Are telcos and hyperscalers destined to be frenemies?

Telcos and cloud providers are both customers and competitors. The move to 5G commercialization and private networks could deepen all sides of these complicated relationships.

Roz Roseboro, Consulting Analyst, Light Reading

August 6, 2020

5 Min Read
Are telcos and hyperscalers destined to be frenemies?

Telcos and cloud providers are both customers and competitors. The move to 5G commercialization and private networks could deepen all sides of these complicated relationships.

As I was brushing up on what has transpired in the industry during my year away, I was struck by the number of announcements regarding alliances between Tier 1 CSPs and the three leading hyperscale cloud providers. Google, Amazon and Microsoft all touted new platforms and services targeting the telco/5G market, with AT&T, Verizon, Vodafone, Telefonica and others entering strategic partnerships with those companies to develop new offerings. In Light Reading's interview with Glen Gore, director of solutions architecture at AWS, Gore characterized the relationship with telcos as "It's not about replacing the telco. It's about augmenting and helping."

Given that both are customers of one other, I think it's more tricky/sensitive/fraught/pick your adjective than that. Both see the potential of 5G. Both embrace cloud-native. Of course, there are degrees of "seeing potential" and "embracing cloud-native." And therein lies the rub. We all remember the hard feelings generated during previous transformations when the telcos footed the bill for massive network upgrades and the over-the-top players took a joyride on infrastructure they didn't pay for – reaping most of the profits while CSPs were stuck with most of the costs. The telcos are hellbent on ensuring 5G won't be a repeat.

It's important to understand that this is a technology story as well as a business/commercial story. And it will differ whether we are talking about enterprises or consumers. Consider: Who has the trust of the enterprise? It largely depends on how mission-critical/strategic it is. The maturity of the company might play a role, too. What about the trust of the consumer? Consumers bash telecom providers (to be fair – consumer complaints are usually about pricing/billing and not about the service itself) but enterprises have long trusted telcos for their reliability and security – two things (especially the latter) that are unlikely to be uttered about the cloud providers.

On the flip side, enterprises will trust them to provide a robust environment for developing applications. And that's something unlikely to be uttered about the telcos. To date, most of the hype around 5G is about enterprises. Indications from South Korea and China suggest that consumers don't yet see a compelling need to switch to 5G – so I'll keep the rest of my commentary focused on the enterprise market.

A few years ago, the question of whose cloud infrastructure would host the next wave of services had been a major point of discussion. Many thought the telcos had an advantage because of their central office/switching centers. Alas, converting central offices (COs) into data centers proved to be more difficult than the telcos thought as facilities concerns loomed large. It has been well documented and discussed that most telcos abandoned their public cloud efforts years ago. When the name of the game is scale, it's hard to out-Amazon Amazon.

In addition, more than one company, seemingly annoyed, suggested to me that the volume of services requiring ultra-low latency (like vehicle-to-vehicle communications to manage traffic) was an overall small portion – which lessened the attractiveness/necessity/advantage of telcos' more distributed CO locations (more distributed than the hyperscale cloud providers and traditional data center operators, like Equinix). It now looks like the public cloud might be close enough for most 5G services. However, as Gore pointed out in his interview with LR, it's the "combination of individual data at the edge and centralized processing of the data at scale, and combining the two together" — meaning it's not an either/or, but a both/and situation.

Another way to look at it is that hyperscale cloud providers will bring the platforms and tools, and telcos the connectivity. This does not mean that telcos are just dumb pipes as networking attributes are an important part of the service equation. As reported by Mike Dano, during an AWS event earlier this month, Vodafone Business' Jennifer Gill Didoni "explained that Vodafone is working to develop a network that can be adjusted based on the specific customer, their device, their location and their network needs, with latency speeds ranging from 100 milliseconds to 10ms." Because of the tighter dependency on the network for 5G applications, telcos may be in a stronger position than they were during the 3G and 4G transitions that were driven mostly by consumer applications that were (mostly) happy to get best efforts on the suddenly ginormous high-speed pipes.

Lastly, there's the important issue of hosting network functions in the cloud. All three of the top hyperscale cloud providers – especially Microsoft – are positioning for that. It occurs to me that having network functions in the public cloud, in a way, reverses the situation from the 3G/4G years, in that the telcos would be benefiting from someone else's investment. Turnabout is fair play, I suppose. It should be noted that some analysts say Microsoft's Affirmed Networks and Metaswitch acquisitions are part of a strategy to deliver private networking (especially for IoT) for enterprises – which obviously puts them in "enemy" territory. We shall see.

Having witnessed numerous transformations/transitions over the years, I feel confident in saying that the technology issues are unlikely to be the gating factor in how soon the telecom market sees meaningful revenues from 5G. Rather, the question of who will own the customer relationship is one of the most significant unknowns — and is fundamental to how the 5G marketplace will develop and evolve. It is sometimes said that adversity makes for strange bedfellows. In the case of the telcos and hyperscale cloud providers, it is opportunity rather than adversity, but just the same, collaboration and alliances between friends and foes will be critical for both to maximize the tremendous opportunity 5G promises.

Roz Roseboro, Consulting Analyst, Light Reading. Roz is a former Heavy Reading analyst who covered the telecom market for nearly 20 years. She's currently a Graduate Teaching Assistant at Northern Michigan University.

About the Author(s)

Roz Roseboro

Consulting Analyst, Light Reading

Roz Roseboro has more than 20 years' experience in market research, marketing and product management. Her research focuses on how innovation and change are impacting the compute, network and storage infrastructure domains within the data centers of telecom operators. She monitors trends such as how open source is impacting the development process for telecom, and how telco data centers are transforming to support SDN, NFV and cloud. Roz joined Heavy Reading following eight years at OSS Observer and Analysys Mason, where she most recently managed its Middle East and Africa regional program, and prior to that, its Infrastructure Solutions and Communications Service Provider programs. She spent five years at RHK, where she ran the Switching and Routing and Business Communication Services programs. Prior to becoming an analyst, she worked at Motorola on IT product development and radio and mobile phone product management.

Roz holds a BA in English from the University of Massachusetts, Amherst, and an MBA in marketing, management, and international business from the J.L. Kellogg Graduate School of Management at Northwestern University. She is based in Chicago. 

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