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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Driving the agility flywheel: the stepwise journey to agile

Agility is front of mind, now more than ever

Telecoms operators today face an increasingly challenging market, with pressure coming from new non-telco competitors, the demands of unfamiliar B2B2X business models that emerge from new enterprise opportunities across industries and the need to make significant investments in 5G. As the telecoms industry undergoes these changes, operators are considering how best to realise commercial opportunities, particularly in enterprise markets, through new types of value-added services and capabilities that 5G can bring.

However, operators need to be able to react to not just near-term known opportunities as they arise but ready themselves for opportunities that are still being imagined. With such uncertainty, agility, with the quick responsiveness and unified focus it implies, is integral to an operator’s continued success and its ability to capitalise on these opportunities.

Traditional linear supply models are now being complemented by more interconnected ecosystems of customers and partners. Innovation of products and services is a primary function of these decentralised supply models. Ecosystems allow the disparate needs of participants to be met through highly configurable assets rather than waiting for a centralised player to understand the complete picture. This emphasises the importance of programmability in maximising the value returned on your assets, both in end-to-end solutions you deliver, and in those where you are providing a component of another party’s system. The need for agility has never been stronger, and this has accelerated transformation initiatives within operators in recent years.

Register for our upcoming ‘How to drive operator agility’ webinar on 16th June

Concepts of agility have crystallised in meaning

In 2015, STL Partners published a report on ‘The Agile Operator: 5 key ways to meet the agility challenge’, exploring the concept and characteristics of operator agility, including what it means to operators, key areas of agility and the challenges in the agile transformation. Today, the definition of agility remains as broad as in 2015 but many concepts of agility have crystallised through wider acceptance of the importance of the construct across different parts of the organisation.

Agility today is a pervasive philosophy of incremental innovation learned from software development that emphasises both speed of innovation at scale and carrier-grade resilience. This is achieved through cloud native modular architectures and practices such as sprints, DevOps and continuous integration and continuous delivery (CI/CD) – occurring in virtuous cycle we call the agility flywheel.

The Agility Flywheel

agility-flywheel

Source: STL Partners

Six years ago, operators were largely looking to borrow only certain elements of cloud native for adoption in specific pockets within the organisation, such as IT. Now, the cloud model is more widely embraced across the business and telcos profess ambitions to become software-centric companies.

Same problem, different constraints

Cloud native is the most fundamental version of the componentised cloud software vision and progress towards this ideal of agility has been heavily constrained by operators’ underlying capabilities. In 2015, operators were just starting to embark on their network virtualisation journeys with barriers such as siloed legacy IT stacks, inelastic infrastructures and software lifecycles that were architecture constrained. Though these barriers continue to be a challenge for many, the operators at the forefront – now unhindered by these basic constraints – have been driving a resurgence and general acceleration towards agility organisation-wide, facing new challenges around the unknowns underpinning the requirements of future capabilities.

With 5G, the network itself is designed as cloud native from the ground up, as are the leading edge of enterprise applications recently deployed by operators, alleviating by design some of the constraints on operators’ ability to become more agile. Uncertainty around what future opportunities will look like and how to support them requires agility to run deep into all of an operators’ processes and capabilities. Though there is a vast raft of other opportunities that do not need cloud native, ultimately the market is evolving in this direction and operators should benchmark ambitions on the leading edge, with a plan to get there incrementally. This report looks to address the following key question:

Given the flexibility and driving force that 5G provides, how can operators take advantage of recent enablers to drive greater agility and thrive in the current pace of change?

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Table of Contents

  • Executive Summary
  • Agility is front of mind, now more than ever
    • Concepts of agility have crystallised in meaning
    • Same problem, different constraints
  • Ambitions to be a software-centric business
    • Cloudification is supporting the need for agility
    • A balance between seemingly opposing concepts
  • You are only as agile as your slowest limb
    • Agility is achieved stepwise across three fronts
    • Agile IT and networks in the decoupled model
    • Renewed need for orchestration that is dynamic
    • Enabling and monetising telco capabilities
    • Creating momentum for the agility flywheel
  • Recommendations and conclusions

The Telco Cloud Manifesto

Telco cloud: A key enabler of the Coordination Age

The Coordination Age is coming

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

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

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How telecoms can define a new role

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

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

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

 

Table of Contents

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

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Five telcos changing culture: Lessons from neuroscience

Introduction: The role of skills and culture in telco transformation

Skills and culture are the biggest barriers to transformation

It is generally accepted that the telecoms industry is currently undergoing a major process of transformation. In very general terms, telcos are engaged in a transition from being primarily operators of physical infrastructure and networks designed for the efficient delivery of analogue voice and packet data services, to being providers of cloud-based (distributed software, IT and virtualised) infrastructure, platforms and digital services (including communications).

STL Partners has documented this sea change in numerous previous reports focusing on different aspects of the transformation: technology, processes, business models, organisation and culture. This report focuses more closely on two interrelated aspects: skills and culture.

A recent STL Partners ‘summit’ workshop of leading SE Asian operators found that skills and culture are presently seen as the greatest barriers to transformation:

Figure 1: Benefits of and obstacles to transformation

Source: STL Partners

The above chart, reporting the results of a snap survey of attendees of the SE Asia summit, could be interpreted as implying that skills and culture change are of very little direct benefit to telcos, given that only two respondents indicated that it had “the greatest value” to their organisation. But at the same time, telcos are clearly focused on addressing the skills and culture issue, as this was overwhelmingly the most salient transformation challenge that the senior operator executives picked out. And the results of this small but high-quality survey are entirely consistent with STL Partners’ findings in other parts of the world, including research conducted for this report (see Sections 2 and 3 below).

There is a chronic shortage of essential software and IT skills in the industry

Precisely why have skills and culture emerged as such a critical challenge at this time? The skills issue is easier to analyse. The new business and technology model to which operators are transforming places a much greater emphasis on software and IT skills than traditional telco operations: skills such as software development and coding; digital product development and operations (DevOps), and marketing; cloud and IT infrastructure deployment, maintenance and support; etc. There is a chronic shortage of highly-skilled people in these areas, which varies country by country but could rightly be described as a global shortage owing to the international character of the telecoms industry. It is the top talent that is needed right now given the complexity of the technological and IT challenges that are involved in the migration from the legacy Telco 1.0 to the telco-cloud service provider (Telco 2.0).

Telcos have adopted a variety of methods to try to close the skills gap. These are discussed in more detail in Sections 2 and 3 below in the context of conversations on skills and culture we have had with five operators from different parts of the world. On skills, these operators have adopted three broad approaches:

  • Aim to fulfil the skills requirements of the business from existing staff as much as possible by giving every employee the opportunity to up- and reskill (AT&T)
  • Try to meet the skills needs of the business through a combination of selective hires and retraining; but accept that a given percentage of positions in the company after the transformation phase can only be filled by new hires, and that existing staff whose functions have become redundant or who cannot adapt will need to be let go (Telkom Indonesia, Middle Eastern operator (MEO), and international enterprise networking provider (EO))
  • Accept that the business needs to transform radically and rapidly, and a relatively high percentage of people without the requisite skills or whose roles have become redundant must be let go (former developed-market incumbent (DMI))

Content:

  • Executive Summary
  • 1. Introduction: The role of skills and culture in telco transformation
  • 2. AT&T: A textbook exercise in re-skilling and culture change
  • 3. Two other models of skills development and culture change
  • 4. Conclusion: Skills are necessary but not sufficient, without culture

Figures:

  • Figure 1: Benefits of and obstacles to transformation
  • Figure 2: Old and new telco cultures and business model
  • Figure 3: MRI scans showing parts of the brain activated by social rejection and physical pain

Telco Transformation: The 20 Metrics That Matter

Introduction: Why do metrics matter?

Driving business model change

This report discusses the key metrics that telcos are using and developing to track the progress and success of their transformation initiatives. The report builds on a substantial body of work by STL Partners on the role that metrics can play in driving operators’ efforts to develop digital-service businesses. This previous work has taken the form of reports and case studies, as well as a number of bespoke consulting projects designed to support operators with their digital transformation strategies.[1]

In essence, our work and expertise in this area leads us to the conclusion that metrics and an associated governance process are an integral component of telcos’ digital and overall transformation. This is not just because metrics help to gauge the progress of operators’ initiatives throughout the period when the metrics are recorded, but because they define and embody the very purpose of telco transformation: to drive and manage activity on operator networks, and maximize the potential for that activity to be monetised, whether on- or off-net.

In this introduction, we outline how:

  • The focus of performance metrics is different between new and existing business models
  • Telcos need new measures to track organisational, operational, process and culture transformation in the face of a new focus on service innovation and flexibility, and a changing competitive landscape
  • The report addresses these issues

A shift from financial to customer enagement (and potential opportunity)

This essential function of Telco 2.0 metrics is markedly different from that of the financial and operational metrics that operators have traditionally employed which focus on revenues, costs, number of customers, and volume and price of megabytes and voice minutes carried and consumed. The business model these metrics correspond to is relatively simple and static: value is generated from monetising as much as possible the consumption of voice minutes and data packets, while reducing the cost to produce them. The metrics allow you to analyse past trends, and project future production capacity and earnings; but they are not a forward-looking tool enabling operators to respond dynamically to changing market conditions, to evolve the product offering, or transform the business model.

By contrast, digital services derive value from the specific content or application functionality they deliver to the user, and the ability to monetise that in a variety of ways: not always through direct, usage-based fees and billing.  And, although digital services can of course enhance existing products (as in the case of entertainment bundled with connectivity, for instance), they often treat network and connectivity services merely as the enabling infrastructure or asset, rather than the product itself. This means that for the digital telco, the emphasis of metrics changes to measuring usage of its digital services and the quality of the user experience, along with other indicators of future direct or indirect revenue growth.

Digital businesses often go through different stages of progress toward monetisation, and metrics are important in driving this development. The key idea is that if you drive usage and customer satisfaction, you create more opportunities to monetise the services involved. So you need a new, flexible set of metrics to capture the success, and inherent value, of the new business models as they evolve. The same is true of new telco services enabled by SDN and NFV (as discussed further below): there is not always an immediate direct revenue uptick; but the new capabilities and services are designed to attract new customers, and to generate usage and customer loyalty, which can be monetised in a variety of new ways at some future point. So it is critical to capture the revenue potential as well as revenue already achieved; and other metrics, which we discuss further below, should provide a measure of how fast or effectively a telco is evolving from the classic telco business model to the new state.

The contrast between the kind of metrics employed by the traditional and digital telco, along with those of digital start-ups and potential investors in digital services, is illustrated by the following table, taken from one of STL Partners’ previous studies on the question[2]:

We will discuss some of the Telco 2.0 metrics further below. However, what this table illustrates is how the focus in Telco 2.0 metrics shifts from usage-based revenues (as in the case of the Telco 1.0) to usage per se, and the impact of that usage on customer loyalty, brand, partners and revenue opportunity, as opposed to revenue already banked. The metrics – around usage and customer engagement – encapsulate the business model, which we could express in the form of an equation: number of users (or site visits, downloads, etc.) + frequency / length of use = revenue (opportunity). So driving the metrics in the right direction is tantamount to steering the business as a whole toward becoming a digital brand capable of generating customer enagagement in a crowded marketplace.

A new focus on service innovation and flexibility…

Presently, the focus of telco transformation efforts has shifted to the drive to virtualize networking functionality through Software Defined Networking (SDN: the centralization and virtualisation of control functionality previously provided by dedicated routers) and Network Functions Virtualisation (NFV: the virtualisation of a whole array of functionality in the edge and core networks hitherto provided by dedicated hardware appliances).

One of the primary aims of this transformation is to enable operators’ primary network and connectivity services to also be created, delivered and consumed in the manner of digital services: in and from the cloud / over the Internet; on demand; and as a software-based service. In the enterprise market, for example, leading SDN / NFV players are already rolling out Network as a Service (NaaS) and virtual CPE (vCPE) offerings that enable clients to customize their WAN connectivity and network features on demand via web portals, and pay for services on an ‘as-ordered’ basis as they scale bandwidth and networking parameters up or down.[3] In the consumer market, SDN / NFV similarly offers the prospect of enabling users to customize their connectivity and communications services more extensively and instantaneously than has hitherto been possible.

These characteristics of virtualised networks present a massive opportunity to telcos, as well as an enormous risk. On the one hand, SDN and NFV create the potential for operators to develop innovative, flexible combinations of communications and digital services in a more agile and cost-efficient manner, enabling them to compete more effectively with OTT players and accommodate massive growth in network usage generated by digital services.

…and new competition

On the other hand, as service and value creation is migrated away from dedicated physical facilities and hardware to software that can in theory be deployed over any physical network, this creates the possibility for third parties to develop OTT, virtual, on-demand network services from the cloud. This could result in telcos being disintermediated from their very core networking and connectivity services, as well as from the digital-service value chain. Software-Defined WAN (SD-WAN) is a practical example of this: third-party service providers install their own CPE and virtual network functions at enterprise sites, and connect them up to an SDN controller; they can then deliver flexible WAN connectivity services over networks of different types, and from different suppliers, relegating telcos potentially to the role of mere wholesale connectivity providers.[4]

In this way, virtualisation creates a dynamic whereby, as services are migrated to virtual functions, value creation will also increasingly depend on these, while the value of physical networking and connectivity services will decline as virtualised service providers and customers alike pick from a range of alternative connectivity providers. Consequently, telcos’ ownership and provision of the physical networks that support virtualised services may become equally if not more important as a means to own the customer relationship than as a revenue driver in their own right. Retaining the customer relationship means operators hold on to the opportunity to deliver increasingly more valuable virtualised services to those customers.

Increased emphasis on offensive and defensive moves

More service flexibility for both operators and for new competitors means that telcos find themselves in both an offensive and defensive position in relation to virtualisation. Offensively, virtualisation presents the opportunity to drive revenue growth and market share from new services, while also reducing the costs, resources and time required to deliver, manage and update both new and existing services. Defensively, virtualisation offers telcos a means to bolster revenues from core connectivity and communications services (including by managing more efficiently the incremental traffic generated by virtualised services over their networks), while defending their existing customer base from competitive players’ virtualised service offerings. This in turn protects the platform that ownership of the customer provides to up- and cross-sell further value-added (and value-adding) virtualised services.

In this context, metrics can play a vital role in helping to monitor progress with the different offensive and defensive components of telcos’ virtualisation strategies, in particular:

  • Offensive:
    • Tracking growth in revenues and number of customers attributable to new, virtualisation-enabled services.
    • Assessing the impact of virtualisation on costs and profitability.
  • Defensive:
    • Evaluating the impact of the new services on customer loyalty (particularly given the additional strategic importance of retaining the existing connectivity customer base)[5].
    • Measuring revenues and number of customers for the existing, core business (and so determining whether the new services are helping offset the decline in these).

In addition to these finance- and market-focused metrics, others around the production, performance and user experience of the new virtualised services become more important. This is in the light of the above remarks about the different operating model that applies to a digital services business, where the ability to quickly innovate and launch services that match changing and growing customer expectations and usage is key.

Organisational, operational, process and culture transformation

To achieve these gains, a considerable transformation of operators’ internal organisation, processes and indeed culture is required, and not merely a transformation of the network and the business model. To be successful, digital transformation – and transformation SDN, NFV and edge computing – requires the telco to become a different sort of organisation, more like that of other successful web and digital businesses.  Specifically, the telco must be founded on agile, DevOps principles, and cross-functional product and project teams.[6] Accordingly, new metrics are also required to monitor the progress of this overarching telco transformation.

In the remainder of this report, we will:

  1. Explain why operators seem so reluctant to talk about new metrics.
  2. Present and analyse the metrics we have uncovered through discussions with AT&T, Telstra and an European incumbent.
  3. Set out our view of the 20 most critical, top-level metrics for operators engaged in SDN / NFV-led transformation in its current phase.

[5] The drive to increase customer loyalty can also be part of an offensive strategy in that stickier services attract more usage and traffic, and hence have more long-term revenue potential

[6] This topic has been discussed in numerous previous STL discussions of telco transformation and will also form the focus of a forthcoming executive briefing on the topic of skills development and culture change. It is also discussed in further detail below.

 

  • Executive Summary
  • A reluctance to talk metrics
  • Why metrics matter for the virtualised telco
  • Conclusions and recommendations
  • Next Steps
  • Introduction: Why do metrics matter?
  • Driving business model change
  • A shift from financial to customer enagement (and potential opportunity)
  • A new focus on service innovation and flexibility…
  • …and new competition
  • Increased emphasis on offensive and defensive moves
  • Organisational, operational, process and culture transformation
  • Why most operators hate to talk metrics
  • Key transformation metrics of AT&T, Telstra and a major Western European incumbent
  • The transformation metrics explained
  • Evaluating the metrics used by European Incumbent (EI), AT&T & Telstra
  • Transformation: The 20 Metrics That Matter
  • Overview
  • The 20 Metrics that Matter: Description and analysis
  • Conclusion: New metrics define the new model

 

  • Figure 1: Different players’ metric requirements
  • Figure 2: Phasing of transformation metrics
  • Figure 3: Transformation metrics of AT&T, Telstra and a European incumbent (EI)
  • Figure 4: Instant pricing on Telstra’s PEN platform
  • Figure 5: The 20 types of metric that matter for successful telco transformation

Telco Cloud: Translating New Capabilities into New Revenue

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Preface

The telecoms industry is embracing network virtualisation and software defined networking, which are designed to both cut costs and enable greater agility. Whilst most operators have focused on the operating and capital cost benefits of virtualisation, few have attempted to define the range of potential new services that could be enabled by these new technologies and even fewer have attempted to forecast the associated revenue growth.

This report outlines:

  • Why and how network functions virtualisation (NFV), software defined networking (SDN) and distributed compute capabilities could generate new revenue growth for telcos.
  • The potential new services enabled by these technologies.
  • The revenue growth that a telco might hope to achieve.

This report does not discuss the cost, technical, organisational, market or regulatory challenges operators will need to overcome in making the transition to SDN and NFV. STL Partners (STL) also acknowledges that operators are still a long way from developing and launching some of the new services discussed in this paper, not least because they require capabilities that do not exist today. Nevertheless, by mapping the opportunity landscape for operators, this report should help to pave the way to fully capturing the transformative potential of SDN and NFV.

To sense-check our findings, STL has tested the proposed service concepts with the industry. The new services identified and modelled by STL were shared with approximately 25 telecoms operators. Hewlett Packard Enterprise (HPE) kindly commissioned and supported this research and testing programme.

However, STL wrote this report independently, and the views and conclusions contained herein are those of STL.

Introduction

The end of growth in telecoms…?

Most telecoms operators are facing significant competitive pressure from rival operators and players in adjacent sectors. Increased competition among telcos and Internet players has driven down voice and messaging revenues. Whilst demand for data services is increasing, STL forecasts that revenue growth in this segment will not offset the decline in voice and messaging revenue (see Figure 5).

 Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market

Source: STL Partners analysis

Figure 5 shows STL forecasts for revenues over a six-year horizon for an illustrative converged telco operating in an advanced market. The telco, its market characteristics and the modelling mechanics are described in detail later in this report.

We believe that existing ‘digital’ businesses (representing consumer digital services, such as IPTV and managed services for enterprises) will not grow significantly on an organic basis over the next six years (unless operators are able to radically transform their business). Note, this forecast is for a converged telco (mobile and fixed) addressing both enterprise and consumer segments; we anticipate that revenues could face a steeper decline for non-converged, consumer-only or enterprise-only players.

Given that telcos’ cost structures are quite rigid, with high capex and opex requirements to manage infrastructure, the ongoing decline in core service revenue will continue to put significant pressure on the core business. As revenues decline, margins fall and telcos’ ability to invest in innovation is curbed, making it even harder to find new sources of revenue.

New technologies can be a catalyst for telco transformation

However, STL believes that new technologies have the potential to both streamline the telco cost structure and spur growth. In particular, network functions virtualisation (NFV) and software-defined networking (SDN) offer many potential benefits for telcos.

Virtualisation has the potential to generate significant cost savings for telcos. Whilst the process of managing a transition to NFV and SDN may be fraught with challenges and be costly, it should eventually lead to:

  • A reduction in capex – NFV will lead to the adoption of generic common-off-the-shelf (COTS) hardware. This hardware will be lower cost, able to serve multiple functions and will be more readily re-usable. Furthermore, operators will be less tied to vendors’ proprietary platforms, as functions will be more openly interchangeable. This will increase competition in the hardware and software markets, leading to an overall reduction in capital investment.
  • Reduction of opex through automation. Again, as services will be delivered via software there will be less cost associated with the on-going management and maintenance of the network infrastructure. The network will be more-centrally managed, allowing more efficient sharing of resources, such as space, power and cooling systems.
  • Product lifecycle management improvements through more integrated development and operations (devops)

In addition to cost savings, virtualisation can also allow operators to become more agile. This agility arises from two factors:

  1. The nature of the new infrastructure
  2. The change in cost structure

As the new infrastructure will be software-centric, as opposed to hardware-centric, greater levels of automation will be possible. This new software-defined, programmable infrastructure could also increase flexibility in the creation, management and provisioning of services in a way that is not possible with today’s infrastructure, leading to greater agility.

Virtualisation will also change the telco cost structure, potentially allowing operators to be less risk-averse and thereby become more innovative. Figure 6 below shows how virtualisation can impact the operating model of a telco. Through virtualisation, an infrastructure player becomes more like a platform or product player, with less capital tied-up in infrastructure (and the management of that infrastructure) and more available to spend on marketing and innovation.

Redefining the cost structure could help spur transformation across the business, as processes and culture begin to revolve less around fixed infrastructure investment and more-around software and innovation.

Figure 6: Virtualisation can redefine the cost structure of a telco

Source: STL Partners analysis

This topic is explored in detail in the recent Executive Briefings: Problem: Telecoms technology inhibits operator business model change (Part 1) and Solution: Transforming to the Telco Cloud Service Provider (Part 2).

 

  • Preface
  • Executive Summary
  • Introduction
  • The end of growth in telecoms…?
  • New technologies can be a catalyst for telco transformation
  • Defining ‘Telco Cloud’
  • How Telco Cloud enables revenue-growth opportunities for telcos
  • Connect services
  • Perform services
  • Capture, Analyse & Control services
  • Digital Agility services
  • Telco Cloud Services
  • Service Overview: Revenue vs. Ease of Implementation
  • 15 Service types defined (section on each)
  • The Revenue Opportunity
  • Model overview
  • Sizing the revenue potential from Telco Cloud services
  • Timeline for new service launch
  • Breaking down the revenues
  • Customer experience benefits
  • Conclusions
  • Appendix
  • Modelling Assumptions & Mechanics
  • Service Descriptions: Index of Icons

 

  • Figure 1: Defining Telco Cloud
  • Figure 2: Overview of Telco Cloud categories and services
  • Figure 3: Telco Cloud could boost revenues X% higher than the base case
  • Figure 4: Breakdown of Telco Cloud revenues in 2021
  • Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market
  • Figure 6: Virtualisation can redefine the cost structure of a telco
  • Figure 7: Defining Telco Cloud
  • Figure 8: Telco Cloud Service Categories
  • Figure 9: Telco Cloud will enable immersive live VR experiences
  • Figure 10: Telco Cloud can enable two-way communication in real-time
  • Figure 11: Overview of Telco Cloud categories and services
  • Figure 12: Telco Cloud Services: Revenue versus ease of implementation
  • Figure 13: Telco X – Base case shows declining revenues
  • Figure 14: Telco X – Telco Cloud services increase monthly revenues by X% on the base case by Dec 2021
  • Figure 15: Telco X – Timeline of Telco Cloud service launch dates
  • Figure 16: Telco X (converged) – Net new revenue by service category (Dec 2021)
  • Figure 17: Telco Y (mobile only) – Net new revenue by service category (Dec 2021)
  • Figure 18 Telco Z (fixed only) – Net new revenue by service category (Dec 2021)
  • Figure 19: Modelling Mechanics

Facing Up to the Software-Defined Operator

Introduction

At this year’s Mobile World Congress, the GSMA’s eccentric decision to split the event between the Fira Gran Via (the “new Fira”, as everyone refers to it) and the Fira Montjuic (the “old Fira”, as everyone refers to it) was a better one than it looked. If you took the special MWC shuttle bus from the main event over to the developer track at the old Fira, you crossed a culture gap that is widening, not closing. The very fact that the developers were accommodated separately hints at this, but it was the content of the sessions that brought it home. At the main site, it was impressive and forward-thinking to say you had an app, and a big deal to launch a new Web site; at the developer track, presenters would start up a Web service during their own talk to demonstrate their point.

There has always been a cultural rift between the “netheads” and the “bellheads”, of which this is just the latest manifestation. But the content of the main event tended to suggest that this is an increasingly serious problem. Everywhere, we saw evidence that core telecoms infrastructure is becoming software. Major operators are moving towards this now. For example, AT&T used the event to announce that it had signed up Software Defined Networks (SDN) specialists Tail-F and Metaswitch Networks for its next round of upgrades, while Deutsche Telekom’s Terastream architecture is built on it.

This is not just about the overused three letter acronyms like “SDN and NFV” (Network Function Virtualisation – see our whitepaper on the subject here), nor about the duelling standards groups like OpenFlow, OpenDaylight etc., with their tendency to use the word “open” all the more the less open they actually are. It is a deeper transformation that will affect the device, the core network, the radio access network (RAN), the Operations Support Systems (OSS), the data centres, and the ownership structure of the industry. It will change the products we sell, the processes by which we deliver them, and the skills we require.

In the future, operators will be divided into providers of the platform for software-defined network services and consumers of the platform. Platform consumers, which will include MVNOs, operators, enterprises, SMBs, and perhaps even individual power users, will expect a degree of fine-grained control over network resources that amounts to specifying your own mobile network. Rather than trying to make a unitary public network provide all the potential options as network services, we should look at how we can provide the impression of one network per customer, just as virtualisation gives the impression of one computer per user.

To summarise, it is no longer enough to boast that your network can give the customer an API. Future operators should be able to provision a virtual network through the API. AT&T, for example, aims to provide a “user-defined network cloud”.

Elements of the Software-Defined Future

We see five major trends leading towards the overall picture of the ‘software defined operator’ – an operator whose boundaries and structure can be set and controlled through software.

1: Core network functions get deployed further and further forwards

Because core network functions like the Mobile Switching Centre (MSC) and Home Subscriber Server (HSS) can now be implemented in software on commodity hardware, they no longer have to be tied to major vendors’ equipment deployed in centralised facilities. This frees them to migrate towards the edge of the network, providing for more efficient use of transmission links, lower latency, and putting more features under the control of the customer.

Network architecture diagrams often show a boundary between “the Internet” and an “other network”. This is called the ‘Gi interface’ in 3G and 4G networks. Today, the “other network” is usually itself an IP-based network, making this distinction simply that between a carrier’s private network and the Internet core. Moving network functions forwards towards the edge also moves this boundary forwards, making it possible for Internet services like content-delivery networking or applications acceleration to advance closer to the user.

Increasingly, the network edge is a node supporting multiple software applications, some of which will be operated by the carrier, some by third-party services like – say – Akamai, and some by the carrier’s customers.

2: Access network functions get deployed further and further back

A parallel development to the emergence of integrated small cells/servers is the virtualisation and centralisation of functions traditionally found at the edge of the network. One example is so-called Cloud RAN or C-RAN technology in the mobile context, where the radio basebands are implemented as software and deployed as virtual machines running on a server somewhere convenient. This requires high capacity, low latency connectivity from this site to the antennas – typically fibre – and this is now being termed “fronthaul” by analogy to backhaul.

Another example is the virtualised Optical Line Terminal (OLT) some vendors offer in the context of fixed Fibre to the home (FTTH) deployments. In these, the network element that terminates the line from the user’s premises has been converted into software and centralised as a group of virtual machines. Still another would be the increasingly common “virtual Set Top Box (STB)” in cable networks, where the TV functions (electronic programming guide, stop/rewind/restart, time-shifting) associated with the STB are actually provided remotely by the network.

In this case, the degree of virtualisation, centralisation, and multiplexing can be very high, as latency and synchronisation are less of a problem. The functions could actually move all the way out of the operator network, off to a public cloud like Amazon EC2 – this is in fact how Netflix does it.

3: Some business support and applications functions are moving right out of the network entirely

If Netflix can deliver the world’s premier TV/video STB experience out of Amazon EC2, there is surely a strong case to look again at which applications should be delivered on-premises, in the private cloud, or moved into a public cloud. As explained later in this note, the distinctions between on-premises, forward-deployed, private cloud, and public cloud are themselves being eroded. At the strategic level, we anticipate pressure for more outsourcing and more hosted services.

4: Routers and switches are software, too

In the core of the network, the routers that link all this stuff together are also turning into software. This is the domain of true SDN – basically, the effort to substitute relatively smart routers with much cheaper switches whose forwarding rules are generated in software by a much smarter controller node. This is well reported elsewhere, but it is necessary to take note of it. In the mobile context, we also see this in the increasing prevalence of virtualised solutions for the LTE Enhanced Packet Core (EPC), Mobility Management Entity (MME), etc.

5: Wherever it is, software increasingly looks like the cloud

Virtualisation – the approach of configuring groups of computers to work like one big ‘virtual computer’ – is a key trend. Even when, as with the network devices, software is running on a dedicated machine, it will be increasingly found running in its own virtual machine. This helps with management and security, and most of all, with resource sharing and scalability. For example, the virtual baseband might have VMs for each of 2G, 3G, and 4G. If the capacity requirements are small, many different sites might share a physical machine. If large, one site might be running on several machines.

This has important implications, because it also makes sharing among users easier. Those users could be different functions, or different cell sites, but they could also be customers or other operators. It is no accident that NEC’s first virtualised product, announced at MWC, is a complete MVNO solution. It has never been as easy to provide more of your carrier needs yourself, and it will only get easier.

The following Huawei slide (from their Carrier Business Group CTO, Sanqi Li) gives a good visual overview of a software-defined network.

Figure 1: An architecture overview for a software-defined operator
An architecture overview for a software-defined operator March 2014

Source: Huawei

 

  • The Challenges of the Software-Defined Operator
  • Three Vendors and the Software-Defined Operator
  • Ericsson
  • Huawei
  • Cisco Systems
  • The Changing Role of the Vendors
  • Who Benefits?
  • Who Loses?
  • Conclusions
  • Platform provider or platform consumer
  • Define your network sharing strategy
  • Challenge the coding cultural cringe

 

  • Figure 1: An architecture overview for a software-defined operator
  • Figure 2: A catalogue for everything
  • Figure 3: Ericsson shares (part of) the vision
  • Figure 4: Huawei: “DevOps for carriers”
  • Figure 5: Cisco aims to dominate the software-defined “Internet of Everything”