Telcos and GAFA: Dancing with the disruptors

Introduction

Across much of the world, the competing Internet ecosystems led by Amazon, Apple, Facebook and Google have come to dominate the consumer market for digital services. Even though most telcos continue to compete with these players in the service layer, it is now almost a necessity for operators to partner with one or more of these ecosystems in some shape or form.

This report begins by pinpointing the areas where telcos are most likely to partner with these players, drawing on examples as appropriate. In each case, it considers the nature of the partnership and the resulting value to the telco and to the Internet ecosystem. It also considers the longer-term, strategic implications of these partnerships and makes recommendations on how telcos can try to strengthen their negotiating position.

This research builds on the findings of the Digital Partnerships Benchmarking Study conducted between 26th September and 4th November 2016 by STL Partners and sponsored by AsiaInfo. That study involved a survey of 34 operators in Europe and Asia Pacific. It revealed that whereas almost all operators expected to grow their partnerships business in the future, they differed on how they expected to pursue this growth.

Approximately half (46%) of the operator respondents wanted to scale up and partner with a large number of digital players, while the other half (49%) wanted to focus in on a few strategic partnerships.  Those looking to partner with a large number of companies were primarily interested in generating new revenue streams or increasing customer relevance, while many of those who wanted to focus on a small number of partnerships also regarded increasing revenues from the core business as a main objective (see Figure 1).

Figure 1: The business objectives differ somewhat by partnership strategy

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Respondents were also asked to rank the assets that an operator can bring to a partnership, both today and in the future. These ranks were converted into a normalized score (see Figure 2): A score of 100% in Figure 2 would indicate that all respondents placed that option in the top rank.

Figure 2: Operators regard their customer base as their biggest asset

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Clearly, operators are aware that the size of their customer base is a significant asset, and they are optimistic that it is likely to remain so: it is overall the highest scoring asset both today and in the future.

In the future, the options around customer data (customer profiling, analytics and insights) are given higher scores (they move up the ranks). This suggests that operators believe that they will become better at exploiting their data-centric assets and – most significantly – that they will be able to monetize this in partnerships, and that these data-centric assets will have significant value.

The findings of the study confirm that most telcos believe they can bring significant and valuable assets to partnerships. This report considers how those assets can be used to strike mutually beneficial deals with the major Internet ecosystems. The next chapter explains why telcos and the leading Internet players need to co-operate with each other, despite their competition for consumers’ attention.

Contents:

  • Executive Summary
  • Strategic considerations
  • Delivering bigger, better entertainment
  • Improving customer experience
  • Extending and enhancing connectivity
  • Developing the networks of the future
  • Delivering cloud computing to enterprises
  • Introduction
  • Telcos and lnternet giants need each other
  • Delivering bigger, better entertainment
  • Content delivery networks
  • Bundling content and connectivity
  • Zero-rating content
  • Carrier billing
  • Content promotion
  • Apple and EE in harmony
  • Value exchange and takeaways
  • Improving the customer experience
  • Making mobile data stretch further
  • Off-peak downloads, offline viewing
  • Data plan awareness for apps
  • Fine-grained control for consumers
  • Value exchange and takeaways
  • Extending and enhancing connectivity
  • Subsea cable consortiums
  • Free public Wi-Fi services
  • MVNO Project Fi – branded by Google, enabled by telcos
  • Value exchange and takeaways
  • Developing the networks of the future
  • Software-defined networks: Google and the CORD project
  • Opening up network hardware: Facebook’s Telecom Infra Project
  • Value exchange and takeaways
  • Delivering cloud computing to enterprises
  • Reselling cloud-based apps
  • Secure cloud computing – AWS and AT&T join forces
  • Value exchange and takeaways
  • Conclusions and Recommendations
  • Google is top of mind
  • Whose brand benefits?

Figures:

  • Figure 1: The business objectives differ somewhat by partnership strategy
  • Figure 2: Operators regard their customer base as their biggest asset
  • Figure 3: US Internet giants generate about 40% of mobile traffic in Asia-Pacific
  • Figure 4: Google and Facebook are now major players in mobile in Africa
  • Figure 5: Examples of telco-Internet platform partnerships in entertainment
  • Figure 6: BT Sport uses YouTube to promote its premium content
  • Figure 7: Apple Music appears to have helped EE’s performance
  • Figure 8: Amazon is challenging Apple and Spotify in the global music market
  • Figure 9: Examples of telco-Google co-operation around transparency
  • Figure 10: YouTube Smart Offline could alleviate peak pressure on networks
  • Figure 11: Google’s Triangle app gives consumers fine-grained control over apps
  • Figure 12: Examples of telco-Internet platform partnerships to deliver connectivity
  • Figure 13: Project Fi’s operator partners provide extensive 4G coverage
  • Figure 14: Both T-Mobile US and Sprint need to improve their financial returns
  • Figure 15: Examples of telco-Internet platform partnerships on network innovation
  • Figure 16: AWS has a big lead in the cloud computing market
  • Figure 17: Examples of telco-Internet platform partnerships in enterprise cloud
  • Figure 18: AT&T provides private and secure connectivity to public clouds
  • Figure 19: Amazon and Alphabet lead corporate America in R&D
  • Figure 20: Telcos need to be wary of bolstering already powerful brands
  • Figure 21: Balancing immediate value of partnerships against strategic implications
  • Figure 22: Different telcos should adopt different strategies

Customer Experience: Is it Time for the Mobile CDN?

Summary: Changing consumer behaviours and the transition to 4G are likely to bring about a fresh surge of video traffic on many networks. Fortunately, mobile content delivery networks (CDNs), which should deliver both better customer experience and lower costs, are now potentially an option for carriers using a combination of technical advances and new strategic approaches to network design. This briefing examines why, how, and what operators should do, and includes lessons from Akamai, Level 3, Amazon, and Google. (May 2013, Executive Briefing Service). CDN Traffic as Percentage of Backbone May 2013

Introduction

Content delivery networks (CDNs) are by now a proven pattern for the efficient delivery of heavy content, such as video, and for better user experience in Web applications. Extensively deployed worldwide, they can be optimised to save bandwidth, to provide greater resilience, or to help scale up front-end applications. In the autumn of 2012, it was estimated that CDN providers accounted for 40% of the traffic entering residential ISP networks from the Internet core. This is likely to be an underestimate if anything, as a major use case for CDN is to reduce the volume of traffic that has to transit the Internet and to localise traffic within ISP networks. Craig Labovitz of DeepField Networks, formerly the head of Arbor’s ATLAS instrumentation project, estimates that from 35-45% of interdomain Internet traffic is accounted for by CDNs, rising to 60% for some smaller networks, and 85% of this is video.

Figure 1: CDNs, the supertankers of the Internet, are growing
CDN Traffic as Percentage of Backbone May 2013

Source: DeepField, STL

In the past, we have argued that mobile networks could benefit from deploying CDN, both in order to provide CDN services to content providers and in order to reduce their Internet transit and internal backhaul costs. We have also looked at the question of whether telcos should try to compete with major Internet CDN providers directly. In this note, we will review the CDN business model and consider whether the time has come for mobile CDN, in the light of developments at the market leader, Akamai.

The CDN Business Model

Although CDNs account for a very large proportion of Internet traffic and are indispensable to many content and applications providers, they are relatively small businesses. Dan Rayburn of Frost & Sullivan estimates that the video CDN market, not counting services provided by telcos internally, is around $1bn annually. In 2011, Cisco put it at $2bn with a 20% CAGR.

This is largely because much of the economic value created by CDNs accrues to the operators in whose networks they deploy their servers, in the form of efficiency savings, and to the content providers, in the form of improved sales conversions, less downtime, savings on hosting and transit, and generally, as an improvement in the quality of their product. It’s possible to see this as a two-sided business model – although the effective customer is the content provider, whose decisions determine the results of competition, much of the economic value created accrues to the operator and the content provider’s customer.

On top of this, it’s often suggested that margins in the core CDN product, video delivery, are poor and it would be worth moving to supposedly more lucrative “media services”, products like transcoding (converting original video files into the various formats served out of the CDN for networks with more or less bandwidth, mobile versus fixed devices, Apple HLS versus Adobe Flash, etc) and analytics aimed at content creators and rightsholders, or to lower-scale but higher-margin enterprise products. We are not necessarily convinced of this, and we will discuss the point further on page 9. For the time being, note that it is relatively easy to enter the CDN market, and it is influenced by Moore’s law.  Therefore, as with most electronic, computing, and telecoms products, there is structural pressure on prices.

The Problem: The Traffic Keeps Coming

A major 4G operator recently released data on the composition of traffic over their new network. As much as 40% of the total, it turned out, was music or video streaming. The great majority of this will attract precisely no revenue for the operator, unless by chance it turns out to represent the marginal byte that induces a user to spend money on out-of-bundle data. However, it all consumes spectrum and needs backhauling and therefore costs money.

The good news is that most, or even all, of this could potentially be distributed via a CDN, and in many cases probably will be distributed by a CDN as far as the mobile operator’s Internet point of presence. Some of this traffic will be uplink, a segment likely to grow fast with better radios and better device cameras, but there are technical options related to CDN that can benefit uplink applications as well.

Figure 2: Video, music, and photos are filling up a 4G mobile network

EE traffic by category and source Percentage May 2013

Source: EE, STL

Another 36.5% of the traffic is accounted for by Web browsing and e-mail. A large proportion of the Web activity could theoretically come from a CDN, too – even if the content itself has to be generated dynamically by application logic, things like images, fonts, and JavaScript libraries are a quick win in terms of performance. Estimates of how much Internet traffic in general could be served from a CDN range from 35% (AT&T) to 98% (Analysys Mason).

As 29% of their traffic originates from the top 3 point sources – YouTube, Facebook, and iTunes – it’s also observable that signing-up a relatively small subset of content providers as customers will provide considerable benefit. Out of those three, all of them use a CDN, and two of those – Facebook and iTunes – are customers of Akamai, while YouTube relies on Google’s own solution.

We can re-arrange the last chart to illustrate this more fully. (Note that Skype, as a peer-to-peer application that is also live, is unsuitable for CDN as usually understood.)

Figure 3: The top 9 CDN-able point sources represent 40% of EE’s traffic
Key Point Sources and Others May 2013

Source: EE, STL

Looking further afield, the next chart shows the traffic breakdown by application from DeepField’s observations in North American ISP networks.

Figure 4: The Web giants ride on the CDNs
Percentage Peak Hour Traffic May 2013

Source: DeepField

Clearly, the traffic sources and traffic types that are served from CDNs are both the heaviest to transport and also the ones that contribute most to the busy hour; note that these are peak measurements, and the total of the CDN traffic here (Netflix, YouTube, CDN other, Facebook) is substantially more than it is on average.

To read the Software Defined Networking in full, including the following sections detailing additional analysis…

  • Akamai: the World’s No.1 CDN
  • Financial and KPI review
  • The Choice for CDN Customers: Akamai, Amazon, or DIY like Google?
  • CDN depth: the key question
  • CDN depth and mobile networks
  • Akamai’s guidelines for deployment
  • Why has mobile CDN’s time come?
  • What has held mobile CDN back?
  • But the world has changed…
  • …Networks are much less centralised…
  • …and IP penetrates much more deeply into the network
  • Licensed or Virtual CDN – a (relatively) new business model
  • SDN: a disruptive opportunity
  • So, why right now?
  • Conclusions
  • It may be time for telcos to move on mobile CDN
  • The CDN industry is exhibiting familiar category killer dynamics
  • Regional point sources remain important
  • CDN internals are changing the structure of the Internet
  • Recommendations for action

…and the following figures…

  • Figure 1: CDNs, the supertankers of the Internet, are growing
  • Figure 2: Video, music, and photos are filling up a 4G mobile network
  • Figure 3: The top 9 CDN-able point sources represent 40% of EE’s traffic
  • Figure 4: The Web giants ride on the CDNs
  • Figure 5: Akamai’s revenues by line of business
  • Figure 6: Observed traffic share for major CDNs

 

CDNs 2.0: should telcos compete with Akamai?

Content Delivery Networks (CDNs) such as Akamai’s are used to improve the quality and reduce costs of delivering digital content at volume. What role should telcos now play in CDNs? (September 2011, Executive Briefing Service, Future of the Networks Stream).

Should telcos compete with Akamai?

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Introduction

We’ve written about Akamai’s technology strategy for global CDN before as a fine example of the best practice in online video distribution and a case study in two-sided business models, to say nothing of being a company that knows how to work with the grain of the Internet. Recently, Akamai published a paper which gives an overview of its network and how it works. It’s a great paper, if something of a serious read. Having ourselves read, enjoyed and digested it, we’ve distilled the main elements in the following analysis, and used that as a basis to look at telcos’ opportunities in the CDN market.

Related Telco 2.0 Research

In the strategy report Mobile, Fixed and Wholesale Broadband Business Models – Best Practice Innovation, ‘Telco 2.0′ Opportunities, Forecasts and Future Scenarios we examined a number of different options for telcos to reduce costs and improve the quality of content delivery, including Content Delivery Networks (CDNs).

This followed on from Future Broadband Business Models – Beyond Bundling: winning the new $250Bn delivery game in which we looked at long term trends in network architectures, including the continuing move of intelligence and storage towards the edge of the network. Most recently, in Broadband 2.0: Delivering Video and Mobile CDNs we looked at whether there is now a compelling need for Mobile CDNs, and if so, should operators partner with existing players or build / buy their own?

We’ll also be looking in depth at the opportunities in mobile CDNs at the EMEA Executive Brainstorm in London on 9-10th November 2011.

Why have a CDN anyway?

The basic CDN concept is simple. Rather than sending one copy of a video stream, software update or JavaScript library over the Internet to each user who wants it, the content is stored inside their service provider’s network, typically at the POP level in a fixed ISP.

That way, there are savings on interconnect traffic (whether in terms of paid-for transit, capex, or stress on peering relationships), and by locating the servers strategically, savings are also possible on internal backhaul traffic. Users and content providers benefit from lower latency, and therefore faster download times, snappier user interface response, and also from higher reliability because the content servers are no longer a single point of failure.

What can be done with content can also be done with code. As well as simple file servers and media streaming servers, applications servers can be deployed in a CDN in order to bring the same benefits to Web applications. Because the content providers are customers of the CDN, it is possible to also apply content optimisation with their agreement at the time it is uploaded to the CDN. This makes it possible to save further traffic, and to avoid nasty accidents like this one.

Once the CDN servers are deployed, to make the network efficient, they need to be filled up with content and located so they are used effectively – so they need to be located in the right places. An important point of a CDN, and one that may play to telcos’ strengths, is that location is important.

Figure 1: With higher speeds, geography starts to dominate download times

CDN Akamai table distance throughput time Oct 2011 Telco 2.0

Source: Akamai

CDN Player Strategies

Market Overview

CDNs are a diverse group of businesses, with several major players, notably Akamai, the market leader, EdgeCast, and Limelight Networks, all of which are pure-play CDNs, and also a number of players that are part of either carriers or Web 2.0 majors. Level(3), which is widely expected to acquire the LimeLight CDN, is better known as a massive Internet backbone operator. BT Group and Telefonica both have CDN products. On the other hand, Google, Amazon, and Microsoft operate their own, very substantial CDNs in support of their own businesses. Amazon also provides a basic CDN service to third parties. Beyond these, there are a substantial number of small players.

Akamai is by far the biggest; Arbor Networks estimated that it might account for as much as 15% of Internet traffic once the actual CDN traffic was counted in, while the top five CDNs accounted for 10% of inter-domain traffic. The distinction is itself a testament to the effectiveness of CDN as a methodology.

The impact of CDN

As an example of the benefits of their CDN, above and beyond ‘a better viewing experience’, Akamai claim that they can demonstrate a 15% increase in completed transactions on an e-commerce site by using their application acceleration product. This doesn’t seem out of court, as Amazon.com has cited similar numbers in the past, in their case by reducing the volume of data needed to deliver a given web page rather than by accelerating its delivery.

As a consequence of these benefits, and the predicted growth in internet traffic, Akamai expect traffic on their platform to reach levels equivalent to the throughput of a US national broadcast TV station within 2-5 years. In the fixed world, Akamai claims offload rates of as much as 90%. The Jetstream CDN  blog points out that mobile operators might be able to offload as much as 65% of their traffic into the CDN. These numbers refer only to traffic sources that are customers of the CDN, but it ought to be obvious that offloading 90% of the YouTube or BBC iPlayer traffic is worth having.

In Broadband 2.0: Mobile CDNs and video distribution we looked at the early prospects for Mobile CDN, and indeed, Akamai’s own move into the mobile industry is only beginning. However, Telefonica recently announced that its internal, group-wide CDN has reached an initial capability, with service available in Europe and in Argentina. They intend to expand across their entire footprint. We are aware of at least one other mobile operator which is actively investing in CDN capabilities. The degree to which CDN capabilities can be integrated into mobile networks is dependent on the operator’s choice of network architecture, which we discuss later in this note.

It’s also worth noting that one of Akamai’s unique selling points is that it is very much a global operator. As usual, there’s a problem for operators, especially mobile operators, in that the big Internet platforms are global and operators are regional. Content owners can deal with one CDN for their services all around the world – they can’t deal with one telco. Also, big video sources like national TV broadcasters can usually deal with one ex-incumbent fixed operator and cover much of the market, but must deal with several mobile operators.

Application Delivery: the frontier of CDN

Akamai is already doing a lot of what we call “ADN” (Application-Delivery Networking) by analogy to CDN. In a CDN, content is served up near the network edge. In an ADN, applications are hosted in the same way in order to deliver them faster and more reliably. (Of course, the media server in a CDN node is itself a software application.) And the numbers we cited above regarding improved transaction completion rates are compelling.

However, we were a little under-whelmed by the details given of their Edge Computing product. It is restricted to J2EE and XSLT applications, and it seems quite limited in the power and flexibility it offers compared to the state of the art in cloud computing. Google App Engine and Amazon EC2 look far more interesting from a developer point of view. Obviously, they’re going for a different market. But we heartily agree with Dan Rayburn that the future of CDN is applications acceleration, and that this goes double for mobile with its relatively higher background levels of latency.

Interestingly, some of Akamai’s ADN customers aren’t actually distributing their code out to the ADN servers, but only making use of Akamai’s overlay network to route their traffic. Relatively small optimisations to the transport network can have significant benefits in business terms even before app servers are physically forward-deployed.

Other industry developments to watch

There are some shifts underway in the CDN landscape. Notably, as we mentioned earlier, there are rumours that Limelight Networks wants to exit the packet-pushing element of it in favour of the media services side – ingestion, transcoding, reporting and analytics. The most likely route is probably a sale or joint venture with Level(3). Their massive network footprint gives them both the opportunity to do global CDNing, and also very good reasons to do so internally. Being a late entrant, they have been very aggressive on price in building up a customer base (you may remember their role in the great Comcast peering war). They will be a formidable competitor and will probably want to move from macro-CDN to a more Akamai-like forward deployed model.

To read the note in full, including the following additional analysis…

  • Akamai’s technology strategy for a global CDN
  • Can Telcos compete with CDN Players?
  • Potential Telco Leverage Points
  • Global vs. local CDN strategies
  • The ‘fat head’ of content is local
  • The challenges of scale and experience
  • Strategic Options for Telcos
  • Cooperating with Akamai
  • Partnering with a Vendor Network
  • Part of the global IT operation?
  • National-TV-centred CDNs
  • A specialist, wholesale CDN role for challengers?
  • Federated CDN
  • Conclusion

…and the following charts…

  • Figure 1: With higher speeds, geography starts to dominate download times
  • Figure 2: Akamai’s network architecture
  • Figure 3: Architectural options for CDN in 3GPP networks
  • Figure 4: Mapping CDN strategic options

Members of the Telco 2.0 Executive Briefing Subscription Service and Future Networks Stream can download the full 19 page report in PDF format here. Non-Members, please subscribe here, buy a Single User license for this report online here for £795 (+VAT), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, people and products referenced: 3UK, Akamai, Alcatel-Lucent, Amazon, Arbor Networks, BBC, BBC iPlayer, BitTorrent, BT, Cisco, Dan Rayburn, EC2, EdgeCast, Ericsson, Google, GSM, Internet HSPA, Jetstream, Level(3), Limelight Networks, MBNL, Microsoft, Motorola, MOVE, Nokia Siemens Networks, Orange, TalkTalk, Telefonica, T-Mobile, Velocix, YouTube.

Technologies and industry terms referenced: 3GPP, ADSL, App Engine, backhaul, Carrier-Ethernet, Content Delivery Networks (CDNs), DNS, DOCSIS 3, edge computing, FTTx, GGSN, Gi interface, HFC, HSPA+, interconnect, IT, JavaScript, latency, LTE, Mobile CDNs, online, peering, POPs (Points of Presence), RNC, SQL, UMTS, VPN, WLAN.