In the Cloud Era, It’s About Connectivity

Operators still fear the 'dumb pipe' label, but they must realize that their unique role in the future marketplace is in providing ultra-broadband connectivity between users and content.

Sterling Perrin, Senior Principal Analyst, Heavy Reading

September 27, 2016

3 Min Read
In the Cloud Era, It’s About Connectivity

Being a telecommunications service provider isn't as simple as it once was. Network operators are scrambling to find their roles in the new era of web-scale Internet, cloud and over-the-top (OTT) content. Pick up The Wall Street Journal on any given day, and headlines abound with the latest accomplishments of Google, Amazon, Apple and other web-scale and OTT giants. Telecom operators are relegated to the back pages -- unless they're partnering with one of the big web-scale or OTT providers.

Stock valuations reflect a similar trend. As of September, the top five largest companies in the S&P 500 by market capitalization are Apple, Alphabet, Microsoft, Amazon and Facebook (in descending order). AT&T is the only telecom company to crack the top ten (at number nine) -- but its market cap is less than half of Apple's.

In response, many operators have embarked on strategies to become web-scale and OTT providers themselves. In 2011, Telefonica created the Telefonica Digital subsidiary in an effort to develop products beyond connectivity, including OTT products. Operators including AT&T, CenturyLink, Verizon and Windstream spent billions of dollars acquiring data center assets to compete with the likes of Amazon. The latest example of this trend comes from Verizon, which, earlier this summer purchased Yahoo for $4.8 billion.

But thus far, results are mixed at best. Telefonica dissolved its Telefonica Digital subsidiary in 2014 (though the operators continues to invest in digital products), and several of the operators that led the buying spree in data center assets have either sold them off or are now actively engaged in selling them. Operators are finding it difficult to compete head-on with the web-scale and OTT providers at what they do best.

Connectivity has become a dirty word in telecom circles -- often disparagingly referred to (by operators themselves) as "dumb pipes." But operators do have a unique and crucial role to play in the future in providing the ultra-broadband (UBB) connectivity between users and content.

In 2015, Heavy Reading conducted a whitepaper survey of 84 respondents from operators around the world, and we asked them to rate various broadband mega-trends by the expected business and revenue impact of each over the next five years. UBB connectivity -- defined as providing 100 Mbit/s services or higher -- topped the ranking by a large percentage, with more than 50% of respondents expecting very positive impacts from UBB services. In this same survey, we asked operators to identify their top UBB priorities over the next five years. The top priorities identified were increasing mobile broadband speeds to handle new applications, increasing their broadband penetration overall and increasing fixed broadband speeds to UBB rates.

One final data point on the key role of connectivity: In a separate global survey of network operators on the topic of enterprise services, also conducted in 2015, we asked operators to identify timelines for rolling out various cloud-related services. The most aggressive timelines identified were for offering Ethernet connectivity and transport of cloud services. As several operators have observed in one-on-one interviews, without a network, there is no cloud!

What does this all mean for the future of network operators? Content may be king today, but operators must realize that their unique role is in providing the efficient connectivity to get that content where it needs to go. Increasingly, that means moving to UBB data rates. Of course, operators will (and should) continue to invest in new business models, but the winners will do so while also remaining at the leading edge of providing the services that make the world of cloud connected.

This blog is sponsored by Huawei. For more information, please visit Ultra Broadband Forum 2016.

— Sterling Perrin, Senior Analyst, Heavy Reading

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About the Author(s)

Sterling Perrin

Senior Principal Analyst, Heavy Reading

Sterling has more than 20 years of experience in telecommunications as an industry analyst and journalist. His coverage area at Heavy Reading is optical networking, including packet-optical transport and 5G transport.

Sterling joined Heavy Reading after five years at IDC, where he served as lead optical networks analyst, responsible for the firm’s optical networking subscription research and custom consulting activities. In addition to chairing and moderating many Light Reading events, Sterling is a NGON & DCI World Advisory Board member and past member of OFC’s N5 Market Watch Committee. Sterling is a highly sought-after source among the business and trade press.

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