparate siloes in their networks and create a unified view of their network. This provides better visibility across the entire network for network operations teams and makes the task of assuring their networks easier. A more unified or common management layer also enables a more granular view and creates scope for AI/ML to deliver further gains in operational simplification and automation. In addition to the benefits for service assurance and lifecycle management, CSPs are also looking to better identify priority areas for improvement and develop more granular cost-benefit analysis for future investment planning.

Enabling greater control, resilience and automation

Implicit in these developments is the greater need for automation within the network to ensure not only the greatest cost efficient optimisation of network speeds and processing power, but also the ability to navigate greater network intricacy. One particular European operator we spoke to described the need to enable greater automation across the entire lifecycle, introduce CI/CD pipelines for more agile service development and provide much more granular information and visibility across the entire network. By simplifying and converging the network, operators can address some of the inherent complexity and disparate siloes in their networks and create a unified view of their network. This provides better visibility across the entire network for network operations teams and makes the task of assuring their networks easier. A more unified or common management layer also enables a more granular view and creates scope for AI/ML to deliver further gains in operational simplification and automation. In addition to the benefits for service assurance and lifecycle management, CSPs are also looking to better identify priority areas for improvement and develop more granular cost-benefit analysis for future investment planning.

Supporting greater innovation and ecosystem development

As the industry moves to more ecosystem-centric, B2B2X models, operators need to be more versatile in supporting diverse types of services with different types of customers. As more and more devices become connected throughout the Coordination Age , the network will need to become more responsive to different use case needs. The underlying network infrastructure needs to facilitate the faster development of richer network functionality and the plethora of emerging use cases, in order to support greater innovation. This means the network (and network teams) need to handle fast changing functions and more agile service development, and frequent software updates.

With a resurging interest in more network-enabled applications, from telematics and connected car to different types of location-based services or immersive experiences (AR/VR) that can respond to network performance data, the network needs to become more visible, distributed, programmable and instructible. Operators can leverage and expose these network capabilities to both internal and external parties, including customers and partners such as application developers, to serve new types of revenue opportunities and ecosystem partners . The expansion of 5G will create the risk of added complexity to the network, not least through the increase in access infrastructure including thousands of locations supporting distributed virtualised workloads (both cloud native network functions and other applications). This makes convergence and the simplification of the management layer even more imperative. The ability to dynamically manipulate network functions is just one of many programmable capabilities the network will require but doing this while keeping the network and associated services secured is no simple task.

Table of contents

  • Executive Summary
  • Preface
  • Introduction
    • Significant opportunity, high risk of complacency
    • The imperative that CSPs can no longer ignore
  • Evaluating the key drivers for convergence
    • Cost savings are a priority, but CSPs also want top line growth
  • Revisiting the concept of convergence
    • Convergence is a multifaceted problem and solution
    • CSPs take different approaches to tackle similar problems
    • Logical convergence
    • Horizontal convergence
    • Vertical convergence
    • The whole is greater than the sum of its parts
  • A matter of how? not why?
    • History and market variance play a role
    • Understanding the key challenges
  • Taking the plunge
    • Convergence is not just a technology decision
    • Incremental steps, not radical change

Related Research

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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.

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

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.

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

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

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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.

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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

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