Vodafone strikes $1.5B cloud and AI deal with Microsoft

When it comes to the public cloud, Vodafone is strictly polygamous. "We are one third AWS and one third GCP [Google Cloud Platform], and the final third is split between OCI [Oracle Cloud Infrastructure] and [Microsoft] Azure," Scott Petty, Vodafone's chief technology officer, told reporters in August 2023, reeling off a list of famous and not-so-famous public cloud names. The approach hasn't changed, it insists. But under a major ten-year deal announced today, Vodafone will be leaning very heavily on Microsoft.

Providing further evidence of Big Tech's unstoppable march into the telecom industry, it will see Vodafone invest as much as $1.5 billion in a range of Microsoft-backed technologies. Perhaps most significant is the rejigging of the IT estate. Currently, Vodafone hosts customer relationship management and other IT workloads on tens of thousands of x86 servers installed in its own data centers. Henceforth, those workloads will shift to Azure. M-Pesa, Vodafone's mobile money platform in Africa, will also be housed on the Microsoft cloud platform.

This is not, however, a step toward using the public cloud for the network side of the business. Like most other big European operators, Vodafone remains adamant that its 5G core functions and other telco workloads are going to remain on-premises. Its position contrasts with that of US operators like AT&T and Dish Network, which have been adopting public-cloud technologies to support 5G. "Our view would be that's too risky and that you are almost outsourcing a core competency," Petty told Light Reading in October 2021. His views seem no different now.

Generative AI ramps up

If Vodafone's public cloud move promises the biggest savings, its embrace of generative artificial intelligence (AI) – just a day after the International Monetary Fund (IMF) warned of the technology's threat to white-collar jobs – will probably garner most attention. In August, when Vodafone flagged generative AI partnerships with both Microsoft and Google, Petty said use cases were "100% internal" and that he was not ready to expose the technology directly to customers. But he appears to be less wary five months on.

Under the arrangement announced today, Microsoft-backed OpenAI, the company behind ChatGPT, is to be deployed "across all Vodafone customer touchpoints." That appears to include TOBi, the customer-facing chatbot that Vodafone originally built with IBM's Watson technology. Thanks to OpenAI, customer-facing websites should in future serve up more tailored information in response to queries, based on factors such as the customer's location, according to a Vodafone spokesperson. On the chatbot side, employees will also be able to make use of Microsoft Copilot as a kind of digital assistant.

The partnership will further involve the bundling of Microsoft applications into Vodafone's portfolio of enterprise services. These could include features such as Microsoft Teams Phone Mobile along with support for Azure cloud services and Microsoft's security products.

But the arrangement is not just about Vodafone adopting and selling Microsoft technologies. Besides making use of Vodafone's fixed and mobile connectivity services, the software giant – currently the world's biggest company by market capitalization – will become an investor in Vodafone's "Internet of Things" platform, which the operator plans to set up as a standalone business by April this year. In turn, that platform, which now supports about 175 million connections, will gain access to the Azure ecosystem of app developers.

Risks and rewards

These are important if not revolutionary moves by the UK-headquartered operator. There will undoubtedly be speculation about the consequences for AWS and Google, the other big public clouds. But the company message is that both still figure in its plans, with AWS used primarily for digital services and training and Google retained exclusively for data analytics. As polygamous as that may sound, the concern will be that Vodafone has grown too reliant on separate clouds for specific items. Like others, the operator has acknowledged how difficult moving workloads from one cloud to another can be. "It's a pain in the ass," was how Petty described it around this time last year.

Heavy dependence on a single Big Tech player for something as potentially game changing as generative AI will look especially dangerous to the skeptics. And there is still no shortage of concern about the technology's habit of "hallucinating" and the possibility it leaks confidential data to the wider world. To guard against that risk, however, Vodafone was last year relying on private containers in Microsoft's data centers to wall off data from public consumption. It has also kept another Big Tech player in the generative AI mix, making use of a Google-built machine-learning platform called Vertex AI.

Analysts will naturally be interested in the impact the tie-up could have on Vodafone's operating model. Telco sales growth is elusive and the cost of building and maintaining fixed and mobile networks remains high. After various asset disposals and some adverse foreign exchange movements, Vodafone reported a €155 million (US$169 million) net loss for the six months to September 2023, with revenues dipping 4.3%, to about €21.9 billion ($23.9 billion), compared with the year-earlier period.

It aims to slash €1 billion ($1.1 billion) off annual operating costs by 2026 and cut about 11,000 jobs across the organization, which had about 98,000 employees in its previous fiscal year. Vodafone will feasibly need fewer in-house technicians after shifting so much of its IT estate into Azure. Yet Petty last August downplayed the likelihood of job losses related to generative AI rollout. "We don't really see it as a replacement for customer care," he said. "We see it as a virtual assistant to take away some of the drudgery work." After warnings from the IMF and Davos this week, many will be unconvinced.