Cloud 2.0: don’t blow it, telcos

Summary: enterprise cloud computing services need great connectivity to work, but there are opportunities for telcos to participate beyond the connectivity. What are the opportunities, how are telcos approaching them, and what are the key strategies? Includes forecasts for telcos’ shares of VPC, IaaS, PaaS and SaaS. (September 2011, Executive Briefing Service, Cloud & Enterprise ICT Stream) Apps & Telco APIs Figure 1 Drivers of the App Market Telco 2.0 Sept 2011
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Below is an extract from this 28 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Cloud and Enterprise ICT Stream here. Non-members can 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.

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Introduction

In our previous analyses Cloud 2.0: What are the Telco Opportunities? and Cloud 2.0: Telcos to grow Revenues 900% by 2014 we’ve looked broadly at the growing cloud market opportunity for telcos. This new report takes this analysis forward, looking in detail at the service definitions, market forecasts and the industry’s confidence in them, and actual and potential strategies for telcos.

We’ll also be looking in depth at the opportunities in cloud services in the Cloud 2.0: Transforming technology, media and telecoms at the EMEA Executive Brainstorm in London on Thursday 10th November 2011.

The Cloud Market

Cloud computing represents the next wave of IT. Almost all organisations are saying that they will adopt cloud computing to a greater or lesser extent, across all segments and sizes. Consequently, we believe that there exists a large opportunity for telcos if they move quickly enough to take advantage of it.

Total market cloud forecasts – variation and uncertainty

In order to understand where the best opportunities are and how telcos can best take use their particular strengths to advantage of them, we need to examine the size of that opportunity and to understand which areas of cloud computing are most likely to offer the best returns.

Predictions for the size and growth of the cloud computing market are very diverse:

  • Merrill Lynch has previously offered the most optimistic estimate: $160 billion by the end of 2011 (The Cloud Wars: $100+ billion at stake, May 2008)
  • Gartner predicted expenditure of $150.1 billion by 2013 (Gartner forecast, March 2009)
  • IDC predicts annual cloud services revenues of $55.5 billion in by 2014 (IDC report, June 2010)
  • Cisco has estimated the cloud market at $43 billion by 2013 (STL Partners video, October 2010)
  • Bain expects spending to grow �?vefold from $30 billion in 2011 to $150 billion by 2020 (The Five Faces of the Cloud, 2011)
  • IBM’s Market Insights Cloud Phase 2 assessment of September 2011 sizes the cloud market at $88.5bn by 2015
  • Of that total, research by AMI Partners suggests that SMBs’ share of that spend will approach $100 billion by 2014 – over 60 % of the total (World Wide Cloud Services Study, December 2010)

Figure 1 – Cloud services market forecast comparisons

Cloud 2.0 Industry Forecast Comparisons Bain, Gartner, IDC, Cisco Sept 2011 Telco 2.0

Source: Bain, Cap Gemini, Cisco, Gartner, IBM, IDC, Merrill Lynch

Whichever way you look at it, the volume of spending on cloud computing is high and growing. But why are there such large variations in the estimates of that growth?

There is a clear correlation between the report dates and the market forecast sizes. Two of the forecasts – from Merrill Lynch and Gartner – are well over two years old, and are likely to have drawn conclusions from data gathered before the 2008 recession started to bite. Both are almost certainly over-optimistic as a result, and are included as an indication of the historic uncertainty in Cloud forecasts rather than criticism of the forecasters.

More generally, while each forecaster will be using different assumptions and extrapolation techniques, the variation is also likely to reflect a lack of maturity of the cloud services market: there exists little historical data from which to extrapolate the future, and little experience of what kinds of growth rates the market will experience. For example, well-known inhibitors to the adoption of cloud, such security and control, have yet to be resolved by cloud service providers to the point where enterprise customers are willing to commit a substantial volume of their IT spending.

Additionally, the larger the organisation, the slower the adoption of cloud computing is likely to be; it takes a long time for large enterprises to move to a new computing model that involves changing fundamental IT architectures and will be a process undertaken over time. It is hard to be precise about the degree to which they will inhibit the growth of cloud acceptance.

As a result, in a world where economic uncertainty seems unlikely to disappear in the short to medium term, it would be unwise to assume a high level of accuracy for market sizing predictions, although the general upward trend is very clear.

Cloud service types

Cloud computing services fall into three broad categories: infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS).

Figure 2 – Cloud service layer definitions

Cloud 2.0 Service Types vs. layers Telco 2.0 Sept 2011

Source: STL Partners/Telco 2.0

Of the forecasts available, we prefer Bain’s near term forecast because: 1) it is based on their independent Cloud ‘Center of Excellence’ work; 2) it is relatively recent, and 3) it has clear and meaningful categories and definitions.
The following figure summarises Bain’s current market forecast, split by cloud service type.

Figure 3 – Cloud services: market forecast and current players

Cloud 2.0 Forecast growth by service type Sep 2011 Telco 2.0

Currently, telcos have around a 5% share of the c.$20 billion annual cloud services revenue, with 25 % CAGR forecast to 2013.

At the May 2011 EMEA Telco 2.0 Executive Brainstorm, we used these forecasts as a base to explore market views on the various cloud markets. There were c.200 senior executives at the brainstorm from industries across Telecoms, Media and Technology (TMT) and, following detailed presentations on Cloud Services, they were asked highly structured questions to ascertain their views on the likelihood of telco success in addressing each service.

Infrastructure as a Service (IaaS)

IaaS consists of cloud-based, usually virtualised servers, networking, and storage, which the customer is free to manage as they need. Billing is typically on a utility computing model: the more of each that you use, the more you pay. The largest of the three main segments, Bain forecasts IaaS to be worth around $3.5 billion in 2011, with 45 % CAGR forecast. The market leader is Amazon with about 18 % share. Other players include IBM and Rackspace. Telcos currently have about 20 % of this market – Qwest/Savvis/Equinix, and Verizon/Terremark.

Respondents at the EMEA Telco 2.0 Brainstorm estimated that telcos could take an average share of 25% of this market. The distribution was reasonably broad, with the vast majority in the 11-40% range.

Figure 4 – IaaS – Telco market share forecasts

Cloud 2.0 IaaS Telco Forecasts Sept 2011 Telco 2.0

Source: EMEA Telco 2.0 Executive Brainstorm delegate vote, May 2011

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

  • Virtual Private Cloud (VPC)
  • Software as a Service (SaaS)
  • Platform as a Service (PaaS)
  • Hybrid Cloud
  • Cloud Service Brokerage
  • Overall telco cloud market projections by type, including forecast uncertainties
  • Challenges for telcos
  • Which areas should telcos target?
  • Telcos’ advantages
  • IaaS, PaaS, or SaaS?
  • Developing other segments
  • What needs to change?
  • How can telcos deliver?
  • Telcos’ key strengths
  • Key strategy variables
  • Next Steps

…and the following charts…

  • Figure 1 – Cloud services market forecast comparisons
  • Figure 2 – Cloud service layer definitions
  • Figure 3 – Cloud services: market forecast and current players
  • Figure 4 – IaaS – Telco market share forecasts
  • Figure 5 – VPC – Telco market share forecasts
  • Figure 6 – SaaS – Telco market share forecasts
  • Figure 7 – PaaS – Telco market share forecasts
  • Figure 8 – Total telco cloud market size and share estimates – 2014
  • Figure 9 – Uncertainty in forecast by service
  • Figure 10 – Telco cloud strengths
  • Figure 11 – Cloud services timeline vs. profitability schematic
  • Figure 12 – Telcos’ financial stability

Members of the Telco 2.0 Executive Briefing Subscription Service and the Cloud and Enterprice ICT Stream can download the full 28 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: Aepona, Amazon, AMI Partners, Bain, BT, CenturyLink, CENX, Cisco, CloudStack, Deutsche Telekom, EC2, Elastic Compute Cloud (EC2), EMC, Equinix, Flexible 4 Business, Force.com, Forrester, France Telecom, Gartner, Google App Engine, Google Docs, IBM, IDC, Intuit, Java, Merrill Lynch, Microsoft, Microsoft Office 365, MySQL, Neustar, NTT, OneVoice, OpenStack, Oracle, Orange, Peartree, Qwest, Rackspace, Red Hat, Renub Research, Sage, Salesforce.com, Savvis, Telstra, Terremark, T-Systems, Verizon, VMware, Vodafone, Webex.

Technologies and industry terms referenced: Azure, Carrier Ethernet, Cloud computing, cloud service providers, Cloud Services, Communications as a Service, compliance, Connectivity, control, forecast, Global reach, Hybrid Cloud, Infrastructure as a Service (IaaS), IT, Mobile Cloud, network, online, Platform as a Service (PaaS), Reliability, resellers, security, SMB, Software as a Service (SaaS), storage, telcos, telecoms, strategy, innovation, transformation, unified communications, video, virtualisation, Virtual Private Cloud (VPC), VPN.

Cloud 2.0: What are the Telco Opportunities?

Summary: Telco 2.0’s analysis of operators’ potential role and opportunity in ‘Cloud Services’, a set of new business model opportunities that are still in an early stage of development – although players such as Amazon have already blazed a substantial trail. (December 2010, , Executive Briefing Service, Cloud & Enterprise ICT Stream & Foundation 2.0)

  • Below is an extract from this Telco 2.0 Report. The report can be downloaded in full PDF format by members of the Telco 2.0 Executive Briefing service and the Cloud and Enterprise ICT Stream here.
  • Additionally, to give an introduction to the principles of Telco 2.0 and digital business model innovation, we now offer for download a small selection of free Telco 2.0 Briefing reports (including this one) and a growing collection of what we think are the best 3rd party ‘white papers’. To access these reports you will need to become a Foundation 2.0 member. To do this, use the promotional code FOUNDATION2 in the box provided on the sign-up page here. NB By signing up to this service you give consent to us passing your contact details to the owners / creators of any 3rd party reports you download. Your Foundation 2.0 member details will allow you to access the reports shown here only, and once registered, you will be able to download the report here.
  • See also the videos from IBM on what telcos need to do, and Oracle on the range of Cloud Services, and the Telco 2.0 Analyst Note describing Americas and EMEA Telco 2.0 Executive Brainstorm delegates’ views of the Cloud Services Opportunity for telcos.
  • We’ll also be discussing Cloud 2.0 at the Silicon Valley (27-28 March) and London (12-13 June) Executive Brainstorms.
  • To access reports from the full Telco 2.0 Executive Briefing service, or to submit whitepapers for review for inclusion in this service, please email contact@telco2.net or call +44 (0) 207 247 5003.

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The Cloud: What Is It?

Apart from being the leading buzzword in the enterprise half of the IT industry for the last few years, what is this thing called “Cloud”? Specifically, how does it differ from traditional server co-location, or indeed time-sharing on mainframes as we did in the 1970s? These are all variations on the theme of computing power being supplied from a remote machine shared with other users, rather than from PCs or servers deployed on-site.

Two useful definitions were voiced at the 11th Telco 2.0 EMEA Executive Brainstorm in November 2010:

  • “A standardised IT Capability delivered in a pay-per-use, self-service way.” Stephan Haddinger, Chief Architect Cloud Computing, Orange – citing a definition by Forrester.
  • “STEAM – A Self-Service, multi-Tenanted, Elastic, broad Access, and Metered IT Service.” Neil Sholay, VP Cloud and Comms, EMEA, Oracle.

The definition of Cloud has been rendered significantly more complicated by the hype around “cloud” and the resultant tendency to use it for almost anything that is network resident. For a start, it’s unhelpful to describe anything that includes a Web site as “cloud computing”. A good way to further understand ‘Cloud Services’ is to look at the classic products in the market.

The most successful of these, Amazon’s S3 and EC2, provide low-level access to computing resources – disk storage, in S3, and general-purpose CPU in EC2. This differs from an ASP (Application Service Provider) or Web 2.0 product in that what is provided isn’t any particular application, but rather something close to the services of a general purpose computer. It differs from traditional hosting in that what is provided is not access to one particular physical machine, but to a virtual machine environment running on many physical servers in a data-centre infrastructure, which is probably itself distributed over multiple locations. The cloud operator handles the administration of the actual servers, the data centres and internal networks, and the virtualisation software used to provide the virtual machines.

Varying degrees of user control over the system are available. A major marketing point, however, is that the user doesn’t need to worry about system administration – it can be abstracted out as in the cloud graphic that is used to symbolise the Internet on architecture diagrams. This tension between computing provided “like electricity” and the desire for more fine-grained control is an important theme. Nobody wants to specify how their electricity is routed through the grid, although increasing numbers of customers want to buy renewable power – but it is much more common for businesses (starting at surprisingly small scale) to have their own Internet routing policies.

So, for example, although Amazon’s cloud services are delivered from their global data centre infrastructure, it’s possible to specify where EC2 instances run to a continental scale. This provides for compliance with data protection law as well as for performance optimisation. Several major providers, notably Rackspace, BT Global Services, and IBM, offer “private cloud” services which represent a halfway house between hosting/managed service and fully virtualised cloud computing. And some explicit cloud products, such as Google’s App Engine, provide an application environment with only limited low-level access, as a rapid-prototyping tool for developers.

The Cloud: Why Is It?

Back at the November 2009 Telco 2.0 Executive Brainstorm in Orlando, Joe Weinman of AT&T presented an argument that cloud computing is “a mathematical inevitability”. His fundamental point is worth expanding on. For many cloud use cases, the decision between moving into the cloud and using a traditional fleet of hosted servers is essentially a rent-vs-buy calculus. Weinman’s point was that once you acquire servers, whether you own them and co-locate or rent them from a hosting provider, you are committed to acquiring that quantity of computing capacity whether you use it or not. Scaling up presents some problems, but it is not that difficult to co-locate more 1U racks. What is really problematic is scaling down.

Cloud computing services address this by basically providing volume pricing for general-purpose computing – you pay for what you use. It therefore has an advantage when there are compute-intensive tasks with a highly skewed traffic distribution, in a temporary deployment, or in a rapid-prototyping project. However, problems arise when there is a need for capacity on permanent standby, or serious issues of data security, business continuity, service assurance, and the like. These are also typical rent-vs-buy issues.

Another reason to move to the cloud is that providing high-availability computing is expensive and difficult. Cloud computing providers’ core business is supporting large numbers of customers’ business-critical applications – it might make sense to pass this task to a specialist. Also, their typical architecture, using virtualisation across large numbers of PC-servers to achieve high availability in the manner popularised by Google, doesn’t make sense except on a scale big enough to provide a significant margin of redundancy in the hardware and in the data centre infrastructure.

Why Not the Cloud?

The key objections to the cloud are centred around trust – one benefit of spreading computing across many servers in many locations is that this reduces the risk of hardware and/or connectivity failure. However, the problem with moving your infrastructure into a multi-tenant platform is of course that it’s another way of saying that you’ve created a new, enormous single point of commercial and/or software failure. It’s also true that the more critical and complex the functions that are moved into cloud infrastructure, and the more demanding the contractual terms that result, the more problematic it becomes to manage the relationship. (Neil Lock, IT Services Director at BT Global Services, contributed an excellent presentation on this theme at the 9th Telco 2.0 Executive Brainstorm.) At some point, the additional costs of managing the outsourcer relationship intersect with the higher costs of owning the infrastructure and internalising the contract. One option involves spending more money on engineers, the other, spending more money on lawyers.

Similar problems exist with regard to information security – a malicious actor who gains access to administrative features of the cloud solution has enormous opportunities to cause trouble, and the scaling features of the cloud mean that it is highly attractive to spammers and denial-of-service attackers. Nothing else offers them quite as much power.

Also, as many cloud systems make a virtue of the fact that the user doesn’t need to know much about the physical infrastructure, it may be very difficult to guarantee compliance with privacy and other legislation. Financial and other standards sometimes mandate specific cryptographic, electronic, and physical security measures. It is quite possible that the users of major clouds would be unable to say in which jurisdiction users’ personal data is stored. They may consider this a feature, but this is highly dependent on the nature of your business.

From a provider perspective, the chief problem with the cloud is commoditisation. At present, major clouds are the cheapest way bar none to buy computing power. However, the very nature of a multi-tenant platform demands significant capital investment to deliver the reliability and availability the customers expect. The temptation will always be there to oversubscribe the available capacity – until the first big outage. A capital intensive, very high volume, and low price business is the classic case of a commodity – many operators would argue that this is precisely what they’re trying to get away from. Expect vigorous competition, low margins, and significant CAPEX requirements.

To download a full PDF of this article, covering…

  • What’s in it for Telcos?
  • Conclusions and Recommendations

…Members of the Telco 2.0TM Executive Briefing Subscription Service and the Cloud & Enterprise ICT Stream can read the Executive Summary and download the full report in PDF format here. Non-Members, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details.

Telco 2.0 Next Steps

Objectives:

  • To continue to analyse and refine the role of telcos in Cloud Services, and how to monetise them;
  • To find and communicate new case studies and use cases in this field.

Deliverables:

Cloud 2.0: What Should Telcos do? IBM’s View

Summary: IBM say that telcos are well positioned to provide cloud services, and forecast an $89Bn opportunity over 5 years globally. Video presentation and slides (members only) including forecast, case studies, and lessons for future competitiveness.

Cloud Services will also feature at Best Practice Live!, Feb 2-3 2011, and the 2011 Telco 2.0 Executive Brainstorms.

 

At the 11th EMEA Telco 2.0 Brainstorm, November 2010, Craig Wilson, VP, IBM Global Telecoms Industry, said that:

  • Cloud Services represent an $89Bn opportunity in 5 years;
  • Telcos / Service Providers are “well positioned” to compete in Cloud Services;
  • Security remains the CIO’s biggest question mark, but one that telcos can help with;
  • and outlined two APAC telco Cloud case studies.

Members of the Telco 2.0 Executive Briefing Service and the Cloud and Enterprise ICT Stream can also download Craig’s presentation here (for membership details please see here, or to join, email contact@telco2.net or call +44 (0) 44 207 247 5003).

See also videos by Oracle describing a range of cloud case studies, Cisco on the market opportunity and their own case study of Cloud benefits, and Telco 2.0’s Analyst Note on the Cloud Opportunity.

Telco 2.0 Next Steps

Objectives:

  • To continue to analyse and refine the role of telcos in Cloud Services, and how to monetise them;
  • To find and communicate new case studies and use cases in this field.

Deliverables: