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

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

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

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

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

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

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

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

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

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

Geographical distribution of STL Partners’ telco cloud benefit survey

 

Source: STL Partners

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

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

Phases of telco cloudification

Source: STL Partners

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

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

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

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

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

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

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

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

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

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Table of Contents

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

Related research

VNFs on public cloud: Opportunity, not threat

VNF deployments on the hyperscale cloud are just beginning

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

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

Five business models for telco-hyperscaler partnerships

Source: STL Partners

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

Major telcos deploying VNFs in the public cloud

Source: STL Partners

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

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

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

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

Table of contents

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

Related Research

 

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Cloud 2.0: the fight for the next wave of customers

Summary: The fight for the Cloud Services market is about to move into new segments and territories. In the build up to the launch of our new strategy report, ‘Telco strategies in the Cloud’, we review perspectives on this shared at the 2012 EMEA and Silicon Valley Executive Brainstorms by strategists from major telcos and tech players, including: Orange, Telefonica, Verizon, Vodafone, Amazon, Bain, Cisco, and Ericsson (September 2012, , Executive Briefing Service, Cloud & Enterprise ICT Stream). Cloud Growth Groups September 2012
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Below is an extract from this 33 page Telco 2.0 Briefing 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 and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Introduction

As part of the New Digital Economics Executive Brainstorm series, future strategies in Cloud Services were explored at the New Digital Economics Silicon Valley event at the Marriott Hotel, San Francisco, on the 27th March, 2012, and the second EMEA Cloud 2.0 event at the Grange St. Pauls Hotel on the 13th June 2012.

At the events, over 200 specially-invited senior executives from across the communications, media, retail, finance and technology sectors looked at how to make money from cloud services and the role and strategies of telcos in this industry, using a widely acclaimed interactive format called ‘Mindshare’.

This briefing summarises key points, participant votes, and our high-level take-outs from across the events, and focuses on the common theme that the cloud market is evolving to address new customers, and the consequence of this change on strategy and implementation. We are also publishing a comprehensive report on Cloud 2.0: Telco Strategies in the Cloud.

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Executive Summary

The end of the beginning

The first phase of enterprise cloud services has been dominated by the ‘big tech’ and web players like Amazon, Google, and Microsoft, who have developed highly sophisticated cloud operations at enormous scale. The customers in this first round are the classic ‘early adopters’ of enterprise ICT – players with a high proportion of IT genes in their corporate DNA such as Netflix, NASA, Silicon Valley start ups, some of the world’s largest industrial and marketing companies, and the IT industry itself. There is little doubt that these leading customers and major suppliers will retain their leading edge status in the market.

The next phase of cloud market development is the move into new segments in the broader market. Participants at the EMEA brainstorm thought that a combination of new customers and new propositions would drive the most growth in the next 3 years.

UK Services Revenues: Actual and Forecast (index)

These new segments comprise both industries and companies outside the early adopters in developed markets, and companies in new territories in emerging and developing markets. These customers are typically less technology oriented, more focused on business requirements, and need a combination of de-mystification of cloud and support to develop and run such systems.

Closer to the customer

There are opportunities for telcos in this evolving landscape. While the major players’ scale will be hard to beat, there are opportunities in the new segments in being ‘closer to the customer’. This involves telcos leveraging potential advantages of:

  • existing customer relationships, existing enterprise IT assets, and channels to markets (where they exist);
  • geographical proximity, where telcos can build, locate and connect more directly to overcome data sovereignty and latency issues.

Offering unique, differentiated services

Telcos should also be able to leverage existing assets and capabilities through APIs in the cloud to create distinctive offerings to enterprise and SME customers:

  • Network assets will enable better management of cloud services by allowing greater control of the network components;
  • Data assets will enable a wider range of potential applications for cloud services that use telco data (such as identification services);
  • And communications assets (such as APIs to voice and messaging) will allow communications services to be built in to cloud applications.

Next steps for telcos

  • Telcos need to move fast to leverage their existing relationships with customers both large and small and optimise their cloud offerings in line with new trends in the enterprise ICT market, such as bring-your-own-device (BYOD).
  • Customers are increasingly looking to outsource business processes to cut costs, and telcos are well-placed to take advantage of this opportunity.
  • Telcos need to continue to partner with independent software vendors, in order to build new products and services. Telcos should also focus on tight integration between their core services and cloud services or cloud service providers (either delivered by themselves or by third parties.) During the events, we saw examples from Vodafone, Verizon and Orange amongst others.
  • Telcos should also look at the opportunity to act as cloud service brokers. For example, delivering a mash up of Google Apps, Workday and other services that are tightly integrated with telco products, such as billing, support, voice and data services. The telco could ensure that the applications work well together and deliver a fully supported, managed and billed suite of products.
  • Identity management and security also came through as strong themes and there is a natural role for telcos to play here. Telcos already have a trusted billing relationship and hold personal customer information. Extending this capability to offer pre-population of forms, acting as an authentication broker on behalf of other services and integrating information about location and context through APIs would represent additional business and revenue generating opportunities.
  • Most telcos are already exploring opportunities to exploit APIs, which will enable them to start offering network-as-a-service, voice-as-a-service, device management, billing integration and other services. Depending on platform and network capability, there are literally hundreds of APIs that telcos could offer to external developers. These APIs could be used to develop applications that are integrated with telcos’ network product or service, which in turn makes the telco more relevant to their customers.

We will be exploring these strategies in depth in Cloud 2.0: Telco Strategies in the Cloud and at the invitation only New Digital Economics Executive Brainstorms in Digital Arabia in Dubai, 6-7 November, and Digital Asia in Singapore, 3-5 December, 2012.

Key questions explored at the brainstorms and in this briefing:

  • How will the Cloud Services market evolve?
  • Which customer and service segments are growing fastest (Iaas, PaaS, SaaS)?
  • What are the critical success factors to market adoption?
  • Who will be the leading players, and how will it impact different sectors?
  • What are the telcos’ strengths and who are the most advanced telcos today?
  • Which aspects of the cloud services market should they pursue first?
  • Where should telcos compete with IT companies and where should they cooperate?
  • What must telcos do to secure their share of the cloud and how much time do they have?

Stimulus Speakers/Panelists

Telcos

  • Peter Martin, Head of Strategy, Cloud Computing, Orange Group
  • Moisés Navarro Marín, Director, Strategy Global Cloud Services, Telefonica Digital
  • Alex Jinivizian, Head of Enterprise Strategy, Verizon Enterprise Solutions
  • Robert Brace, Head of Cloud Services, Vodafone Group

Technology Companies

  • Mohan Sadashiva, VP & GM, Cloud Services, Aepona
  • Gustavo Reyna, Solutions Marketing Manager, Aepona
  • Iain Gavin, Head of EMEA Web Services, Amazon
  • Pat Adamiak, Senior Director, Cloud Solutions, Cisco
  • Charles J. Meyers, President, Equinix Americas
  • Arun Bhikshesvaran, CMO, Ericsson
  • John Zanni, VP of Service Provider Marketing & Alliances, Parallels

Consulting & Industry Analysis

  • Chris Brahm, Partner, Head of Americas Technology Practices, Bain
  • Andrew Collinson, Research Director, STL Partners

With thanks to our Silicon Valley 2012 event sponsors and partners:

Silicon Valley 2012 Event Sponsors

And our EMEA 2012 event sponsors:

EMEA 2012 Event Sponsors

To read the note in full, including the following sections detailing support for the analysis…

  • Round 2 of the Cloud Fight
  • Selling to new customers
  • What channels are needed?
  • How will telcos perform in cloud?
  • With which services will telcos succeed?
  • How can telcos differentiate?
  • Comments on telcos’ role, objectives and opportunities
  • Four telcos’ perspectives
  • Telefonica Digital – focusing on business requirements
  • Verizon – Cloud as a key Platform
  • Orange Business Services – communications related cloud
  • Vodafone – future cloud vision
  • Techco’s Perspectives
  • Amazon – A history of Amazon Web Services (AWS)
  • Cisco – a world of many clouds
  • Ericsson – the networked society and telco cloud
  • Aepona – Cloud Brokerage & ‘Network as a Service’ (NaaS)
  • The Telco 2.0™ Initiative

…and the following figures…

  • Figure 1 – Bain forecasts for business cloud market size
  • Figure 2 – Key barriers to cloud adoption
  • Figure 3 – Identifying the cloud growth markets
  • Figure 4 – Requirements for success
  • Figure 5 – New customers to drive cloud growth
  • Figure 6 – How to increase revenues from cloud services
  • Figure 7 – How to move cloud services forward
  • Figure 8 – Enterprise cloud channels
  • Figure 9 – Small businesses cloud channels
  • Figure 10 – Vote on Telco Cloud Market Share
  • Figure 11 – Telcos’ top differentiators in the cloud
  • Figure 12 – The global reach of Orange Business
  • Figure 13 – The telco as an intermediary
  • Figure 14 – Vodafone’s vision of the cloud
  • Figure 15 – Amazon Web Services’ cloud infrastructure
  • Figure 16 – Cisco’s world of many clouds
  • Figure 17 – Cloud traffic in the data centre
  • Figure 18 – Ericsson’s vision for telco cloud
  • Figure 19 – Summary of Ericsson cloud functions
  • Figure 20 – Aepona Cloud Services Broker
  • Figure 21 – How to deliver network-enhanced cloud services

Members of the Telco 2.0 Executive Briefing Subscription Service and the Cloud and Enterprise ICT Stream can download the full 33 page report in PDF format hereNon-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Companies and technologies covered: Telefonica, Vodafone, Verizon, Orange, Cloud, Amazon, Google, Ericsson, Cisco, Aepona, Equinix, Parallels, Bain, Telco 2.0, IaaS, PaaS, SaaS, private cloud, public cloud, telecom, strategy, innovation, ICT, enterprise.