Telco edge platforms: Balancing speed vs value

Defining the edge

Edge computing has been hailed as key to help deliver the promises of 5G, enabling transformative use cases and experiences. Significantly for mobile service providers, deriving value from their networks and presence at the edge remains an aspiration for a new source of revenues and a more favourable position in the value chain. There is strong belief that this needs to exceed what was achieved with 3G and 4G, where OTT players built entire businesses through successful services using centralised platforms leveraging fast, ubiquitous internet access. Mobile operators remain hopeful that they can evolve from ‘dumb pipes’ and derive more value from dynamic connectivity services, value added platforms, and partnerships.

The edge means different things to different people, so it is useful to define terminology and clarify the scope of this report. We understand the edge to refer to compute, storage and networking infrastructure, facilities, software, and services which exist physically or architecturally between typically non-telco cloud data centres and end-devices. This report will focus on the ‘telco edge’ for both mobile and fixed line telecoms operators.  The term MEC (initially ETSI’s Mobile Edge Computing which evolved to Multi-access Edge Computing) has historically been used for telco edge predominantly with a focus on deployment in the access network, however as we will see its use has somewhat broadened as telcos initially deploy edge computing more centrally.

Enter your details below to request an extract of the report

The edge continuum spans between end devices and hyperscale cloud

It is common practice to define an edge continuum in a diagram such as below which shows the different edge locations between an end device and the hyperscaler cloud. Typically, the physical distance, the number of network hops, and network latency will increase the further the edge location shifts to the right.

The edge continuum

edge platform

In considering the telco edge, we will primarily be focussed on the network edge, consisting of data centres logically situated in telco’s access, transport, and core network facilities. The on-premise edge (sometimes referred to enterprise or private edge) may be offered by telcos and others to enterprises but is closely related to private 4G/5G networks and single tenant propositions which are out of scope of this report. STL has written about this in reports such as Private networks: Lessons so far and what next and Combining private 5G and edge computing: The revenue opportunity.

The network edge affords a wide range of choices to deliver edge services from within the network. Network edge also includes neutral host providers that offer facilities for multiple infrastructure providers, which support enterprise applications, as well as radio access networks. These may be offered by traditional telcos, tower infrastructure providers and others.

The regional edge sits outside telco networks at internet exchanges, carrier exchanges, interconnect points, co-location, and data centre facilities. Multiple parties can deploy infrastructure at such locations which are designed as neutral, well-connected locations for third party equipment.  For some use cases, these locations are considered as ‘close enough’ or ‘near enough’ edge sites.

Edge computing drivers and benefits vary depending on the use case

While low latency is often cited as the justification for moving application workloads from the cloud to the edge, there are other drivers such as reduced data transit, data sovereignty and improving redundancy. These factors may be just as relevant as low latency, or more so, depending on the specific use case.

Edge computing benefits

Migrating workloads from end-devices to the edge can also bring benefits such as reduced power consumption, allowing smaller form factors at lower costs, and enabling experiences that are simply not possible on existing devices due to heavy computational requirements. Processing in the cloud may have been previously dismissed due to its limitations or constraints. One consumer example would be Instagram or Snapchat real-time video filters with heavy machine learning processing requirements. The processing for these may move to the edge to improve and standardise performance across devices, by not relying on the end-device’s processing power. Partners

However, the public cloud is well established and here to stay, so it is prudent to view the edge as complementary to and an extension of the public cloud, offering characteristics which may be important for specific components of certain use cases.

Table of Contents

  • Executive Summary
    • Most telcos do not yet see demand for a fully distributed edge
    • The platform is an important piece of the edge, but the verdict is still out on which approach to take
    • Telcos need to guarantee multi-cloud and multi-edge orchestration for their customers
    • Next steps
  • Introduction
    • Defining the edge
    • The state of the edge
  • Cloud vs edge
    • Contrasting public cloud and public edge
    • Latency in fixed vs mobile networks
    • The rationale for telco edge
  • Telco edge propositions and use cases
    • Internal applications for telcos
    • External applications for telcos
    • Telco edge propositions based on telco’s capabilities
    • Potential use case opportunities for telco edge
  • Where is the telco edge?
    • Edge really means core for now
    • Challengers to the telco edge
  • Building the telco edge platform
    • Edge developers want a consistent and seamless experience
    • The potential providers of network edge platforms
    • Cloud-centric capabilities and business models are key the success of telco edge platforms
  • Overcoming challenges
    • Telco industry challenges
    • External challenges
  • Conclusion: What should telcos do?

Enter your details below to request an extract of the report

Forecasting capacity of network edge computing

Telco edge build has been slower than expected

Telecoms operators have been planning the deployment of edge computing sites for at least the last three years.

Initially, the premise of (mobile) edge computing was to take advantage of the prime real estate telecoms operators had. Mobile operators, in particular, had undergone a process of evolving their network facilities from sites which housed purpose-built networking equipment to data centres as they adopted virtualisation. The consolidation of networking equipment meant there would be spare capacity in these data centres that could easily host applications for enterprises and developers.

That evolution has now been accelerated by the advent of 5G, a mobile generation built on a software-based architecture and IT principles. The result will be a proliferation of edge data centres that will be used for radio access network and core network hardware and software.

However, the reality is that it has taken time for telcos to deploy these sites. There are multiple reasons for this:

  1. Cost: There is a cost to renovate an existing telco site and ensure it meets requirements common for world-class data centres.
  2. Demand: Telcos are hesitant to take on the risk of building out the infrastructure until they are certain of the demand for these data centres.
  3. 5G roll-out: Mobile operators have been prioritising their 5G RAN roll-out in the last two years, over the investment in edge data centres.
  4. Partnership decisions: The discussion around who to partner with to build the edge data centres has become more complicated, because of the number of partners vying for the role and the entrance of new partners (e.g. hyperscalers) which has slowed down decision-making

Download the additional file to view the accompanying spreadsheet

Enter your details below to request an extract of the report

Early adopters have taken significant strides in their edge strategy in 2021

2020 and 2021 have been seen as inflection points as a number of leading telecoms operators have launched edge sites: e.g. AT&T, Verizon, Cox Communications, SK Telecom and Vodafone. Arguably, this was triggered by AWS announcing partnerships on AWS Wavelength with four telecoms operators in November 2019, with more recently announced (e.g. Telstra in 2021).

Going forward, key questions remain on the trajectory of telco edge build:

  • How many edge data centres will telcos build and make available for consumer/enterprise applications?
  • How much capacity of telco edge computing will there be globally?
  • How much of telco edge computing will be used for distributed core network functions vs. consumer/enterprise applications?
  • What proportion of telco edge data centre capacity will be taken up by hyperscalers’ platforms?

This report seeks to forecast the capacity at telecoms operators’ edge data centres until 2025 and provide clarity on the nature and location of these sites. In other words, how many sites and servers will be available for running applications and where will these sites be located, both physically and logically in the telecoms operators’ networks.

Before reading this report, we would recommend reading STL Partners’ previous publications on telco edge computing to provide context for some of the key themes addressed, for example:

The report focuses on network edge computing sites

Edge computing comprises of a spectrum of potential location and technologies designed to bring processing power closer to the end-device and source of data, outside of a central data centre or cloud. This report focuses on forecasting capacity at the network edge – i.e. edge computing at edge data centres owned (and usually operated) by telecoms operators.

The initial version of the forecast models capacity at these sites for non-RAN workloads. In other words, processing for enterprise or consumer applications and the distributed core network functions required to support them. Future versions of the forecast will expand to RAN.

Forecast scope in terms of edge locations and workload types

The report covers two out of three scenarios for building the network edge

Table of content

  • Executive summary
  • Introduction
  • There are 3 key factors determining telco edge data centre build out
  • Logically, most network edge will be in the transport aggregation layer
  • Geographically, we will see a shift in the concentration of network edge data centres
  • The limited capacity at network edge DCs will largely be used for edge applications
  • Most telecoms operators are taking a hybrid approach to building their edge
  • Conclusions and next steps
  • Appendix: Methodology

Enter your details below to request an extract of the report

Edge computing market sizing forecast

Introducing STL Partners’ edge computing market sizing forecast

This report presents the key findings of STL Partners’ new demand forecast model for edge computing services. Its purpose is to:

  • Assess the demand from 20 use cases which currently rely on edge or will require edge to fully develop;
  • Identify the total revenue across the value chain: hardware, connectivity, application, edge infrastructure (network and on-premise), and integration and support;
  • Output a full set of results for over 180 countries over the 2020–2030 period per use case and per vertical.

This report is accompanied by a dashboard which presents a summary of our model output and the associated graphics for the world’s regions and for 20 major markets. The dashboard also presents the full revenue output for the 180+ countries.

Download the accompanying spreadsheet (Edge Insights subscribers only)

Enter your details below to request an extract of the report

Edge computing addressable revenue will reach US$543 billion by 2030

High-level findings from the model indicate that:

  • The growth in the number of connected devices, as well as the need for higher levels of automation, operational efficiency and cost reduction, will drive the adoption of edge computing across many use cases and verticals over the next 10 years. This will result in increased spend across the value chain.
  • The total edge computing addressable market will grow from US$10 billion in 2020 to US$543 billion in 2030 at a CAGR of 49% over the 10-year period.
  • The total value chain breaks into five main components which are hardware, connectivity, application, integration & support, in addition to the edge infrastructure which includes both on-prem edge and network edge.

Total edge computing addressable revenue

Edge computing

Source: STL Partners

Table of contents

  • Executive Summary
  • Methodology
  • Revenue by value chain component
  • Revenue by use case
  • Revenue by vertical
  • Revenue by region
  • Appendix

For more information on STL Partners’ edge-related services, please go to our Edge Insights Service page.

The new forecast is intended to complement:

Enter your details below to request an extract of the report

The Coordination Age Companies: The First Release

This is the first report in a series outlining companies that we think are lighting the path on the journey to the Coordination Age. Its goal is to deepen understanding of the Coordination Age and to inspire innovation and engagement in this crucial transition.

What is the Coordination Age?

The Coordination Age is STL Partners’ term for the new economic and technological era that the world is transitioning to. In the Coordination Age, the over-arching need of governments, companies and individuals is to make better use of the available resources to “make the world run better”. This means managing those resources to deliver better outcomes, better experiences, and less waste.

Connected technologies, including 5G, IoT, Artificial Intelligence, automation, Cloud and Edge Computing, are key tools to the efficient use, management and distribution of those resources. Resources include time, money, carbon, goods, water, land, buildings, raw materials, energy, and so on.

Why Coordination?

Managing resources better requires multiple partners to coordinate their actions and processes to deliver outcomes for maximum efficiency and effect. There does not need to be an all powerful, central ‘coordinator’. That is often neither desirable nor possible. Instead, there will be a multitude of interconnected processes and players that achieve coordination on demand to deliver the outcomes needed within the ecosystem overall.

Coordination, transformation and technology

Much of the action of coordination will be automated – processes or parties communicating with another automatically for the sake of speed, cost and efficiency, but the whole system will be under the control of people and organisations as it is now.

The Coordination Age is the master key to the puzzle of digital transformation. While the technologies have implied what is possible, the Coordination Age shows what it is for and why transformation is necessary, and what it will take to make it work in practice in real world ecosystems – the how.

Role of this report

This is the first report in a series outlining companies that we think are lighting the path on the journey to the Coordination Age. Its goal is to deepen understanding of the Coordination Age and to inspire innovation and engagement in this crucial transition.

Enter your details below to request an extract of the report

 

The Coordination Age 100: Inspiration for change

We aim to profile 100 companies across a number of industries as inspiration for new business models, how to transform a business to succeed in the Coordination Age; and/or as potential partners for the telecom industry. The Coordination Age is well underway and many companies have been built around driving this step change in our economy, or are transforming themselves to adapt to it. Some telcos have already started on the Coordination Age path as we have looked at this in Are telcos smart enough to make money work?, The roles of 5G & private networks and Can telcos create a compelling smart home?. However, for companies not already on this path, it’s hard to know where to start and what emerging technologies, business models and ecosystems driving that are Coordination Age.

What is a Coordination Age company?

  • A Coordination Age company delivers better use of resources to their customers by combining different technology resources such as connectivity (IoT, 4G, 5G, Wi-Fi, etc.)​, cloud/edge computing, AI and machine learning, and automation
  • It operates in a B2B2X environment, bringing together previously siloed data, processes, companies, and customers
  • A Coordination Age company usually operates across physical and digital worlds, but in some cases the resources can be predominantly digital too (e.g. in financial services or entertainment)

Benefits: better use of  / returns on resources

coordination age benefits

Table of content

  • Executive summary
  • Introduction – the Coordination Age and this report
  • What is the “Coordination Age 100”?
    • The Coordination Age 100: Inspiration for change
    • What is a Coordination Age company?
    • Coordination Age natives vs transformers
  • Ten company profiles
  • Coordination Age natives vs transformers
    • Coordination Age natives
      • Octopus Energy
      • Ocado
      • Booking.com
      • Babylon Health
      • Starling Bank
      • Upstart
    • Coordination Age transformers
      • Hitachi Rail
      • Rolls Royce
      • Orange Money/Orange Bank
      • Signify

 

Enter your details below to request an extract of the report

 

Telco roadmap to net-zero carbon emissions: Why, when and how

Telcos’ role in reducing carbon emissions

There are over eighty telecoms operators globally that turn over $1 billion or more in revenues every year. As major companies, service providers (SPs) have a role to play in reducing global carbon emissions. So far, they have been behind the curve. In the Corporate Knights Global 100 of the world’s most sustainable corporations, only five of them are telcos (BT, KPN, Cogeco, Telus and StarHub) and none of them are in the top 30.

In this report, we explore the aims, visions and priorities of SPs in their journey to become more sustainable companies. More specifically, we have sought to understand the practical steps they are undertaking to reduce their carbon footprints. This includes discovering how they define, prioritise and drive initiatives as well as the governance and reporting used to determine their progress to ‘net-zero’.

Each SP’s journey is unique; we’ve explored how regional and market influences affect their journey and how different personas and influencers within the SP approach this topic. To do this, we have spoken to 40 individuals at SPs globally. Interviewees have varied, from corporate and social responsibility (CSR) representatives, to those responsible for the SP’s technology and enterprise strategies. This report reflects the strategies and ambitions we learnt about during these conversations.

Enter your details below to request an extract of the report


 

This report is informed by interviews from SPs globallytelcos carbon emissions

What do we mean by scope 1, 2 and 3?

Before diving in further, it’s important to align on the key terminology that all major SPs are drawing on to evaluate and report their sustainability efforts: in particular, how they disclose and commit to reducing their greenhouse gas emissions.

SPs divide their carbon emissions into scope 1, 2 and 3 – scope 3 is by far the most significant

For most SPs, scope 1 (e.g. emissions from the fleet of vehicles used to install equipment or perform maintenance tasks on base stations) and scope 2 (e.g. the electricity they purchase to run their networks) makes up less than 20% of their overall footprint. These emissions can be recorded and reported on accurately and there are established methodologies for doing so.

Scope 3, however, is where 80%+ of SP carbon emissions come from. This is because it captures the impact of the SP’s whole supply chain, e.g. the carbon emissions released from manufacturing the network equipment that they deploy. It also includes the carbon emissions arising from supplying customers with products and services that an SP sells, e.g. from shipping and de-commissioning consumer handsets or servers provided to enterprise customers.

Table of Contents

  • Executive Summary
  • Table of Figures
  • Introduction
    • What do we mean by scope 1, 2 and 3?
    • Where are SPs in their sustainability journey?
    • How does this differ by region?
    • What’s covered in the rest of the report?
  • Procurement and sustainable supply chain
    • Scope 1, 2 and 3: Where are procurement teams focused
    • Current priorities
    • Regional nuances
    • Best and next practices
  • Networking
  • IT and facilities
  • Enterprise products and services
  • Key recommendations and conclusion

Enter your details below to request an extract of the report


 

Private networks: Lessons so far and what next

The private networks market is rapidly developing

Businesses across a range of sectors are exploring the benefits of private networks in supporting their connected operations. However, there are considerable variations between national markets, reflecting spectrum and other regulatory actions, as well as industrial structure and other local factors. US, Germany, UK, Japan and the Nordics are among the leading markets.

Enterprises’ adoption of digitalisation and automation programmes is growing across various industries. The demand from enterprises stems from their need for customised networks to meet their vertical-specific connectivity requirements – as well as more basic considerations of coverage and cost of public networks, or alternative wireless technologies.

On the supply side, the development in cellular standards, including the virtualisation of the RAN and core elements, the availability of edge computing, and cloud management solutions, as well as the changing spectrum regulations are making private networks more accessible for enterprises. That said, many recently deployed private cellular networks still use “traditional” integrated small cells, or major vendors’ bundled solutions – especially in conservative sectors such as utilities and public safety.

Many new players are entering the market through different vertical and horizontal approaches and either competing or collaborating with traditional telcos. Traditional telcos, new telcos (mainly building private networks or offering network services), and other stakeholders are all exploring strategies to engage with the market and assessing the opportunities across the value chain as private network adoption increases.

Following up on our 2019 report Private and vertical cellular networks: Threats and opportunities, we explore the recent developments in the private network market, regulatory activities and policy around local and shared spectrum, and the different deployment approaches and business cases. In this report we address several interdependent elements of the private networks landscape

Enter your details below to request an extract of the report

What is a private network?

A private network leverages dedicated resources such as infrastructure and spectrum to provide precise coverage and capacity to specific devices and user groups. The network can be as small as a single radio cell covering a single campus or a location such as a manufacturing site (or even a single airplane), or it can span across a wider geographical area such as a nationwide railway network or regional utility grids.

Private networks is an umbrella term that can includes different LAN (or WAN) connectivity options such as Wi-Fi and LPWAN. However, more commonly, the term is being associated with private cellular networks based on 3GPP mobile technologies, i.e. LTE or 5G New Radio (NR).

Private networks are also different from in-building densification solutions like small cells and DAS which extend the coverage of public network or strengthen its capacity indoors or in highly dense locations. These solutions are still part of the public network and do not support customised control over the local network access or other characteristics. In future, some may support local private networks as well as public MNOs’ services.

Besides dedicated coverage and capacity, private networks can be customised in other aspects such as security, latency and integration with the enterprise internal systems to meet business specific requirements in ways that best effort public networks cannot.

Unlike public networks, private networks are not available to the public through commercially available devices and SIM cards. The network owner or operator controls the authorisation and the access to the network for permissioned devices and users. These definitions blur somewhat if the network is run by a “community” such as a municipality.

Typically, devices will not work outside the boundaries of their private network. That is a requirement in many use cases, such as manufacturing, where devices are not expected to continue functioning outside the premise. However, in a few areas, such as logistics, solutions can include the use of dual-SIM devices for both public and private networks or the use of other wide area technologies such as TETRA for voice. Moreover, agreements with public networks to enable roaming can be activated to support certain service continuity outside the private network boundaries.

While the technology and market are still developing, several terms are being used interchangeably to describe 3GPP private networks such dedicated networks, standalone networks, campus networks, local networks, vertical mobile network and non-public networks (NPN) as defined by the 3GPP.

The emergence of new telcos

Many telcos are not ready to support private networks demands from enterprises on large scale because they lack sufficient resources and expertise. Also, some enterprises might be reluctant to work with telcos for different reasons including their concerns over the traditional telcos’ abilities in vertical markets and a desire to control costs. This gap is already catalysing the emergence of new types of mobile network service providers, as opposed to traditional MNOs that operate national or regional public mobile networks.

These players essentially carry out the same roles as traditional MNOs in configuring the network, provisioning the service, and maintaining the private network infrastructure. Some of them may also have access to spectrum and buy network equipment and technologies directly from network equipment vendors. In addition to “new telcos” or “new operators”, other terms have been used to describe these players such as specialist operators and alternative operators. Throughout this report, we will use new telcos or specialist operators when describing these players collectively and traditional/public operators when referring to typical wide area national mobile network provider. New players can be divided into the following categories:

Possible private networks service providers

private networks ecosystem

Source: STL Partners

Table of content

  • Executive Summary
    • What next
    • Trends and recommendations for telcos, vendors, enterprises and policymakers
  • Introduction
  • Types of private network operators
    • What is a private network?
    • The emergence of new telcos
  • How various stakeholders are approaching the market
    • Technology development: Choosing between LTE and 5G
    • Private network technology vendors
    • Regional overview
    • Vertical overview
    • Mergers and acquisitions activities
  • The development of spectrum regulations
    • Unlicensed spectrum for LTE and 5G is an attractive option, but it remains limited
    • The rise of local spectrum licensing threatens some telcos
    • …but there is no one-size fits all in local spectrum licensing
    • How local spectrum licensing shapes the market and enterprise adoption
    • Recommendations for different stakeholders
  • Assessing the approaches to network implementation
    • Private network deployment models
    • Business models and roles for telcos
  • Conclusion and recommendations
  • Index
  • Appendix 1:  Examples of private networks deployments in 2020 – 2021

Enter your details below to request an extract of the report

2020 in review and focus on North America: How should telcos do cloud?

Tenth update of the Telco Cloud Tracker

This report accompanies the tenth release of STL Partners’ ‘Telco Cloud Tracker’ database. This contains data on deployments of NFV (Network Functions Virtualisation), SDN (Software Defined Networking) and cloud-native network functions (CNFs) in the networks of the leading telcos worldwide. This analytical report focuses on trends in North America, set in global context.

Download the report extract

Scope and content of the Tracker

The data in the tenth update covers the period up to the end of January 2021, although reference is made in the report to events and deployments after that date. The data is drawn predominantly from public-domain information contained in news releases from operators and vendors, along with reputable industry media. However, it also includes a smaller set of deployment data disclosed to us confidentially by operators and vendors. This information is added to the aggregate data sections of the ‘Tracker’ spreadsheet, which do not refer to the specific solutions supplied or the operators where they were deployed.

We apply the term ‘deployment’ to refer to the total set of virtual network functions (VNFs), CNFs or SDN technology, and their associated management software and infrastructure, deployed at an operator – or at one or more of an operator’s opcos or natcos – in order to achieve a defined objective or support particular services (in the spreadsheet, we designate these as the ‘primary purpose’ of the deployment). For example, this could be:

  • to implement a virtualised mobile core
  • to launch a software-defined WAN (SD-WAN) service
  • or to construct a ‘telco cloud’ or NFV infrastructure (NFVi): a cloud infrastructure platform on which virtualised network services can be introduced and operated.

Accordingly, some of the deployments contained in the database comprise multiple elements, which are listed separately, including details about the category of NFV / SDN / CNF, and vendor and product name where known.

In addition to these mainly public-domain deployments, there are many non-publicised deployments that are inevitably omitted from the ‘Tracker’. However, the ever-growing ‘Tracker’ database now constitutes a considerable body of research that in our view offers a reliable snapshot of the overall market and the main trends in the evolution of telco cloud. In addition, as the ‘Tracker’ contains details only of deployments in live, commercial telco networks (either completed or in progress), this provides a useful corrective to the hype of some vendors’ pronouncements about agreements with operators, which often relate only to collaboration arrangements and preliminary trials, rather than commercial roll-outs.

The one exception to this rule of including only deployments that are implemented to support commercial services is a limited set of data on some of the current live network trials of open and / or virtual RAN (vRAN). The reason for making this exception is the very high level of interest currently in open RAN.

In terms of the telcos included, we limit the database mainly to Tier-One international and national telecoms operators, along with national fixed and mobile operators in smaller markets. For subsequent updates, we may expand the range and types of service providers included, because telco cloud is opening up opportunities for new players to provide cloud- and CNF-based connectivity and related services that are competing strongly with classic telco services.

SD-WAN in focus

In this update of the Tracker we have included a deep dive on SD-WAN, which was one of the main early drivers of SDN/NFV deployments, particularly among North American operators. It is worth exploring in more detail because, as it evolves into an increasingly cloud-centric and cloud-native service, it is emerging as another battleground between operators, hyperscalers and vendors.

5G is driving deployments – but will it drive business model change?

This is the first update to the ‘Telco Cloud Tracker’ in 2021, which provides an opportunity to review 2020 and discuss the key trends in 2021.

Despite the global pandemic, the pace of virtualised network function (VNF) deployments has continued at a strong level.

Total deployments by region, 2016 to 2021

Our projection is that the final number of deployments in 2020 will be at around the same level as 2019 (182 in total). Many live deployments are confirmed some time after the event, swelling the totals for previous years. Accordingly, some of the deployments currently recorded as ‘in progress’ will be added to the tally for 2020.

5G core dominates the scene but is done largely via single-vendor, ‘vertical’ NFV

The main driver of deployments in 2020 was 5G network launches around the world, particularly in the second half of the year. This meant that many Non-standalone (NSA) 5G cores – the platform supporting almost all live 5G networks – also went live, as is illustrated below:

 Deployments by leading network function, 2016 to 2021

We recorded 76 completed deployments of NSA cores in 2020, up from 56 in 2019. A further ten deployments were either completed or pending in the first quarter of 2021.

Table of content

  • Executive Summary
    • 5G core drives deployments
    • SD-WAN: Telco value moves from the WAN to the edge
    • The industry is facing an existential question: How should telcos do cloud?
    • Conclusion from North America analysis: Can a brownfield MNO be more cloud-native than a greenfield one?
  • Introduction
    • Tenth update of the Telco Cloud Tracker
    • Scope and content of the Tracker
    • SD-WAN in focus
  • 5G is driving deployments – but will it drive business model change?
    • 5G core dominates the scene but is done largely via single-vendor, ‘vertical’ NFV
    • The industry faces an existential question: how should telcos do cloud?
    • Focus on North America: four divergent answers to the existential question
  • SD-WAN: While WAN moves to the cloud, new software-defined value migrates to the edge
    • SD-WAN was one of the success stories of the first phase of SDN / NFV
    • SD-WAN has been largely made in America
    • Changes accelerated by Covid favour SD-WAN vendors over telcos – but telcos retain strengths in key areas
    • Main opportunities currently for telcos in SD-WAN, and challenge from vendors
    • ‘SD’ moves towards the edge, while ‘WAN’ moves to the cloud
  • Conclusion: Can a brownfield MNO be more cloud-native than a greenfield one?

 

Download the report extract

Cloud native: Just another technology generation?

Cloud native networking: Telecoms’ latest adventure

As a term, cloud native has currency in telecoms networking. 5G has contributed to the recent industry-wide interest in adopting cloud native applications for networks. This is because the 5G standalone core networks (5G SA) that operators are now planning (and some have started deploying) are intended to run as software that is specified and architected following cloud native principles.

Within telecoms, thinking about cloud native tends to centre on the next phase of moving network functions into a software environment, building on lessons learned with NFV/SDN. Viewed from this perspective, cloud native is the next step in the telecoms industry technology evolution: from analogue to digital circuit-switched to digital IP to virtualised to cloud native.

Enter your details below to download the report extract

Telcos’ business model is reaching end-of-life

The rise of mobile telephony and fixed and mobile broadband means that telecoms operators have enjoyed 20 years of strong growth in all major markets. That growth has stalled. It happened in Japan and South Korea as early as 2005, in Europe from 2012 or so and, market by market, others have followed. STL Partners forecasts that, apart from Africa, all regions will see a compound annual growth rate (CAGR) below 3% for both fixed and mobile services for the next three years. Ignoring pandemic ‘blips’, we forecast a CAGR of less than 1% per annum globally. This amounts to a decline in real terms.

The telecoms industry is reaching the end of its last growth cycle

The telecoms industry’s response to this slowdown has been to continue to invest capital in better networks – fibre, 4G, 5G – to secure more customers by offering more for less. Unfortunately, as competitors also upgrade their networks, connectivity has become commoditised as value has shifted to the network-independent services that run over them.

In other words, the advantage that telcos had when only telecoms services could run on telecoms networks has gone: the defensive moat from owning fibre or spectrum has been breached. Future value comes from service innovation not from capital expenditure. The chart below sums the problem up: seven internet players generate around 65% of the revenue generated by 165 operators globally, but have a c. 50% bigger combined market capitalisation. This is because the capital markets believe that revenue and profit growth will accrue to these service innovators rather than telecoms operators.

Tech companies are more highly valued than telcos

Understand, then emulate the operating model

Operators have been aspiring to learn from technology firms so they can transform their operations and services. But changes have been slow, and it is difficult to point to many ‘poster child’ operators that successfully made a move beyond pure telecommunications. Partly this is due to a mismatch between corporate announcements and their investment policies. Too often we hear CEOs express a desire to change their organisations and that they intend to offer a host of exciting new services, only to see that aspiration not borne out when they allocate resources. Where other tech companies make substantial investments in R&D and product development, operators continue to invest miniscule amounts in service innovation (especially in comparison to what is poured into the network itself).

Telco vs tech-co investment models

STL Partners believes that many of the network-related activities that will enable operators to reduce capital expenditure, such as cloud-native networking, will also enable them to automate and integrate processes and systems so they are more flexible and agile at introducing new services. So, an agile software-oriented infrastructure will enable changes in business processes such as product development and product management, partnering, and customer care – if management prioritises investment and drives change in these areas. Cloud native business practices and software were developed by technology companies (and then widely adopted by enterprise IT functions) as a means to deliver greater innovation at scale whilst reducing the level of capital relative to revenue.

Our belief is that financial and operational developments need to happen in unison and operators need to move quickly and with urgency to a new operating model supported by cloud native practices and technology, or face sharp declines in ROI.

Table of Contents

  • Executive Summary
  • Table of Figures
  • Preface
  • Cloud native networking: Telecoms’ latest adventure
  • Telcos’ business model is reaching end-of-life
    • Understand, then emulate the operating model
    • The coordination age – a new role for telcos
    • 5G: Just another G?
    • Cloud native: Just another technology generation?
  • Different perspectives: Internal ability, timing …and what it means to be a network operator
    • Organisational readiness, skills and culture
    • Target operating model and ecosystem
    • Assembly versus Engineering
    • Wider perceptions across the business functions
    • Operator segment 1: Risk of complacency
    • Operator segment 2: Align for action
    • Operator segment 3: Urgent re-evaluation
    • Operator segment 4: Stay focused and on track
  • Appendix 1
    • Interviewee overview
  • Appendix 2
    • Defining Cloud Native
    • There is consensus on the meaning of cloud native software and applicability to networks
    • Agreement on the benefits: automation at scale for reliability and faster time to market
    • …and changing supplier relationships

Enter your details below to download the report extract

Microsoft, Affirmed and Metaswitch: What does it mean for telecoms?

What is Microsoft doing, and should telcos be worried?

Over the past two years, Microsoft and its cloud business unit Azure have intensified and deepened their involvement in the telecoms vertical. In 2020, this included the acquisition of two leading independent vendors of cloud-native network software, Affirmed Networks and Metaswitch. This move surprised many industry observers, as it represented an intensification of Microsoft’s involvement in telco networking.

In addition, in September 2020, Microsoft announced its ‘Azure for Operators’ strategy. This packages up all the elements of Microsoft’s and Azure’s infrastructure and service offerings for the telecoms industry – including those provided by Affirmed and Metaswitch – into a more comprehensive, end-to-end portfolio organised around Microsoft’s concept of a ‘carrier-grade cloud’: a cloud that is truly capable of supporting and delivering the distinct performance and reliability that telcos require from their network functions, as opposed to the mainstream cloud devoted to enterprise IT.

In this report, our discussion of Microsoft’s strategy and partnership offer to telcos is our own interpretation based on our research, including conversations with executives from Microsoft, Affirmed Networks and Metaswitch.

We examine Microsoft’s activities in the telecoms vertical in the light of three central questions:

  • What is Microsoft doing in telecoms, and what are its intentions?
  • How should telcos respond to Microsoft’s moves and those of comparable hyperscale cloud providers? Should they consume the hyperscalers’ telco cloud products, compete against the hyperscalers, or collaborate with them?
  • And what would count as success for telcos in relationship to Microsoft and the other hyperscalers? Are there any lessons to be learned from what is happening already?

Enter your details below to request an extract of the report

Microsoft’s telecom timeline

The last couple of years has seen Microsoft and Azure increasing their involvement in telecoms infrastructure and software while building partnerships with telcos around the world. This march into telecoms stepped up a level with Microsoft’s acquisition in 2020 of two independent virtual network function (VNF) vendors with a strong presence in the mobile core, among other things: Affirmed Networks and Metaswitch. Microsoft was not previously known for its strength in telco network software, and particularly the mobile domain – prompting the question: what exactly was it doing in telecoms?

The graphic below illustrates some of the key milestones in Microsoft’s steady march into telecoms.

Microsoft’s move on telecoms

Microsoft’s five partnership and service models

Microsoft Azure’s key initiatives over the past two years have been to expand its involvement in telecoms, culminating in Microsoft’s acquisition of Affirmed and Metaswitch, and the launch of the Azure for Operators portfolio.

As a result of these initiatives, we believe there are five models of partnership and service delivery that Microsoft is now proposing to operators, addressing the opportunities arising from a convergence of network, cloud and compute. Altogether, these five models are:

Five business models for partnerships

  • A classic telco-vendorrelationship (e.g. with Affirmed or Metaswitch) – helping telcos to evolve their own cloud-native network functions (CNFs), and cloud infrastructure and operations
  • The delivery and management of VNFs and CNFs as a cloud service, or ‘Network Functions-as-a-Service’ (NFaaS)
  • Enabling operators to pursue a hybrid-cloud operating model supporting the delivery of their own vertical-specific and enterprise applications and services, or Platform-as-a-Service (PaaS)
  • Rolling out Azure edge-cloud data centres into telco and enterprise edge locations to serve as a cloud delivery platform for third-party application developers providing low latency-dependent and high-bandwidth services, or ‘Network-as-a-Cloud Platform’ (NaaCP)
  • Using such Azure edge clouds – in enterprise and neutral facilities alongside telco edge locations – as the platform for full-fledged ‘net compute’ services, whether these are developed collaboratively with operators or not.

Table of Contents

  • Executive Summary
    • Microsoft wants to be a win-win partner
    • What should telcos and others do?
    • Next steps
  • Introduction
    • What is Microsoft doing, and should telcos be worried?
  • What has Microsoft done?
    • Microsoft’s telecom timeline
  • What is Microsoft’s strategy?
    • Microsoft’s five partnership and service models
    • The ‘Azure for Operators’ portfolio completes the set
    • 5G, cloud-native and net compute: Microsoft places itself at the heart of telco industry transformation
    • Cellular connectivity – particularly 5G – is pivotal
  • Telco-hyperscaler business models: What should telcos do?
    • Different hyperscalers have different telco strategies: comparison between Azure, AWS and Google Cloud
    • What should telcos do? Compete, consume or collaborate?
  • Microsoft’s ecosystem partnership model: What counts as success for telcos?
    • More important to grow the ecosystem than share of the value chain
    • Real-world examples: AT&T versus Verizon
  • Conclusion: Telcos should stay in the net compute game – and Microsoft wants be a partner
  • Appendix 1: Analysis of milestones of Microsoft’s journey into telecoms
  • Appendix 2: Opportunities and risks of different types of telco-hyperscaler partnership
  • Index

Enter your details below to request an extract of the report

Apple Glass: An iPhone moment for 5G?

Augmented reality supports many use cases across industries

Revisiting the themes explored in the AR/VR: Won’t move the 5G needle report STL Partners published in January 2018, this report explores whether augmented reality (AR) could become a catalyst for widespread adoption of 5G, as leading chip supplier Qualcomm and some telcos hope.

It considers how this technology is developing, its relationship with virtual reality (VR), and the implications for telcos trying to find compelling reasons for customers to use low latency 5G networks.

This report draws the following distinction between VR and AR

  • Virtual reality: use of an enclosed headset for total immersion in a digital3D
  • Augmented reality: superimposition of digital graphics onto images of the real world via a camera viewfinder, a pair of glasses or onto a screen fixed in real world.

In other words, AR is used both indoors and outdoors and on a variety of devices. Whereas Wi-Fi/fibre connectivity will be the preferred connectivity option in many scenarios, 5G will be required in locations lacking high-speed Wi-Fi coverage.  Many AR applications rely on responsive connectivity to enable them to interact with the real world. To be compelling, animated images superimposed on those of the real world need to change in a way that is consistent with changes in the real world and changes in the viewing angle.

AR can be used to create innovative games, such as the 2016 phenomena Pokemon Go, and educational and informational tools, such as travel guides that give you information about the monument you are looking at.  At live sports events, spectators could use AR software to identify players, see how fast they are running, check their heart rates and call up their career statistics.

Note, an advanced form of AR is sometimes referred to as mixed reality or extended reality (XR). In this case, fully interactive digital 3D objects are superimposed on the real world, effectively mixing virtual objects and people with physical objects and people into a seamless interactive scene. For example, an advanced telepresence service could project a live hologram of the person you are talking to into the same room as you. Note, this could be an avatar representing the person or, where the connectivity allows, an actual 3D video stream of the actual person.

Widespread usage of AR services will be a hallmark of the Coordination Age, in the sense that they will bring valuable information to people as and when they need it. First responders, for example, could use smart glasses to help work their way through smoke inside a building, while police officers could be immediately fed information about the owner of a car registration plate. Office workers may use smart glasses to live stream a hologram of a colleague from the other side of the world or a 3D model of a new product or building.

In the home, both AR and VR could be used to generate new entertainment experiences, ranging from highly immersive games to live holograms of sports events or music concerts. Some people may even use these services as a form of escapism, virtually inhabiting alternative realities for several hours a day.

Given sufficient time to develop, STL Partners believes mixed-reality services will ultimately become widely adopted in the developed world. They will become a valuable aid to everyday living, providing the user with information about whatever they are looking at, either on a transparent screen on a pair of glasses or through a wireless earpiece. If you had a device that could give you notifications, such as an alert about a fast approaching car or a delay to your train, in your ear or eyeline, why wouldn’t you want to use it?

How different AR applications affect mobile networks

One of the key questions for the telecoms industry is how many of these applications will require very low latency, high-speed connectivity. The transmission of high-definition holographic images from one place to another in real time could place enormous demands on telecoms networks, opening up opportunities for telcos to earn additional revenues by providing dedicated/managed connectivity at a premium price. But many AR applications, such as displaying reviews of the restaurant a consumer is looking at, are unlikely to generate much data traffic. the figure below lists some potential AR use cases and indicates how demanding they will be to support.

Examples of AR use cases and the demands they make on connectivity


Source: STL Partners

Although telcos have always struggled to convince people to pay a premium for premium connectivity, some of the most advanced AR applications may be sufficiently compelling to bring about this kind of behavioural shift, just as people are prepared to pay more for a better seat at the theatre or in a sports stadium. This could be on a pay-as-you-go or a subscription basis.

Enter your details below to request an extract of the report

The pioneers of augmented reality

Augmented reality (AR) is essentially a catch-all term for any application that seeks to overlay digital information and images on the real-world. Applications of AR can range from a simple digital label to a live 3D holographic projection of a person or event.

AR really rose to prominence at the start of the last decade with the launch of smartphone apps, such as Layar, Junaio, and Wikitude, which gave you information about what you were looking at through the smartphone viewfinder. These apps drew on data from the handset’s GPS chip, its compass and, in some cases, image recognition software to try and figure out what was being displayed in the viewfinder. Although they attracted a lot of media attention, these apps were too clunky to break through into the mass-market. However, the underlying concept persists – the reasonably popular Google Lens app enables people to identify a product, plant or animal they are looking at or translate a menu into their own language.

Perhaps the most high profile AR application to date is Niantic’s Pokemon Go, a smartphone game that superimposes cartoon monsters on images of the real world captured by the user’s smartphone camera. Pokemon Go generated $1 billion in revenue globally just seven months after its release in mid 2016, faster than any other mobile game, according to App Annie. It has also shown remarkable staying power. Four years later, in May 2020, Pokemon Go continued to be one of the top 10 grossing games worldwide, according to SensorTower.

In November 2017, Niantic, which has also had another major AR hit with sci-fi game Ingress, raised $200 million to boost its AR efforts. In 2019, it released another AR game based on the Harry Potter franchise.

Niantic is now looking to use its AR expertise to create a new kind of marketing platform. The idea is that brands will be able to post digital adverts and content in real-world locations, essentially creating digital billboards that are viewable to consumers using the Niantic platform. At the online AWE event in May 2020, Niantic executives claimed “AR gamification and location-based context” can help businesses increase their reach, boost user sentiment, and drive foot traffic to bricks-and-mortar stores. Niantic says it is working with major brands, such as AT&T, Simon Malls, Starbucks, Mcdonalds, and Samsung, to develop AR marketing that “is non-intrusive, organic, and engaging.”

The sustained success of Pokemon Go has made an impression on the major Internet platforms. By 2018, the immediate focus of both Apple and Google had clearly shifted from VR to AR. Apple CEO Tim Cook has been particularly vocal about the potential of AR. And he continues to sing the praises of the technology in public.

In January 2020, for example, during a visit to Ireland, Cook described augmented reality as the “next big thing.”  In an earnings call later that month, Cook added:When you look at AR today, you would see that there are consumer applications, there are enterprise applications. … it’s going to pervade your life…, because it’s going to go across both business and your whole life. And I think these things will happen in parallel.”

Both Apple and Google have released AR developer tools, helping AR apps to proliferate in both Apple’s App Store and on Google Play.  One of the most popular early use cases for AR is to check how potential new furniture would look inside a living room or a bedroom. Furniture stores and home design companies, such as Ikea, Wayfair and Houzz, have launched their own AR apps using Apple’s ARKit. Once the app is familiar with its surroundings, it allows the user to overlay digital models of furniture anywhere in a room to see how it will fit. The technology can work in outdoor spaces as well.

In a similar vein, there are various AR apps, such as MeasureKit, that allow you to measure any object of your choosing. After the user picks a starting point with a screen tap, a straight line will measure the length until a second tap marks the end. MeasureKit also claims to be able to calculate trajectory distances of moving objects, angle degrees, the square footage of a three-dimensional cube and a person’s height.

Table of contents

  • Executive Summary
    • More mainstream models from late 2022
    • Implications and opportunities for telcos
  • Introduction
  • Progress and Immediate Prospects
    • The pioneers of augmented reality
    • Impact of the pandemic
    • Snap – seeing the world differently
    • Facebook – the keeper of the VR flame
    • Google – the leader in image recognition
    • Apple – patiently playing the long game
    • Microsoft – expensive offerings for the enterprise
    • Amazon – teaming up with telcos to enable AR/VR
    • Market forecasts being revised down
  • Telcos Get Active in AR
    • South Korea’s telcos keep trying
    • The global picture
  • What comes next?
    • Live 3D holograms of events
    • Enhancing live venues with holograms
    • 4K HD – Simple, but effective
  • Technical requirements
    • Extreme image processing
    • An array of sensors and cameras
    • Artificial intelligence plays a role
    • Bandwidth and latency
    • Costs: energy, weight and financial
  • Timelines for Better VR and AR
    • When might mass-market models become available?
    • Implications for telcos
    • Opportunities for telcos
  • Appendix: Societal Challenges
    • AR: Is it acceptable in a public place?
    • VR: health issues
    • VR and AR: moral and ethical challenges
    • AR and VR: What do consumers really want?
  • Index

Enter your details below to request an extract of the report

Recovering from COVID: 5G to stimulate growth and drive productivity

For the accompanying PPT chart pack download the additional file on the left

————————————————————————————————————–

Related webinar: How will 5G transform transport and logistics?

In this webinar, we share learnings from 100+ interviews and surveys with industry professionals. During the presentation we will look to answer:

  • How will 5G accelerate digital transformation of the transport and logistics industry?
  • What are the key 5G-enabled use cases and what benefits could these deliver?
  • What must change within the industry to unlock this transformation?
  • What is the role for telcos – how can they work with industry leaders to increase adoption of 5G and build new revenues beyond core communication services?

Date: Thursday 10th September 2020
Time: 4pm BST

View the webinar recording

————————————————————————————————————–

The 5G opportunity and value to verticals

In October 2019, STL Partners published research highlighting the benefits 5G-enabled use cases could unlock for industries. Our forecast predicted a potential $1.4 trillion increase in global GDP by 2030 across eight key industries.

In this short paper we look to update these numbers and explore new insights and conclusions based on two key factors:

  1. STL Partners has produced new research on the impact of 5G on the transport and logistics industry. This has led to more granular insight on the unique benefits and use cases for this vertical.
  2. COVID has changed the global landscape. It has increased demand for some 5G use cases, such as remote patient monitoring or video analytics solutions that determine if the public are respecting social distancing, but has also brought about economic uncertainty. We reflect these nuances in our updated figures.

5G enabled use cases could increase GDP by $1.5 trillion by 2030 – an increase from our original forecast

Source: STL Partners

5G’s impact on transport and logistics: Fresh analysis and new use cases

In 2019, we deep-dived into the 5G opportunity within two key verticals: healthcare and manufacturing. We have since performed a similar deep-dive on the transport and logistics industry, consisting of primary research with experts in the industry. We interviewed 10 enterprises, solutions providers, and members of 5G testbeds who were focused on transport and logistics, as well as surveying 100+ individuals who work in the industry to test the impact they predicted for three key 5G use cases. We will shortly be publishing a full report on these findings in detail.

We have revised our estimation on the impact of 5G on the transport and logistics industry. In 2019, we predicted 5G enabled use cases could increase the GDP value of the transport and logistics industry by 3.5% in 2030. We now believe the impact could be as high as 6%, though importantly some of these benefits are indirect rather than direct.

New forecasts show a bigger impact to the transport and logistics industry

Source: STL Partners

The three 5G-enabled solutions newly explored in detail in our study were:

  • Real-time routing and optimisation: Sensors collect data throughout the supply chain to improve visibility and optimise processes through real-time dynamic routing and scheduling;
  • Automated last 100 metres delivery: Using drones or automated delivery vehicles for the last ‘hundred yards’ of delivery, where the delivery van acts as a mobile final distribution point;
  • Connected traffic infrastructure: Smart sensors or cameras are integrated into traffic infrastructure to collect data about oncoming traffic and trigger real-time actions such as rerouting vehicles or changing traffic lights.

Benefits from these use cases include fewer traffic jams, more efficient supply chains, less fuel required and fewer accidents on the roads.

COVID has changed the landscape and appetite for 5G services

COVID-19 has caused a global economic slowdown. There has been a widespread fall in output across services, production, and construction in all major economies. Social distancing and nationwide lockdowns have led to a significant fall in consumer demand, to business and factory closures, and to supply chain disruptions. The pandemic’s interruption to international trade has far exceeded the impact of the US-China trade war and had a major impact on national economies. Lower international trade, coupled with a precipitous fall in passenger air travel, has also caused the air industry to enter a tailspin.

Table of Contents

  • Preface
  • The 5G opportunity: Updated forecast on value to verticals
  • 5G’s impact on transport and logistics: Fresh analysis and new use cases
    • Increased productivity through more efficient roads: An impact beyond transport and logistics
  • COVID has changed the landscape and appetite for 5G services
    • COVID has impacted the GDP of every country – and outlook for recovery is still unclear
    • Operators’ 5G strategies and roll out have also been impacted
    • Appetite for 5G-enabled healthcare services has been accelerated
  • Conclusion: Where next for the industry?

Cloud gaming: What is the telco play?

To access the report chart pack in PPT download the additional file on the left

Drivers for cloud gaming services

Although many people still think of PlayStation and Xbox when they think about gaming, the console market represents only a third of the global games market. From its arcade and console-based beginnings, the gaming industry has come a long way. Over the past 20 years, one of the most significant market trends has been growth of casual gamers. Whereas hardcore gamers are passionate about frequent play and will pay more to play premium games, casual gamers play to pass the time. With the rapid adoption of smartphones capable of supporting gaming applications over the past decade, the population of casual/occasional gamers has risen dramatically.

This trend has seen the advent of free-to-play business models for games, further expanding the industry’s reach. In our earlier report, STL estimated that 45% of the population in the U.S. are either casual gamers (between 2 and 5 hours a week) or occasional gamers (up to 2 hours a week). By contrast, we estimated that hardcore gamers (more than 15 hours a week) make up 5% of the U.S. population, while regular players (5 to 15 hours a week) account for a further 15% of the population.

The expansion in the number of players is driving interest in ‘cloud gaming’. Instead of games running on a console or PC, cloud gaming involves streaming games onto a device from remote servers. The actual game is stored and run on a remote compute with the results being live streamed to the player’s device. This has the important advantage of eliminating the need for players to purchase dedicated gaming hardware. Now, the quality of the internet connection becomes the most important contributor to the gaming experience. While this type of gaming is still in its infancy, and faces a number of challenges, many companies are now entering the cloud gaming fold in an effort to capitalise on the new opportunity.

5G can support cloud gaming traffic growth

Cloud gaming requires not just high bandwidth and low latency, but also a stable connection and consistent low latency (jitter). In theory, 5G promises to deliver stable ultra-low latency. In practice, an enormous amount of infrastructure investment will be required in order to enable a fully loaded 5G network to perform as well as end-to-end fibre5G networks operating in the lower frequency bands would likely buckle under the load if lots of gamers in a cell needed a continuous 25Mbps stream. While 5G in millimetre-wave spectrum would have more capacity, it would require small cells and other mechanisms to ensure indoor penetration, given the spectrum is short range and could be blocked by obstacles such as walls.

Enter your details below to request an extract of the report

A complicated ecosystem

As explained in our earlier report, Cloud gaming: New opportunities for telcos?, the cloud gaming ecosystem is beginning to take shape. This is being accelerated by the growing availability of fibre and high-speed broadband, which is now being augmented by 5G and, in some cases, edge data centres. Early movers in cloud gaming are offering a range of services, from gaming rigs, to game development platforms, cloud computing infrastructure, or an amalgamation of these.

One of the main attractions of cloud gaming is the potential hardware savings for gamers. High-end PC gaming can be an extremely expensive hobby: gaming PCs range from £500 for the very cheapest to over £5,000 for the very top end. They also require frequent hardware upgrades in order to meet the increasing processing demands of new gaming titles. With cloud gaming, you can access the latest graphics processing unit at a much lower cost.

By some estimates, cloud gaming could deliver a high-end gaming environment at a quarter of the cost of a traditional console-based approach, as it would eliminate the need for retailing, packaging and delivering hardware and software to consumers, while also tapping the economies of scale inherent in the cloud. However, in STL Partners’ view that is a best-case scenario and a 50% reduction in costs is probably more realistic.

STL Partners believes adoption of cloud gaming will be gradual and piecemeal for the next few years, as console gamers work their way through another generation of consoles and casual gamers are reluctant to commit to a monthly subscription. However, from 2022, adoption is likely to grow rapidly as cloud gaming propositions improve.

At this stage, it is not yet clear who will dominate the value chain, if anyone. Will the “hyperscalers” be successful in creating a ‘Netflix’ for games? Google is certainly trying to do this with its Stadia platform, which has yet to gain any real traction, due to both its limited games library and its perceived technological immaturity. The established players in the games industry, such as EA, Microsoft (Xbox) and Sony (PlayStation), have launched cloud gaming offerings, or are, at least, in the process of doing so. Some telcos, such as Deutsche Telekom and Sunrise, are developing their own cloud gaming services, while SK Telecom is partnering with Microsoft.

What telcos can learn from Shadow’s cloud gaming proposition

The rest of this report explores the business models being pursued by cloud gaming providers. Specifically, it looks at cloud gaming company Shadow and how it fits into the wider ecosystem, before evaluating how its distinct approach compares with that of the major players in online entertainment, such as Sony and Google. The second half of the report considers the implications for telcos.

Table of Contents

  • Executive Summary
  • Introduction
  • Cloud gaming: a complicated ecosystem
    • The battle of the business models
    • The economics of cloud gaming and pricing models
    • Content offering will trump price
    • Cloud gaming is well positioned for casual gamers
    • The future cloud gaming landscape
  • 5G and fixed wireless
  • The role of edge computing
  • How and where can telcos add value?
  • Conclusions

Enter your details below to request an extract of the report

AI on the Smartphone: What telcos should do

Introduction

Following huge advances in machine learning and the falling cost of cloud storage over the last several years, artificial intelligence (AI) technologies are now affordable and accessible to almost any company. The next stage of the AI race is bringing neural networks to mobile devices. This will radically change the way people use smartphones, as voice assistants morph into proactive virtual assistants and augmented reality is integrated into everyday activities, in turn changing the way smartphones use telecoms networks.

Besides implications for data traffic, easy access to machine learning through APIs and software development kits gives telcos an opportunity to improve their smartphone apps, communications services, entertainment and financial services, by customising offers to individual customer preferences.

The leading consumer-facing AI developers – Google, Apple, Facebook and Amazon – are in an arms race to attract developers and partners to their platforms, in order to further refine their algorithms with more data on user behaviours. There may be opportunities for telcos to share their data with one of these players to develop better AI models, but any partnership must be carefully weighed, as all four AI players are eyeing up communications as a valuable addition to their arsenal.

In this report we explore how Google, Apple, Facebook and Amazon are adapting their AI models for smartphones, how this will change usage patterns and consumer expectations, and what this means for telcos. It is the first in a series of reports exploring what AI means for telcos and how they can leverage it to improve their services, network operations and customer experience.

Contents:

  • Executive Summary
  • Smartphones are the key to more personalised services
  • Implications for telcos
  • Introduction
  • Defining artificial intelligence
  • Moving AI from the cloud to smartphones
  • Why move AI to the smartphone?
  • How to move AI to the smartphone?
  • How much machine learning can smartphones really handle?
  • Our smartphones ‘know’ a lot about us
  • Smartphone sensors and the data they mine
  • What services will all this data power?
  • The privacy question – balancing on-device and the cloud
  • SWOT Analysis: Google, Apple, Facebook and Amazon
  • Implications for telcos

Figures:

  • Figure 1: How smartphones can use and improve AI models
  • Figure 2: Explaining artificial intelligence terminology
  • Figure 3: How machine learning algorithms see images
  • Figure 4: How smartphones can use and improve AI models
  • Figure 5: Google Translate works in real-time through smartphone cameras
  • Figure 6: Google Lens in action
  • Figure 7: AR applications of Facebook’s image segmentation technology
  • Figure 8: Comparison of the leading voice assistants
  • Figure 9: Explanation of Federated Learning

Vendors vs. telcos? New plays in enterprise managed services

Digital transformation is reshaping vendors’ and telcos’ offer to enterprises

What does ‘digital transformation’ mean?

The enterprise market for telecoms vendors and operators is being radically reshaped by digital transformation. This transformation is taking place across all industry verticals, not just the telecoms sector, whose digital transformation – desirable or actual – STL Partners has forensically mapped out for several years now.

The term ‘digital transformation’ is so familiar that it breeds contempt in some quarters. Consequently, it is worth taking a while to refresh our thinking on what ‘digital transformation’ actually means. This will in turn help explain how the digital needs and practices of enterprises are impacting on vendors and telcos alike.

The digitisation of enterprises across all sectors can be described as part of a more general social, economic and technological evolution toward ever more far-reaching use of software-, computing- and IP-based modes of: interacting with customers and suppliers; communicating; networking; collaborating; distributing and accessing media content; producing, marketing and selling goods and services; consuming and purchasing those goods and services; and managing money flows across the economy. Indeed, one definition of the term ‘digital’ in this more general sense could simply be ‘software-, computing- and IP-driven or -enabled’.

For the telecoms industry, the digitisation of society and technology in this sense has meant, among other things, the decline of voice (fixed and mobile) as the primary communications service, although it is still the single largest contributor to turnover for many telcos. Voice mediates an ‘analogue’ economy and way of working in the sense that the voice is a form of ‘physical’ communication between two or more persons. In addition, the activity and means of communication (i.e. the actual telephone conversation to discuss project issues) is a separate process and work task from other work tasks, in different physical locations, that it helps to co-ordinate. By contrast, in an online collaboration session, the communications activity and the work activity are combined in a shared virtual space: the digital service allows for greater integration and synchronisation of tasks previously carried out by physical means, in separate locations, and in a less inherently co-ordinated manner.

Similarly, data in the ATM and Frame Relay era was mainly a means to transport a certain volume of information or files from one work place to another, without joining those work places together as one: the work places remained separate, both physically and in terms of the processes and work activities associated with them. The traditional telecoms network itself reflected the physical economy and processes that it enabled: comprising massive hardware and equipment stacks responsible for shifting huge volumes of voice signals and data packets (so called on the analogy of postal packets) from one physical location to another.

By contrast, with the advent of the digital (software-, computing- and IP-enabled) society and economy, the value carried by communications infrastructure has increasingly shifted from voice and data (as ‘physical’ signals and packets) to that of new modes of always-on, virtual interconnectedness and interactivity that tend towards the goal of eliminating or transcending the physical separation and discontinuity of people, work processes and things.

Examples of this digital transformation of communications, and associated experiences of work and life, could include:

  • As stated above, simple voice communications, in both business and personal life, have been increasingly superseded by ‘real-time’ or near-real-time, one-to-one or one-to-many exchange and sharing of text and audio-visual content across modes of communication such as instant messaging, unified communications (UC), social media (including increasingly in the work place) or collaborative applications enabling simultaneous, multi-party reviewing and editing of documents and files
  • Similarly, location-to-location file transfers in support of discrete, geographically separated business processes are being replaced by centralised storage and processing of, and access to, enterprise data and applications in the cloud
  • These trends mean that, in theory, people can collaborate and ‘meet’ with each other from any location in the world, and the digital service constitutes the virtual activity and medium through which that collaboration takes place
  • Similarly, with the Internet of Things (IoT), physical objects, devices, processes and phenomena generate data that can be transmitted and analysed in ‘real time’, triggering rapid responses and actions directed towards those physical objects and processes based on application logic and machine learning – resulting in more efficient, integrated processes and physical events meeting the needs of businesses and people. In other words, the IoT effectively involves digitising the physical world: disparate physical processes, and the action of diverse physical things and devices, are brought together by software logic and computing around human goals and needs.

‘Virtualisation’ effectively means ‘digital optimisation’

In addition to the cloud and IoT, one of the main effects of enterprise digital transformation on the communications infrastructure has of course been Network Functions Virtualisation (NFV) and SoftwareDefined Networking (SDN). NFV – the replacement of network functionality previously associated with dedicated hardware appliances by software running on standard compute devices – could also simply be described as the digitisation of telecoms infrastructure: the transformation of networks into software-, computing- and IP-driven (digital) systems that are capable of supporting the functionality underpinning the virtual / digital economy.

This functionality includes things like ultrafast, reliable, scalable and secure routing, processing, analysis and storage of massive but also highly variable data flows across network domains and on a global scale – supporting business processes ranging from ‘mere’ communications and collaboration to co-ordination and management of large-scale critical services, multi-national enterprises, government functions, and complex industrial processes. And meanwhile, the physical, Layer-1 elements of the network have also to become lightning-fast to deliver the massive, ‘real-time’ data flows on which the digital systems and services depend.

Virtualisation creates opportunities for vendors to act like Internet players, OTT service providers and telcos

Virtualisation frees vendors from ‘operator lock-in’

Virtualisation has generally been touted as a necessary means for telcos to adapt their networks to support the digital service demands of their customers and, in the enterprise market, to support those customers’ own digital transformations. It has also been advocated as a means for telcos to free themselves from so-called ‘vendor lock-in’: dependency on their network hardware suppliers for maintenance and upgrades to equipment capacity or functionality to support service growth or new product development.

From the other side of the coin, virtualisation could also be seen as a means for vendors to free themselves from ‘operator lock-in’: a dependency on telcos as the primary market for their networking equipment and technology. That is to say, the same dynamic of social and enterprise digitisation, discussed above, has driven vendors to virtualise their own product and service offerings, and to move away from the old business model, which could be described as follows:

▪ telcos and their implementation partners purchase hardware from the vendor
▪ deploy it at the enterprise customer
▪ and then own the business relationship with the enterprise and hold the responsibility for managing the services

By contrast, once the service-enabling technology is based on software and standard compute hardware, this creates opportunities for vendors to market their technology direct to enterprise customers, with which they can in theory take over the supplier-customer relationship.

Of course, many enterprises have continued to own and operate their own private networks and networking equipment, generally supplied to them by vendors. Therefore, vendors marketing their products and services direct to enterprises is not a radical innovation in itself. However, the digitisation / virtualisation of networking technology and of enterprise networks is creating a new competitive dynamic placing vendors in a position to ‘win back’ direct relationships to enterprise customers that they have been serving through the mediation of telcos.

Virtualisation changes the competitive dynamic

Virtualisation changes the competitive dynamic

Contents:

  • Executive Summary: Digital transformation is changing the rules of the game
  • Digital transformation is reshaping vendors’ and telcos’ offer to enterprises
  • What does ‘digital transformation’ mean?
  • ‘Virtualisation’ effectively means ‘digital optimisation’
  • Virtualisation creates opportunities for vendors to act like Internet players, OTT service providers and telcos
  • Vendors and telcos: the business models are changing
  • New vendor plays in enterprise networking: four vendor business models
  • Vendor plays: Nokia, Ericsson, Cisco and IBM
  • Ericsson: changing the bet from telcos to enterprises – and back again?
  • Cisco: Betting on enterprises – while operators need to speed up
  • IBM: Transformation involves not just doing different things but doing things differently
  • Conclusion: Vendors as ‘co-Operators’, ‘co-opetors’ or ‘co-opters’ – but can telcos still set the agenda?
  • How should telcos play it? Four recommendations

Figures:

  • Figure 1: Virtualisation changes the competitive dynamic
  • Figure 2: The telco as primary channel for vendors
  • Figure 3: New direct-to-enterprise opportunities for vendors
  • Figure 4: Vendors as both technology supplier and OTT / operator-type managed services provider
  • Figure 5: Vendors as digital service creators, with telcos as connectivity providers and digital service enablers
  • Figure 6: Vendors as digital service enablers, with telcos as digital service creators / providers
  • Figure 7: Vendor manages communications / networking as part of overall digital transformation focus
  • Figure 8: Nokia as technology supplier and ‘operator-type’ managed services provider
  • Figure 9: Nokia’s cloud-native core network blueprint
  • Figure 10: Nokia WING value chain
  • Figure 11: Ericsson’s model for telcos’ roles in the IoT ecosystem
  • Figure 12: Ericsson generates the value whether operators provide connectivity only or also market the service
  • Figure 13: IBM’s model for telcos as digital service enablers or providers – or both

Repremiumization: The dangerous self-deception at work in European Telcos

What is ‘Repremiumization’?

Promoted as a viable strategy recently at STL Partners’ Senior Executive Strategy Seminar in London…

Last week STL Partners held an event for senior strategists, marketers, and digital unit leaders across Europe.  The event was attended by 24 executives from 13 operators and 5 executives from Cisco, Intel and CSG International.  All except a handful of people held senior positions within the European telecoms industry – they were not junior staff but instrumental in shaping the thinking at some of the leading European operators.

The event covered several strategic issues facing the European and, in many cases, wider global telecoms industry including:

  1. What will the structure of the European market look like in 2020?  STL Partners presented four scenarios and asked attendees to vote on the most likely scenario as well as facilitating discussions.  The scenarios will be presented in a report published this month (June 2015), Reading the Crystal Ball: The European Telecoms market in 2020.
  2. Where and how should operators build value in the digital ecosystem?  STL Partners presented the case for four strategic options for operators to compete (we will cover these in a forthcoming report in July 2015, Four strategic pathways to Telco 2.0:
    • Piper:  An infrastructure-led, network-oriented strategy focused on moving bits and bytes efficiently and effectively while leaving service development and delivery to other players.  Accept that Telco 2.0 equates to speedy and smart data pipes and focus on cost leadership now.
    • Content: Couple infrastructure capabilities with content distribution (especially video).  Explore options that range from sophisticated content delivery networks all the way to content creation either via commissioning (Netflix model) or exclusive rights.
    • Enterprise:  Accept that differentiation in the consumer segment is impossible but that operators have the skills and relationships to build an expanded role in the large and growing Enterprise ICT market.
    • Authentication: Building digital services has proved challenging for operators but authentication potentially presents a real opportunity to establish a new digital ‘control point’ for operators from which a viable services strategy –for B2B2C enablers and end-user services – can be established.
  3. Winning approaches to building scaled telecoms digital initiatives.  Operators from Europe and beyond presented case studies on their digital activities – focusing on what had worked well and what less well – and attendees discussed the merits and demerits of different approaches.

It was in the second session on how to build value in future that the notion of ‘repremiumization’ was articulated (although nobody used this term). In essence, participants from at least two Tier 1 telcos felt that STL Partners’ description of the Piper strategy as one of competing hard in a commodity market – a market characterised by lack of differentiation in services – was wrong and that in future they would be able to ‘reframe the value of the network in the minds of consumers’ by differentiating against other players based on network quality. This differentiation would enable them to attract premium prices and grow ARPUs. The well-trodden path of ‘network APIs’ were cited as a key way of driving additional volumes (and revenue) through a premium-quality network.

Indeed, attendees were so insistent that this ‘repremiumization’ strategy was viable that when STL Partners asked attendees to vote on the four strategic options (2.1-2.4 above), they asked for it to be added as a fifth option which we have termed ‘Premium Piper’ in Figure 1 below. The chart reflecting the votes of attendees, below, is interesting for a number of reasons:

  • Nearly two-thirds of attendees felt that a ‘Pipe’ strategy of some sort was the best for European operators.  In other words, competing in the services layer was regarded as extremely challenging by many.   This, one suspects, is due to the challenges European operators have had in launching digital services having pursued the strategy late (from 2009 onwards after the market for core voice, messaging and data services had already peaked) and, in most cases, in a half-hearted fashion.
  • Exactly half of those that selected a ‘Pipe’ strategy felt that STL Partners’ Piper was the better approach and the focus should be building great pipes while striving for cost leadership.  The other half felt that a ‘Premium Piper’ strategy was more attractive and that differentiation could be achieve on a sustainable basis through network quality.
  • Those that did support a Europe-wide digital services (non-Piper) strategy were quite evenly split between Content, Enterprise and Authentication (with one person selecting ‘Other’) suggesting that a single non-Piper strategy for the whole European telecoms market is not obvious. (NB We presented the Service Options as single choices rather than ‘do all’ in order to crystallise the debate at the event.)

Figure 1: Where should the European telecoms industry place its bets for future success?

Source: STL Partners Senior Executive Strategy Seminar, June 11th 2015, n=28

…and put forward by a leading strategy house

The notion of a superior network resulting in superior revenues and returns is one that has, for example, been put forward in a paper by Bain and Company’s European office – the argument is set out here and can be summarised thus:

  1. Operators have chosen to compete on price and have thus ‘trained’ consumers to make price the main criteria for choosing an operator.
  2. As prices have fallen, consumers have started to think of operators as mere providers of connectivity and networks as a commodity.
  3. The focus on price has led to lower returns on investment in Europe and, consequently, less network investment.
  4. Fortunately, there are markets (including the US) where customers pay a premium for great connectivity because they appreciate how important the network is to their digital lifestyle.
  5. Therefore, operators must educate customers about how important their networks are and invest in them to realise a price premium as illustrated by this chart:

Figure 2: ARPU levels of 7 customer segments with and without better network services and digital ‘life experience’ offers

Source: http://www.bain.com/publications/articles/repremiumization-the-way-up-for-europes-telcos.aspx

  1. NFV and SDN will be key drivers of premium networks by enabling operators to, for example, dynamically increase speed or bandwidth.
  2. Unlike the past when tier 2 competitors have easily been able to copy market leaders network improvements and so have commoditised the network, market leaders can now use their scale and marketing skills to establish a ‘perceptual shift’ in consumers.
  3. There must be cross-functional developments at operators to deliver on the new ‘premium product’ market promise.

Why is repremiumization 100% hogwash?

STL Partners is convinced that repremiumization is wrong.

Let’s explain why.

The repremiumization argument simply does not stand up to scrutiny

Here is our challenge to the 8 point argument outlined above for repremiumization.

  1. Operators have not chosen to compete on price.  In fact, they have spent significant efforts trying to build and market differentiated brands and services.  Going all the way back to 2002, mobile operators were building digital lifestyle offerings under brands such as Vizzavi, Vodafone Live!, Orange Dot, Genie, and so forth.  Attempts to build differentiated services and brands that would enable them to attract more customers and/or achieve premium prices has been the main focus of marketing departments at every operator in Europe since they started out.
  2. The attempts to differentiate have largely failed despite operators’ best efforts.  The fact that operators are seen as ‘merely providing connectivity’ is  illustrative of this failure and they have been forced, rather than chosen, to compete on price – falling prices are a product of a failed differentiation strategy that…
  3. …has indeed resulted in gradually lower returns on investment as ‘excess profits’ have been competed away – something that happens in most markets and particularly in ones where there is healthy competition and differentiation is difficult to achieve – think commodities, utilities…
  4. There are several reasons why customers pay premium for services in some markets.  These include:
    • Market structure: a consolidated market with a high Herfindahl Index (an economists’ measure of market competitiveness) will tend to have higher prices than fragmented markets with a low Herfindahl Index as one or two large operators are able to exert pricing power.
    • Higher growth markets tend to have higher prices because operators do not need to compete so hard to grow.  Winning customers is easier as new customers take the product for the first time.  Conversely, saturated markets tend to display greater price pressure as operators are forced to drop prices to retain or win customers.
    • Regulation.  In some markets the regulator creates a benign environment for operators by, for example, blocking VOIP which reduces the degree of substitution for traditional telephony.  Markets like this again tend to ‘enjoy’ premium pricing.The US market, cited by Bain, has enjoyed all three benefits compared with Europe. It has 4 mobile operators serving 300m subscribers (with two very large players in AT&T and Verizon and two much smaller ones in T-Mobile and Sprint) compared with 50+ in Europe serving a similar number of customers in total and with most individual European markets having more balanced and, therefore, competitive market shares. Mobile took off later in the US than Europe so the market has continued to grow over recent years while Europe has stalled. The FCC has, until recently, been relatively benign towards telcos despite the hoo-ha over the last 10 years’ around ‘network neutrality’. The European regulator has, by contrast, been pretty harsh on telecoms operators and, among several measures, mandated fixed and mobile price decreases and effectively abolished voice and data roaming charges.What is interesting now is that prices in the US are in freefall. The US price premium is rapidly on its way out. The reason for this is more aggressive behaviour from T-Mobile and Sprint combined with lack of underlying market growth (the market has peaked) and a less supportive regulator. Repremiumization has been tried by Verizon and by AT&T but it simply will not work if competitors charge significantly less for a satisfactory data service.
  5. The Bain chart does indeed suggest that price premium is possible in telecoms but this is for services not for bandwidth, prioritisation, and other network capabilities.  ‘Better network offers’ suggest a negligible ARPU uplift so it would be a much better in point 6 to argue that…
  6. …NFV and SDN will enable operators to cut operating expenses and capex and, potentially, speed up the delivery of new services.  Yes, dynamically adapting the network to support services may enable service differentiation for some segments but the value will be associated with the service itself not the network delivering it so the ability for operators to differentiate solely via the characteristics of the network will be minimal.
  7. Challengers cannot beat market leaders in terms of perceptions of quality? Huh?  Are you serious?  Why?  What is different now?  Tier 1 operators have always enjoyed scale and marketing spend advantages.  If they have failed to differentiate their networks and brands in the past, then a ‘repremiumization’ marketing message won’t make the slightest difference.
  8. We agree(!) that operators need cross-functional developments at operators to deliver new propositions and transform the core of their businesses.

Better networks are a source of advantage for operators by enabling cost leadership

3UK’s value-for-money strategy…

STL Partners does believe that operators with a network advantage do enjoy a competitive advantage.  3 in the UK illustrates this point nicely. It has gone from being a joke among consumers between 2003 and around 2010 owing to poor handsets and network quality, to being the network of choice for, as Bain’s survey puts it, the ‘Digitally Powered’. Indeed it heavily markets its network based on its quality:

‘Big-boned’ ‘Designed for the Internet’  ‘More capacity than any other’

 

The message is that the 3 network is bigger, faster and better than rivals.  So is this an example of differentiation and price premium based on network quality?

No.

3UK’s network, being younger than its peers, is more efficient – the company has a 3G and 4G network only and is not hamstrung by the expensive and complex patchwork of 2G networks that Vodafone, O2 and EE (T-Mobile and Orange) have to manage.  This cost advantage has been further increased by an outsourcing strategy that has been in force for at least a decade – 3 was the first UK operator to outsource its network as well as most product development and management functions.

An efficient network has enabled 3UK to focus on offering better value than its peers to consumers. Its strategy of connecting over 90% of its base stations with fibre backhaul rather than microwave and its dubious ‘advantage ‘of having lots of spectrum for each subscriber compared with other players (owing to its historical low market share) also means that it is not capacity-constrained. Because it is has a lower cost base and lots of excess capacity, it can offer more data and speed for the same price as peers and still make more money than them.

This is not differentiation based on network capabilities – APIs, dynamically delivered bandwidth, etc. but simply a cost advantage that means that 3UK can deliver data more efficiently than others enabling it to offer better value to consumers and so pull away from its peers in terms of volume and margin growth (see Figure 3). It is interesting to note that 3UK is, like the cost-leader Free in France and Play in Poland, a late entrant not a big Tier 1 incumbent at all – quite the reverse of the argument put forward in Bain’s paper.

Figure 3: 3UK winning market share and growing margins against the three bigger players

Source: Company accounts, STL Partners/Telco 2.0 analysis

..does not equate to repremiumization…

Readers may be thinking that if 3UK is able to offer a better data service, then surely it could, if it chose to, price this at a premium and so lift ARPU and margins that way – surely network-based differentiation is alive and kicking?

No, STL Partners thinks that higher access and data prices for 3UK would be highly unlikely on a sustainable basis for two reasons:

  1. Cost leadership does not equate to price leadership.  In a price sensitive (commoditised) market like telecoms, having a lower cost base may enable you provide a marginally better product or service than competitors but this does not necessarily enable you to price it higher (see Lessons from the steel industry: Network quality is unlikely to provide sustainable differentiation below).  3UK may be able to offer more data to a subscriber than competitors (and so achieve a higher ARPU) but it will struggle to convert, for example, lower latency into a higher price.
  2. Cost advantages are likely to be competed away.  The other operators in the UK will be competing hard to lower their cost base to ensure that 3UK does not continue to enjoy an advantage.  EE (itself a result of the need for lower costs by T-Mobile UK and Orange UK), for example, has agreed a deal to be acquired by BT (subject to regulatory approval) which will dramatically lower its backhaul costs. O2 looks likely to be snapped up by 3UK itself – the resulting entity is likely to have a cost base, at least for a few years, that is somewhere between the two companies’.  These two moves alone may wipe out 3UK’s cost advantage and so jeopardise the value-for-money strategy.  That is before we consider the financial impact on Vodafone UK’s recent £1billion investment in its network and potential partner/merger/acquisition of Liberty Global (owner of Virgin Media UK) or Sky.

…and will not yield ever-increasing ARPU

If 3UK is unlikely to achieve sustainably higher prices than competitors, surely rising demand from video and other consumer services and the Internet of Things will ensure that ARPU will continue rising at 3UK as it delivers higher tonnages to customers?

No, again, for two reasons:

  1. As mentioned above, other operators will both increase their network capacity and lower their cost bases so that they too can supply data at a lower price – in other words subscribers will continue to pay the same amount for more (as they have always tended to do).  More data supplied will not translate into more revenue.
  2. Data usage growth will slow.  Just as voice minutes across fixed and mobile peaked (and then declined owing to substitution of other services), so data growth will reduce.  Networks may be able to simultaneously supply the Smart Home with 7 different HD films, 8 different HD online games, 9 different news and information reports as well as carry the data from hundreds of home and personal sensors through virtualised network functions but humans only have one brain and can only cope with so much data.  Greater speeds and bigger tonnages will suffer from diminishing marginal returns because human evolution won’t keep up with technology.  And many of the machines that will be communicating with each other and carrying sensor information will not need huge quantities bandwidth and other network capabilities on a real-time basis – the demands on the network will stabilise compared with the massive growth we are currently experiencing just as the demand for steel girders, for example, has flattened.

Lessons from the steel industry: Network quality is unlikely to provide sustainable differentiation

High-cost US (and European) steel producers challenged by cheap foreign imports

The US (and European) steel industry suffered major disruption during the 1970s and 1980s as large quantities of steel started to be produced by economies with lower labour costs such as China, India and Korea.  The major US steel producers – US Steel, National Steel and Bethlehem Steel – were massive companies which, in their heyday had each employed 100,000 people or more.  They operated integrated steel mills.  That is they mined the raw iron ore from their quarries, smelted it in a blast furnace and then refined the pig iron to produce steel which was cast into different products.  The rationale for integration was that costs could be minimised by ensuring that low-value iron ore did not have to be transported long distances to the plant (which was built next to the quarry).  However, even though they introduced efficiencies, they still employed large quantities of expensive labour during the process which pushed up their production costs relative to that in the emerging economies.

A low-cost start-up with a new business model

In the mid-1960s, Nucor, a medium-sized company with an extremely chequered history up to that point, purchased a steel joist manufacturer called Vulcraft.  Unable to get favourable prices from American companies and concerned about the quality of imported steel, Nucor integrated backwards into steel production.  Iverson, the Nucor CEO, established a new form of steel production in smaller plants, mini-mills, which melted scrap metal down to produce steel.  These modern plants, which were located closer to destination markets to minimise shipping costs of the finished product were far more efficient than the old integrated mills.  They used a fraction of the labour, producing a tonne of steel in around 45 minutes of labour time versus 3 hours at the integrated mills.   This difference meant that by the mid-1980s Nucor could produce steel around 25% cheaper than the integrated mills.  This, in turn, meant that not only could it beat its domestic rivals, but that it could also compete with competitors based in the cheap labour markets.

Quality (Repremiumization) does not result in higher prices

The companies with integrated steel mills were slow to react to the foreign threat and that of Nucor.  Why?  Because they believed in a form of ‘Repremiumization’ – that the quality of their steel was higher than Nucor’s and foreign competitors.  Your author was an equity analyst in the 1990s for JP Morgan covering steel stocks and consistently heard the message from senior managers at US (and European steel operators such as British Steel, Usinor Sacilor and others) that their steel had higher tensile strength and was much higher quality than the cheap imports and steel produced by mini-mills.  So, although they chipped away at costs they did not fundamentally re-engineer their businesses to match the cost base of the overseas players.  The problem, of course, was that the steel provided by the foreign companies (and Nucor) was ‘good enough’ – it met the specifications required for the vast majority of applications.  One customer put it like this when talking about the higher cost players, “They go on about the quality of their steel but it’s still carbon steel, it still rusts, so why should I pay so much more for so-called quality I don’t need?”

Low-cost wins

Today Bethlehem Steel and National Steel have gone (bankrupted in both cases) and US Steel, the biggest of the three, is grimly hanging on but producing less steel now than it did in 1900.  Nucor, meanwhile, has grown to become a Fortune 300 company (see below).  And as for the cheap foreign players?   They have also thrived and Tata Steel and Mittal Steel together now own most of the European steel giants.  The lesson here is clear: telcos cannot rely network quality alone as a means of differentiation, premium pricing and growth.

Figure 4: The importance of cost reduction in disrupted industries – The US Steel Industry

Source: Strategic Management: Competitiveness and Globalization, 4th edition, Hitt, M.A., Ireland, R.D., & Hoskisson, R.E; STL Partners/Telco 2.0 analysis

Conclusions

At best ‘repremiumization’ is misguided; at worst it is pandering to the hopes of some operators that they can somehow return to the ‘good old days’ of high margins and high market shares. Even the name suggests a return to nirvana. But the only time when European operators enjoyed premium pricing was before the market was liberalised – when the incumbents were state monopolies or duopolies. The moment that markets were opened up and competition ensued, so costs and prices were driven down. Higher ARPUs stemmed from higher volumes and premium services.

If operators want to differentiate and achieve higher ARPUs, revenues and margins in the increasingly tough saturated telecoms market of 2015 then service innovation – content services, enterprise services, enabling services – is the only solution. Otherwise the focus should be on cost reduction – building efficient and effective pipes.

If operators want to try to raise prices on the back of a repremiumization marketing message, that’s fine but they will enjoy as much success as King Canute had in ordering the tide back. One thing though, please don’t dress a misguided marketing pitch up as strategy – you’re fooling nobody but yourself.

So that’s our view, but what’s yours? There’s a snap poll below – we’ll share the results on 16th July.

 

As at 15th July 2015, 79% of Respondents Agreed that Repremiumization is not a viable strategy for European Telcos

Source: STL Partners, n = 52

 

 

  • What is ‘Repremiumization’?
  • Promoted as a viable strategy recently at STL Partners’ Senior Executive Strategy Seminar in London…
  • …and put forward by a leading strategy house
  • Why is repremiumization 100% hogwash?
  • The argument simply does not stand up to scrutiny
  • Better networks are a source of advantage for operators by enabling cost leadership
  • Lessons from the steel industry: Network quality is unlikely to provide sustainable differentiation
  • Conclusions

 

  • Figure 1: Where should the European telecoms industry place its bets for future success?
  • Figure 2: ARPU levels of 7 customer segments with and without better network services and digital ‘life experience’ offers
  • Figure 3: Sky UK winning market share and growing margins against the three bigger players
  • Figure 4: The importance of cost reduction in disrupted industries – The US Steel Industry

Telecoms and the Eurozone Economic Crisis: a perfect storm?

What are the possible impacts on telecoms of further economic troubles in the Eurozone? Will it be recessionary business as usual or something much nastier? And how will it impact ‘Telco 2.0’ Strategies? (December 2011, Executive Briefing Service)

EMEA Messaging Decline reasons Nov 2011

Read in Full (Members only)   To Subscribe click here

Below is an extract from the 17 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can subscribe here or for other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

To share this article easily, please click:



Introduction

In October 2008 we started a series of eight articles on the Credit Crunch, starting with Credit crunch – silver lining for telcos? and progressing to Credit Crunch 8: Show us your Labs in March 2009. Sadly, we’re now back looking into the cloudy economic crystal ball. What lies ahead?

A gathering storm?

Recent weeks and months have witnessed near-panic in financial markets, with the woes of the Eurozone top of the list of pain points. Escalating fears about defaults on sovereign debt in Greece, Portugal and Ireland has been followed by “contagion” elsewhere – Italy, Spain, Belgium and even France are in the frame as well.

This in turn is driving knock-on effects in the wider economy, with recession looming once more for much of Europe. Germany is seen as being in the driving seat, but has taken a hard stance on the role of the European Central Bank, and Angela Merkel is wary of overburdening her hardworking, tax-paying electorate.

Elsewhere, the US is still suffering under a huge debt burden but seems to be slowly struggling back to its economic feet. The global macro-economy, however, still looks fragile, with even China showing a couple of signs of shakiness in recent weeks. This is without the de-stabilising effects of the situations with Syria or Iran.

Given the depths of the world’s economic worries, it almost seems churlish and selfish to start thinking about the effect on a specific industrial sector like telecoms. But assuming that “the worst” doesn’t happen, and that the pain is manageable but severe, and the economic and legislative remedies are robust, what might happen? What are the most likely outcomes, and what else might be lurking hidden on the sidelines?

Normal “telcos in a recession” trends?

One possible scenario is that we’ll once more see a ‘traditional’ cyclical economic downturn response, where the telecoms industry hunkers down, goes into “recession mode”, and waits for everything to blow over. The sector has proven pretty resilient in the past – consumers won’t give up their phones and Internet access, although they might shop around a bit more, and hang onto older devices a while more before upgrading.

In that situation we’ll see some sluggishness in revenue growth, some reduced profit forecasts, and maybe some consolidation. To take the most recent example, the telecoms industry we see in 2011 doesn’t look much different to that before the 2008-10 recession. If anything, with the engines of smartphone adoption and mobile broadband growth, it’s powered through the economic gloom almost (but not quite) without flinching.

The sum of all fears

But maybe this time is different. Not only is the current crisis being precipitated by the debt situation rather than a normal “cycle”, but some of the other factors are different too. There are major government austerity projects, potential changes in the structure of the European Union, uncertainty about currencies, write-downs of assets and an inability for even governments to raise finance.

The spectre of financial “contagion” is looming worryingly again, and there’s a real possibility that private individuals might be pressured to breaking point and beyond, where telecom services once again become luxuries compared to the basic necessities of existence. Rather than a “normal” recession, where GDP slips perhaps 1-5% and economies can build/borrow their way out, if GDP slips 5-10% or even more, assorted negative-feedback loops can occur, as highlighted by the current debt problems and harsh Brussels-imposed austerity measures. Growth would seem very hard to come by, even in those countries currently perceived as “safer” such as the UK.

The Irish economic crash has been ongoing for a while during 2011, and signs from operators like Eircom have not been encouraging . Performance of Greek operators like OTE is also sharply down, and this is not encouraging either.

It’s not just the economy

And then add to that some other worries. Even without the current economic situation, telcos are increasingly on shaky ground. Our recent surveys at events have shown an expectation that normal “bread and butter” revenue streams like telephony and messaging are under huge threat from so-called OTT providers. For example, a survey conducted at our EMEA Brainstorm in November 2011 showed an expectation of 30-40% revenue falls in messaging over the next three years, for example, without any explicit reference to the economy, just ongoing market developments. These findings are summarised in the Briefing ‘Your Text is on Fire: OTT’s to burn 40% SMS revenue by 2015’.

Figure 1 – The predicted impact of ‘OTT’ players on messaging revenues

EMEA 2011 Messaging Decline Chart 40% Telco 2.0

These findings are also consistent with views expressed in an online survey of over 300 executives in October 2011, as part of our research for the strategy report ‘Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon’.

Figure 2 – The impact of ‘OTT’ players on the telco business model

Impact of Google, Apple, Facebook, Microsoft/Skype, Amaxon on telco services

The juxtaposition of lower consumer spending-power, plus improving capabilities of various competing services, together with smartphones as almost universal enablers, is not a happy one. The current downturn might hit operators harder than we might hope – people are going to be more incentivised to seek out cheaper options, and may also be more prepared to make price/quality trade-offs that seem unthinkable to telco traditionalists designing networks for 5-9’s reliability.

Impact of debt market chaos / credit crunch 2.0

Many telcos have significant amounts of debt, often used to finance spectrum purchases, network deployments and acquisitions. With 4G and fibre rollouts expected, any dry-up in funding has significant ramifications. Historically underwritten by high and dependable cashflow levels, the same potential risks exist for telcos that are being observed in other parts of the economy (and at national level) – over-leverage, and difficulty in “rolling over” maturing debt.

Greek operator OTE and Irish telco Eircom are thought by Moody’s to be worst exposed, especially given the state of their domestic economies. The “big 5” of Telefonica, Vodafone, Deutsche Telekom, Telecom Italia and France Telecom are thought to be less at risk, as they have cashflow, cash reserves, and available credit lines .

Indeed, many telcos are at the top of the stock yield ratings (see Figure 3 – Telco stock yields are high in European markets), showing that investors want to see a return on their money, or want telcos to ‘give it back before they blow it on something stupid’ to paraphrase Richard Kramer, of Telco 2.0 partners Arete Financial research. In addition, many telco shares yield more that the interest paid on their debt bonds which implies that buying telcos’ shares is riskier than buying their debt, and can mean that investors expect either the dividend or the share price to drop in the short term.

Figure 3 – Telco stock yields are high in European markets

Telco stock yields are high (chart)

Debt exposures and restructuring

Problems are highlighted by some major groups’ expansion into regions now worst-affected by the crisis. For example, T-Mobile has sizeable exposure to the Greek market through its 40% stake in OTE – previously the group’s largest business outside the US and Germany. (OTE has a wider footprint in SE Europe than just Greece – it also operates in Bulgaria, Romania and Albania). Its Greek revenue and customer base has dropped precipitously over the last year. Worse, OTE will need to refinance a large slab of debt over the coming couple of years, which will likely mean it will have to divest assets, probably at prices lower than it would ideally want. Deutsche Telekom AG has already said it will act as a lender of last resort if OTE can’t raise finance on constrained capital markets.

In November 2011, UK joint-venture EverythingEverywhere raised £875m in financing, primarily to pay off other debts it owes to its shareholder parents, France Telecom and Deutsche Telekom.

We see this as a special case, and don’t expect to see much further restructuring of this type, since most telco debt is structured to be tax-efficient and the benefits of any debt restructuring are unlikely to outweigh the tax-efficiency benefits.

However, it is also worth noting that EE will probably have to raise quite a lot more capital if it is to participate fully in 2012’s 800/2600MHz UK spectrum auctions and 4G buildout. This will be the case for the majority of companies wishing to build out LTE in the short term.

Currency exposure

One of the major unknowns at the moment is the fate of the Euro. There is a possibility that there will be some form of restructuring – maybe some countries leaving the Eurozone, or perhaps a two-tier Euro1 and Euro2 system. The Bank of England has undertaken scenario-planning for potential “disorderly” events in the Eurozone. The opinions here are both shrill and conflicting – there are numerous believers in “the project” who feel that the currency should be saved at all costs, and many others who believe equally vehemently that it was a bad idea all along and now needs to be radically altered. Some suggest Greece may be forced out while others think that Germany is too powerful and is itself the cause of the problem.

The net result is that the Euro is looking weaker, and certainly at the time of writing (late November 2011) is falling against currencies like the dollar. Bond markets have shown a flight from Eurozone government paper to perceived “safer havens” like the UK, Switzerland, Sweden and beyond.

How does the currency risk impact telcos?

Most obviously, any major changes will be reflected in their results when reported in local currencies and consolidated. The exact structures (and any hedging) will be highly company-specific. On the vendor side, there are also going to be inevitable fluctuations in import/export attractiveness that are hard to predict or analyse across-the-board, as supply chains are heavily globalised. International services like roaming are also going to be exposed.

Dangerous inflationary pressures

What is more certain is that historically, declining currencies have been a large contributing factor to rising inflation.

In a scenario where revenues are under threat both from general economic conditions and competitive pressures, it is unlikely that telcos would be able to raise their prices to fully cover inflation. The outcome is shrinking margins which ultimately lead to lower telco valuations.

For instance, Orange in the UK have just announced a 4.3% price rise for contract (postpay) customers within their current plans, prompting negative customer reaction. This is despite current UK Retail Price Index (RPI) inflation of greater than 5%. None of the other UK operators have so far followed.

Impact of austerity measures

Perhaps the biggest difference between this economic downturn and the last is the widespread arrival of the “austerity programme” in most countries across Europe. Typically, this is rooted in a desire by governments to cut spending, in order to reduce deficits and convince bond-holders that they might, one day, get their money back. In some cases (e.g. Greece and Italy) the austerity measures are being imposed and monitored by Brussels as a condition of a bail-out, together with the appointment of new governments and prime ministers. Further “political convergence” is expected.

In reality, austerity tends to mean:

  • Lower public-sector spending, typically involving firing government workers, reducing pay or pensions, cancelling projects and reducing departmental operating costs.
  • Higher taxes for individuals and businesses

There are a few big risks here:

  • Lower direct spending on telecoms services by central and local government, and other state-influenced areas such as healthcare and education
  • Slow-down of government-sponsored broadband rollouts or state-paid broadband subsidies for less well-off citizens
  • Possible knock-on impact of lower consumer spending on telecoms, as taxes are increased, and public-sector workers lose jobs or face salary cuts
  • Risks of delays or cutbacks to big telecom-centric projects such as e-government
  • Changes in taxation or accounting regimes impacting operators

Early signs are not promising. Greek, Irish, Romanian and Hungarian telecoms markets have suffered already. Plus Telefonica has suffered from the Spanish government’s changed tax policy on “goodwill deductions” for previous foreign acquisitions.

One slightly perverse outcome is that some large incumbent operators are now seen as less-risky investments than their countries’ own sovereign bonds. Portugal Telecom, for example, is thought to be well-financed for the next 2-3 years, even if it suffers from pressure from its weak domestic economy .

Possible technocratic regulatory changes

One interesting area is the potential for telecoms regulatory changes that might be put in place by the new breed of “technocrats” running some of Europe’s governments. This is only likely to emerge over the next 6-12 months, but some possibilities include:

  • Less concern about competition (at least in the short term). After consolidation, many European markets may be left with three or even two mobile operators, and newcomers in areas like MVNOs may disappear. Regulators may take the view that cash-strapped consumers will put pricing pressure on telcos, even if normal competition relaxes somewhat.
  • More willing consideration of concepts such as structural separation or wholesale models for telecoms, especially if the government can attract private investment without needing to spend its own money.
  • Outsourced / off-shored functions may be “repatriated” as governments look to stimulate employment
  • More negatively, some administrations may look enviously at telcos’ cash flows and attempt to impose new taxes or charges.
  • Potentially accelerated sales of spectrum or government holdings in the telecoms industry – although this will be offset by concerns about lower attainable valuations. Deutsche Telekom has the first right of refusal to buy the remaining 10% state share in Greek operator OTE. It might make offer in exchange for regulatory concessions on fiscal guarantees and freedom to reduce headcount, for example.

Impact on Vendors

There is in any event an ongoing trend for telcos to aim to significantly reduce costs, and operators will continue to look for even better deals. However, cash and debt pressures may both slow refresh time tables and further increase cost pressure on vendors.

Possible upsides of the economic troubles

Possible upsides we can imagine include:

  • Some direct or indirect stimulus funding for major projects which are beneficial for telecoms if their benefits are perceived to outweigh governments’ needs to make cost savings. “Smart cities”, fibre rollouts, major new regeneration projects, airport expansions, train lines and other such infrastructure initiatives tend to have communications pull-through.
  • Less pleasantly, new governments may make changes to labour laws, which enable some European operators to align costs and revenues more easily.
  • Some extra R&D investment by those that have cash and long-term visions. Whether this comes from the telcos or adjacent players such as Apple and Google is yet to be seen.
  • The current crisis may be the catalyst for some much-anticipated (and, arguably much-needed) consolidation in a number of telecoms markets. Vodafone and Wind are looking to combine their Greek businesses. Hutchison’s 3 Group has launched a bid for Orange’s Austrian business unit.
  • Under utilised capacity in the labour market could ultimately be a trigger for digital entrepreneurialism, pushing innovation in areas like apps and gaming and driving medium-term growth.

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

  • Impact on Telco 2.0 Strategies
  • Conclusions and recommendations

…and the following charts…

  • Figure 1 – The predicted impact of ‘OTT’ players on messaging revenues
  • Figure 2 – The impact of ‘OTT’ players on the telco business model
  • Figure 3 – Telco stock yields are high in European markets
  • Figure 4 – Telco 2.0 Strategies demand different operational and financial models
  • Figure 5 – Vodafone’s current view of growth opportunity value

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 17 page report in PDF format here. Non-Members, please subscribe here or please email contact@telco2.net / call +44 (0) 207 247 5003.