New network technologies will not help telcos to reinvent themselves.

Iain Morris, International Editor

March 7, 2016

5 Min Read
Technology Won't Save the Telcos

Every time a new network technology looms into view on the horizon, the crew of the good ship telecom breaks out into a rousing shanty, imagining it will be the answer to all the industry's problems. But despite these successive waves of technology transformation, the undercurrents and eddies seem to grow a little more treacherous with each passing year. (See 5G: Hurdles on the Track.)

Take 3G, for instance. The arrival of true mobile data was supposed to lead to a doubling in average customer spending, according to some analyst projections, and create opportunities for telcos in everything from ecommerce to mobile videoconferencing. Yet by and large, revenues from data services have merely replaced those from voice. Far from reinventing themselves as content and applications specialists, telcos look far more like utility companies than they ever did in the 2G days.

While boosting connection speeds considerably, 4G and fiber-based technologies have done nothing to reverse this trend. If anything, the focus on launching higher-speed networks has seen operators effectively embrace the role of the bit-pipe provider. In the meantime, web-scale companies have marched further into traditional telco territory: For example, in the enterprise sector of the market, telcos now face the real threat of being sidelined by Microsoft Corp. (Nasdaq: MSFT), with its Skype for Business unified communications offering. (See Microsoft Comms Threat to Carriers Is Growing.)

All of a sudden, telcos are having an identity crisis. A number of leading service provider executives claim they have given up trying to fight the over-the-top (OTT) players, and say partnerships are now the way forward. That sounds like bit-pipe thinking, however one dresses it up. Yet the same operators are still talking about business-model transformation. For many of these players, technologies like 5G, SDN and NFV hold the key. (See TeliaSonera's Svardh Plots 5G, NFV Future, MTS's Latsanych Heralds End to OTT Cold War and Telenor's Sandberg Faces 5G, NFV Dilemma.)

No doubt, those technologies promise to be more transformational (in a network sense) than anything that has gone before. Unfortunately, they will not save the telcos from a bit-pipe fate, if that is their aim.

The two big promises of SDN and NFV (typically lumped together) are cost savings and service agility, or the ability to launch and decommission services more rapidly and efficiently than is currently possible. While cost savings are always welcome, greater profitability does not equate to business-model transformation. That is perhaps one reason why some telcos are now choosing to play down cost savings when highlighting the benefits of SDN and NFV technologies. (See Orange Sours on Cost Benefits of NFV and Stop "Overselling" SDN, Orange Tells Vendors.)

That leaves service agility -- something that will be notoriously hard to assess until there are more examples of SDN and NFV deployments. In any case, service agility seems more likely to help operators stand up to other operators than cope with the challenge from OTT players. It will give them some OTT characteristics, such as fleet-footedness and an ability to "fail fast," but it won't change what they are.

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Telcos banking on 5G will be similarly disappointed. As a new air interface, 5G will support even higher-speed and lower-latency connections than 3G and 4G standards, allowing operators to cater to a variety of new bit-pipe needs. While this could certainly bolster revenues, operators will not be able to charge consumers a separate hefty fee for each connected device in the home. Takings from "machine-to-machine" connectivity services are also likely to be relatively meager, given the low "average revenue per user" that industrial devices will generate.

To really thrive in this Internet of Things arena, operators will have to become systems integrators and consultants, according to Bengt Nordström, the CEO of consulting and market research company Northstream . But they have made a poor stab of this so far. The rollout of 5G technology is not going to address this particular shortcoming.

Some operators hope that using 5G, SDN and NFV in combination will open up new service opportunities. Through a technique called "network slicing," a telco might carve out a number of services from the same physical infrastructure -- a high-speed offering for connected cars, for instance, and a low-latency but super-reliable one for industrial equipment. Availability could be turned on and off as needed. (See NFV Key to 5G Business Case, Says TeliaSonera.)

But executives have acknowledged that regulation on net neutrality could pose an obstacle to such plans. Even if it does not, this vision of a multitude of connectivity offerings -- each differentiated from the others on the basis of pricing and service level agreements -- is surely one of the ultimate bit-pipe provider. (See Telecom Needs New Net Neutrality Story, Net Neutrality Rules Threaten 5G, NFV – Telenor and NFV Key to 5G Business Case, Says TeliaSonera.)

Operators could prosper as utility-like players, and network technologies will certainly help them to become more efficient in that role. But they are clearly uncomfortable playing this part, with all of its negative connotations and commoditization risks, even as they continue to explore partnership opportunities with OTT companies.

If they want to be more than just connectivity providers, they will have to look beyond 5G, SDN and NFV to cultural and business change. And that kind of transformation could be much tougher to bring about.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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