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Business Transformation

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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kq4ym 3/15/2016 | 2:35:15 PM
Re: Next Gen Operator It would seem as noted that we're merely in for stability for the telco side. It may have been dreaming that came to the conclusion that the " arrival of true mobile data was supposed to lead to a doubling in average customer spending. The idea that quck profits and steeply rising incomes are easy to obtain may be a pipe dream for most now.
brooks7 3/9/2016 | 12:12:58 PM
Re: I get the feeling the operators know this but....  

I agree with Dennis about DirecTV.  The media buy was Comcast buying NBC.  An equivalent would be AT&T buying Disney.  We seem here to often confuse content with content distribution.

AOL and Yahoo are no longer content or application properties.  They are in the Ad Chain and have some media properties.  We have yet to see where Yahoo lands and how it lands.

And the funny thing is that every replies with infrastructure type comments and says "oh don't do applications."  Which is my entire point and I am glad we are having this conversation.  The complaint is all about Google or Netflix using the network to "take advantage" of the carriers to build their business.  Of course without those services, broadband internet would not be a service delivering all kinds of bottom line.

Now Mordyk doesn't think the service ship has sailed.  Well, let's look at what is going on in the startup world.  It takes a couple of $M to make a startup and today investors want to see a working prototype before funding happens.  Through the use of open source and the application infrastructure and virtual computing, there are hundreds of new applications happening every day.  All of that happens before the carrier can hold enough meetings before a study group can be launched to do an analysis of the idea.

The thing that gets lost here is that connectivity is what customers want.  Within an organization, there are enough restrictions that special services can be offered.  But if you want to engage a global audience, then the lowest common denominator is what you want.  The good news for application providers is that this is working for the most demanding applications today - voice, online gaming and video.  

One last challenge for the carriers.  The whole value chain on their hardware front has been driven to commoditization.  There is little reason to create a comm hardware startup.  Comm software startups still happen around NFV and SDN, but you all would have to admit that this is going pretty slow.  I think NFV will happen as an ongoing cost reduction method.  But the entire "remaking the world" speech that people have about this seems like the commentary about IMS and many other things.

What I see is a return to the stability in the network pre-1980.  Late 90s we had the dial-up explosion, then DSL and Cable Modem, then Fiber and high speed DOCSIS.  The pace of change has slowed considerably.  All we talk about is how to deploy faster broadband.  Nothing new on the horizon.

seven

 
mendyk 3/9/2016 | 8:47:39 AM
Re: I get the feeling the operators know this but.... DirecTV is more a video service provider than a media play. As for AOL and possibly Yahoo, the attraction there seems to be stuff like ad serving technologies. Fundamentally, the media business isn't any more attractive because of early successes of Netflix and other down-market digital plays. IMO, of course.
Gabriel Brown 3/9/2016 | 3:07:20 AM
Re: I get the feeling the operators know this but.... Seven, AT&T acquired DirecTV for $49 billion. Verizon acquired Aol (and may yet acquire Yahoo). So the largest telcos are investing in media properties. 
MordyK 3/8/2016 | 7:54:10 PM
Re: I get the feeling the operators know this but.... "There is no going back to put services inside the network.  That ship has sailed."

Seven,

I don't neccesarily agree with your comments, but I'd like to discuss the services side.

Apps as we know them in their current incarnation installed on our phones are lost, and the walled garden of yore is forever gone. The ability to create network based services which use real-time the network's information in the cloud is an opportunity ripe for carriers.

On another note.: buying an application would be foolish, but building or acquiring enabling capabilities could be interesting. Some of IBM or HP's capabilities come to mind.
brooks7 3/8/2016 | 7:42:45 PM
Re: I get the feeling the operators know this but.... The first problem that the telcos (cable as well) face is that their model of business does not fit that of an OTT provider.  For every Google, there are 10 Dr. Koop.com's.  Telcos invest with a view to deployment on a large scale where investment ALWAYS means return.  If you are OTT player, you can go out of business.

The second problem is that Telcos don't develop their own products.  The OTT players invest in lots of software to develop their products.  We view some of the large cloud players as having a significant role in networking, but they are first and foremost software development shops.  How many applications have AT&T, Verizon, Centurylink, and Frontier Engineers written that are deployed to customers?  0?

The third problem is that the application and OTT space has won.  There is no going back to put services inside the network.  That ship has sailed.  Now people can say "Wow, we can deploy bandwidth more quickly." But that is about it.  This is all about applications and data centers going forward.

So, let me ask you all a question.  Why hasn't AT&T purchased Microsoft?  Seems like a perfectly good cloud play to me.  Or Verizon, why not buy Salesforce?  If they want to get into the game, get into the game.  Otherwise, they are bit pipe providers - like they are today.  By the way - NONE of them are losing money.  Being a bit pipe provider seems to be a pretty good business.  I thought the lesson we SHOULD be learning from at least what is happening in the US is scale matters to carriers.  They are optimizing for cost, not growth.  That is what happens in a commodity business.  

I think the bigger issue is that this is where the carriers were for about 100 years.  Simple connectivity providers.  Then between deregulation, the breakup of AT&T, and the rise of the Internet, they thought they could be more.  Well, if they return to their roots they will do just fine.

seven

 
MordyK 3/8/2016 | 5:00:27 PM
Re: I get the feeling the operators know this but.... One of the biggest problems carriers face in getting a real and competetive foothold in the digital space, is that they need to all move in lockstep with their fellow carriers, or their offering will be incomplete. Whereas their digital brethern benefit from having a unified platform offering that works 100 percent the same however its used.

When Cunard was launched, the pitch was that it was an unlimited free road. While railroads and later trucks (or lorries) required investing in and maintaining roadbeds. This is in effect the same problem utilities face when competeing with digital platforms.

I believe the solution is to create flexible standards for service development along with data platforms, and the combining them with solution creation by becoming system consultants and integrators.

This requires carriers to think of and design all network elements around data services, and not just about offering bit-pipe utility services.
axelfreyberg 3/8/2016 | 3:15:46 PM
Re: Next Gen Operator Let me be more precise - it was an online survey
alangonchar 3/8/2016 | 3:11:11 PM
Re: Next Gen Operator 18,000 interviews - wow would love to know how that was done?
gregw33 3/8/2016 | 9:52:43 AM
Access Network Realities "The access network, or "last mile" is a challenging business.  It has thousands of miles of facilities (wires) that radiate from headends and hubs and terminate in nearly every home and building in the serving area.  It has specialized OSP (Outside Plant) electronics deployed in cabinets, underground vaults and mounted to utility poles.  Adding to the challenges are onerous federal, state and local regulations that hinder flexibility.  Then you have real operational challenges including lightning, floods, backhoe fades and squirrel chews.  " 

The business of access is not for the faint of heart.  5G and Fiber need to augment each other and not compete.  Ask an MNO if they think it' smart to transmit a 2 hour 4K video over billion dollar spectrum :-) 

Many of the issues noted have as a root cause organization structure, legacy mentalities and onerous and unbalanced regulations.


GregW

 
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