Try explaining what Twilio does to many people who grew up pre-Internet (this reporter included) and you might as well speak Klingon. CPaaS? APIs? The acronyms alone seem designed to elicit uncomprehending stares. And yet the software company, for all its ups and downs in the last year, is currently worth more than some of Europe's best-known telecom brands.

Its market capitalization of roughly $34 billion is, for instance, about $12 billion higher than that of Telenor, the Norwegian telecom incumbent with a huge overseas business. Telenor, it should be noted, made about $9.3 billion in revenues for the first nine months of 2021 and around $1.5 billion in free cash flow. Over that same period, Twilio racked up a net loss of $658,504 on sales of less than $2 billion.

The disconnect is one of those head-scratchers for industry folk pondering the generous valuations attached to software companies. But for Erlend Prestgard, a former Telenor executive, it shows where the telecom industry is going wrong.

"The story is that Twilio is a ten-year-old company with basically no physical assets, and it has managed to take the traditional telco services and make them programmable," he says. "The point is that by just making things accessible to a large community you increase the value of the connectivity itself."

Figure 1: Twilio versus Telenor: share price fluctuations since 2017 (Source: Google Finance)

Prestgard grew frustrated with the traditional telecom model when he led strategy for Grameenphone, Telenor's Bangladeshi subsidiary, several years ago. Products developed by that local unit could not be deployed in other Telenor markets because the technology stacks were so different. Everything had to be redone.

It was around this time he met Werner Eriksen, a Telenor colleague working on an internal project called "software telco." The idea was not to reinvent the wheel but to create products and services that made the subscriber experience that little bit better – sending SMS on the web, say, or making phone calls from a browser.

But when Eriksen and his team finally obtained access to the core network of Telenor Norway, they ran into protocols that had been around since the 1970s – protocols that "any modern software developer doesn't want to touch with a stick," says Prestgard. Even worse, the core networks maintained by Telenor subsidiaries in Denmark and Sweden were similarly designed but not quite the same.

"When they started looking at integration, the networks were just different enough, despite tens of thousands of pages of 3GPP specs, that it is basically like rebuilding the product," says Prestgard. "This is where telco innovation goes to die."

API days

The answer, and the genesis of the small company that Prestgard has led since 2017, was a project to rebuild the core network. Besides Twilio, the analogy he likes is Android, not just any smartphone operating system but a common software layer for heterogeneous hardware, bringing application programming interfaces (those famous APIs) for product and service innovation.

Doing the same for the network core seemed like a crazy idea when Prestgard first considered it – so much, he jokes, that he thought Eriksen's team must be either "high or drunk." But Working Group 2 (WG2), the telco software company that has emerged from Telenor's labs, today employs about 60 people, serves clients outside the Telenor group and manages the entire mobile core for Vimla, Telenor's mobile virtual network operator brand in Sweden.

The marketing pitch is largely about simplicity and efficiency – words often used by software challengers in telecom but ones that have some resonance at WG2. With a team of about 40 engineers, it has been able to build in software most of what comprises a full mobile network. WG2 provides that "as-a-service" from the public cloud (it has a close relationship with AWS), pushing hundreds of developer changes out to the production network every single month. Arguing programmability will boost the value of connectivity, it releases APIs so that developers can easily bolt on new products.

Prestgard admits that his company's "as-a-service" approach initially scares away about 90% of today's addressable market. Existing telcos usually want shrink-wrapped software they can manage themselves. A related and even bigger issue is credibility. In short, can a startup with 60 employees persuade a risk-averse industry it is a viable alternative to giants such as Ericsson and Nokia?

"You go for the use cases where you have a realistic chance of succeeding," says Prestgard. "We don't talk to EE or Verizon or AT&T about replacing their main cores. We do, however, talk to them about their adjacent use cases. In addition, we go for MVNX segments, small MNOs, greenfield MNOs and private networks, where the willingness to talk to new vendors is higher."

A newish deal with Hong Kong's CK Hutchison is described as a credibility "breakthrough" by the WG2 boss. Announced in December, that contract covers various MVNO, Internet of Things and private network services for an established operator. WG2 can also shout about a deal with MKI, a Japanese systems integrator targeting private network deployments.

Want to know more about 5G? Check out our dedicated 5G content channel here on Light Reading.

A lack of programmability in traditional core networks is perhaps both a hurdle and an opportunity for WG2. Disregarding that cultural aversion to buying from a 60-person startup rather than Ericsson, the hurdle is the effort involved in a systems overhaul, especially after some epic misfires on "telco transformation." The opportunity could arise if attitudes begin to shift with the success of greenfield projects.

WG2 does have instructive brownfield experience, although it is not disclosing the identity of the customer (Telenor seems likely). On that project, it ended up replacing 22 of 26 vendors used across the core network and business support systems. Prestgard's message is that radical change is needed for programmability. "Please do try to create an API layer that has to coordinate with 22 vendors to make it work," he sighs.

In bed with the cloud

The other worry about WG2 is that, inevitably, it means embracing the public cloud. Hardly any brownfield operators look prepared to run a mainstream core network inside AWS, Google Cloud or Microsoft Azure (AT&T is the most notable exception), and wariness of the public cloud seems to have grown after several high-profile Internet outages last year.

"Still want to put your network core into the public cloud? #suckers," tweeted Neil McRae, the chief architect of the UK's BT, after an AWS outage just a few weeks ago. Neville Ray, the chief technology officer of T-Mobile US, has also voiced reservations, saying "I'm not at the point yet where I would put that in the hands of a third party" in December. Another skeptic is Scott Petty, Vodafone's chief digital officer. "Our view would be that's too risky and you are almost outsourcing a core competency," he said at a Vodafone event last October about AT&T's deal to run its 5G core inside Microsoft Azure.

Figure 2: Enterprise values ($B) from October 2021 (Source: Yahoo Finance, WG2)

But a partnership with AWS has been necessary for a provider as small as WG2, and its resources have given his firm a light-footedness it would otherwise miss, says Prestgard. He likens the approach to walking the length of Norway, as adventurous trekkers do, with only an emergency backpack and water, taking advantage of the 500 cabins built by Norway's tourist authority. "The Nokias and Ericssons would bring a very big backpack with the tents and cooking gear and food," he says. "They can survive in any environment, but the backpack is heavy as hell and expensive."

He confesses to having concerns about the might of Big Tech, however, and does not want to be "locked in." WG2, accordingly, runs its own Kubernetes cluster, meaning it could – in theory – shift more easily between cloud vendors and even make use of private cloud technology. That said, Prestgard has no positive words about Openstack, an ill-fated platform promoted years ago as a challenger to the public clouds. "We started with Openstack but spent half the team's time managing it instead of buildings things that actually mattered," he says.

WG2 draws support from not only Telenor but also Cisco and investment firm Digital Alpha, giving it an array of high-profile sponsors. Cracking the telco market will be tricky, but there is evidently some appetite for its software in private networks and greenfield deployments, where traditional vendors do not have a stranglehold. The comparisons with Twilio – whose share price soared 1,600% between June 2016 and last February – are undoubtedly flattering. But a sector with a shoddy record of innovation could probably use more of its kind.

Related posts:

— Iain Morris, International Editor, Light Reading