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AT&T & AWS: Heavy Reading's View

In a Light Reading column last July, I argued we were embarking on a new "Phase 3" in the commercial relationships between communications service providers (CSPs) and the web-scale Internet companies (WICs). I noted then that this new era would be "characterized by much closer collaboration." (See Kevin Lo's Move to Facebook: Sign of Things to Come?)

While I was clear about this direction of travel in a very general sense, I had no sense of how quickly momentum was building behind it, nor which major industry players would lead it.

With the announcement of AT&T and Amazon Web Services (AWS) entering a strategic partnership to develop enterprise cloud services, we certainly have our answer now. The momentum is right now, and it's fast. These two global giants have planted flags in the ground that will shape the new landscape of collaborative partnerships for many years to come. (See AT&T, AWS Forge Strategic Partnership and AT&T & AWS: A Powerful Combo.)

Typical, though, isn't it? Just when you think you're finally getting your nose out in front in this industry, something happens that consigns what you thought was a worthwhile insight -- a differentiator of sorts -- into basic table stakes universally shared by all. I guess if telecom analysts are going to write about the growing importance and value of open source software, they should be exposed to what disappointingly short-lived differentiation actually feels like for themselves.

So what are the implications of this mega-deal? One is that Google appears to be a lot more closely aligned with Verizon at the dawn of this new era than it is with AT&T. And this appears to go beyond just AT&T's preference for AWS with this enterprise services partnership: In December 2014, Google and Verizon announced they had agreed on a cross-licensing deal, granting rights to use one another's patents. There appears to be no such deal between Google and AT&T. Two days ago (coincidence?) Verizon was also announced as the exclusive distributor of Google's new Pixel phone. AT&T will have to wait its turn, it seems.

Of course, there may be less of a common thread -- less of a single guiding hand -- to these events than I'm perhaps assuming. And even if the announcement hints at the emergence of an initial duopoly in the U.S. between the two biggest WICs by revenues and the two biggest CSPs by revenues, the starting gun on this new era has only just been fired. We ought to expect there's little or no place for sweeping exclusivities in it. Hence, a year or two from now -- and driven by customer demand -- I wouldn't be at all surprised to see AT&T announce a new type of partnership with Google and Verizon announce one with AWS.

Certainly, whatever template it develops in enterprise services with AT&T, AWS should be able to cookie-cut it and replicate it with other CSPs throughout the world (let's not forget that AWS is already partnering with Telstra in Australia, together with Ericsson as well). This will likely be weighing on the minds of executives at Google, as well as other WICs such as Microsoft.

Another possible implication of this announcement is that it may serve to apply the brakes on Google's buildout of access networks à la Google Fiber. Like many others, I have my doubts about the depth of Google's commitment to that business. Depending on how Google perceives the risk of CSPs lining up to prefer AWS, Microsoft or another WIC as partners in rolling out secure enterprise, the Internet of Things (IoT) and other services, it could cause the company to pause for thought about Google Fiber.

This announcement also shines the light on the emergence of a two-way beauty contest between the WICs and CSPs as regards their overall cloud services strategies, and their alignment toward driving market segments with high growth potential. One of those high-growth segments is the IoT, where the AWS and AT&T partnership is set focus some of its energies.

As we state in our brand-new report, Webscale Internet Companies: New Drivers of the Network Equipment Market, we believe Google is the standout leader among the WICs in terms of its commitment to the IoT space. Whether due to its development of Brillo, an IoT OS based on the Android kernel, or its heavy investment in driving engagement of IoT developers across both enterprise and consumer segments onto the Google Cloud Platform (GCP), Google looks set to be the most influential WIC in the IoT space over the next couple of years.

By choosing AWS as its initial go-to-market partner among the WICs, AT&T is potentially getting less by way of IoT assets than it could potentially have gotten from initially partnering Google. As a clear leader in IoT itself, AT&T can be confident it can live with that choice, based on its own IoT leadership and the other, broader goals that it believes AWS will help it achieve with this partnership. But some CSPs starting from a point of limited in-house competence that need a WIC to drive them into a leadership position in IoT are liable to favor Google over AWS.

A survey of 57 qualified CSP respondents conducted for our new report showed 63% of them identify Google as presenting the most significant competitive threat to their business of any WIC. In stark contrast, just 16% pointed to AWS. Despite this, we also know from our research that many CSPs are willing to put the greater competitive threat posed by Google to one side in order to access the company's highly competitive assets in big data analytics and artificial intelligence across many applications and services, of which IoT is only one.

One last thing: I've been clear since shortly before our Big Communications Event in May that the security needs of enterprises have been crying out for collaboration between the WICs and security-savvy CSPs. Sure enough, this is another area in which AT&T and AWS say they plan to collaborate through this partnership.

Where the WICs have to maintain network uptime for their data center tenants -- and are increasingly offering a menu of additional security services such as firewall and IDS/IPS to them -- it stands to reason that combining with leading CSPs to leverage the threat intelligence, detection and mitigation capabilities that they have throughout the wide-area network is a win-win in terms of delivering secure services, end to end.

Oddly enough, AT&T's enterprise security story has come in for some flak from one or two of the bigger analyst firms in recent months. Why? For being overly focused on the threat detection and mitigation capabilities it can bring from within its network. I guess AWS must not have read those reports. Then again, perhaps they just disregarded them.

Not sure which cliché to end with here. The dawn of a new era? Welcome to a brave new world? You heard it here first? Stay tuned? Take your pick.

— Patrick Donegan, Chief Analyst, Heavy Reading

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