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Deutsche Telekom becomes Microsoft tenant in bid for IT savings

Telecom operators love a moan about the dominance of Ericsson, Huawei and Nokia in the market for network equipment. They seem less bothered by the muscle that a few giant US tech firms are flexing elsewhere. Perpetually griping about "vendor lock-in," some big service providers are entrusting their IT systems to Amazon, Google and Microsoft. If the trend persists, telco IT systems will be managed by US public cloud providers.

The latest deal involves Germany's Deutsche Telekom and Microsoft Azure. It is a multi-faceted agreement that matters to both Satya Nadella, Microsoft's CEO, and Timotheus Höttges, the boss of Deutsche Telekom (see video below). But its standout feature is a commitment by Deutsche Telekom to shift most of its IT workloads to the public cloud by 2025. Thousands of Deutsche Telekom employees will be trained to use Azure systems.

Such a move promises major savings. Three UK, a UK mobile operator, said last year that moving its own IT systems to Microsoft Azure would slash IT costs by a third. About two-thirds of employees with technology and IT jobs would be laid off, according to then CEO Dave Dyson, succeeded earlier this year by Robert Finnegan.

Eyes on the bottom line

Deutsche Telekom has not been so brazen. Other than saying a "majority" of internal IT workloads will be moved to the public cloud, it has disclosed nothing about the scale of the plan or its impact on numbers. The only specific is an intention to rely on cloud-based mainframes so that Deutsche Telekom does not have to retrofit its legacy hardware to cope with new services and demands. According to the press release, this should cut operational expenses and equipment costs.

The German incumbent has already excelled at cost cutting in recent years. Its underlying earnings margin was 35.5% for the first nine months of this year, up from 28.7% for the same part of 2015. Headcount fell by nearly 15,000 between 2015 and 2019, boosting per-employee revenues from about €307,000 ($372,000) to more than €383,000 ($464,000) over that period. Profitability should further benefit from the Azure deal.

That and the services promise of the Microsoft tie-up seem to have made Höttges overlook his earlier reservations about non-European tech giants. "Today, only 4% of the world's data is stored in Europe on European companies' clouds," he grumbled at a joint presentation with Orange two years ago. "Meanwhile, the global tech guys have access to all this data, and the more they get the better their services get. We have to do something about that."

Most telco IT systems are still not in the public cloud, but any future dependence on a coterie of US cloud titans could expose operators to abuses. Just look at the mainstream consumer market, where Google has been luring customers to its cloud with the offer of free photo storage. Last month, after years of squeezing out less deep-pocketed rivals, it showed a Machiavellian instinct when it abruptly told customers that they would have to start paying next year. If the comparison seems crude, the issue of data sovereignty should certainly worry telcos – and it seemed to bother Höttges just two years ago.


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James Crawshaw, a principal analyst with Omdia, cautions operators against total dependence on a single public cloud. "My suggestion is to host 70% of your IT workloads with public cloud provider A (for bulk price discounts), and 20% with public cloud provider B (for access to regions A cannot reach, features A does not provide and to have bargaining power with A), and to keep 10% in your own private cloud (for legacy apps that cannot be cost-effectively ported, to retain negotiating leverage with A, and for data sovereignty)," he said in a messaging exchange with Light Reading.

Just how much Deutsche Telekom is transferring to Azure remains unclear, but a growing number of operators are signing public cloud deals. Crawshaw draws attention to AT&T's plans, announced last July, to move most of its non-network IT workloads to Azure by 2024. Three plans to shift about 90% of its IT systems to the public cloud under its own contract with Azure. Australia's cost-cutting Telstra is working with Microsoft on digital transformation, while Spain's Telefónica has also indicated it will use the Microsoft cloud for internal operations.

Unsurprisingly, Azure was the fastest-growing part of Microsoft in the three months to the end of September, with revenues up 48%, compared with the year-earlier quarter. Overall commercial cloud revenues soared from $11.6 billion to $15.2 billion over that period. Deals with telcos will account for a small percentage of the figure, but the actual amount is only going to increase.

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— Iain Morris, International Editor, Light Reading

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