Joe Weinman: Carriers have the ability to bundle network and
IT services with a facilities-based strategy, potentially offering
compelling cost advantages
As in real life, a cloud can look like different things to different people. To the technologist, it is an emerging technology for planetary-scale, distributed, virtualized computing. To the consumer, it is a great way to get free well, advertising-supported services and entertainment. For the enterprise, it is a business model that can enhance agility while reducing cost.
However, for the CEO, CFO or CSO of a telecommunications service provider whether wireline, wireless or integrated; access, transport or managed services; consumer, SMB, enterprise, government or cross-segment the same considerations apply as for any other service:
Strategy, differentiators and go-to-market approach
Financials: revenue, margin, investment, risk
Fit: competencies, assets, culture, skills, organization, brand
Trends and discontinuities for the above
Answers to these partly depend on your starting point. Are you a wireline carrier? Wireless? Subsea or satellite? Integrated? Are you global, regional, a domestic PTT or a local exchange carrier? Are you starting from scratch, or do you already have a co-lo or hosting business? Do you have the ability to make acquisitions? Of what size? Whats your tolerance for risk?
Answers also depend on what we mean by cloud. Most people think IT, and envision either infrastructure, platform or software services. But communications as a service is also a cloud service.
The first high-tech cloud service was the telephone exchange, first deployed in New Haven, Connecticut, in January 28 1878. This even predates the first electric utility, Edisons Pearl Street station in New York City, which went live on September 4 1882.
POTS, of course, has undergone a massive transformation since then: from analogue crossbar to digital electronic switching systems to softswitches to voice over IP and now to industry-standard server-based software for unified communications and collaboration.
This viewpoint suggests that there is no point in asking whether carriers should be in the cloud business. They already are, and have been for over 130 years, offering pay-per-use (measured service), on-demand (off-hook), location-independent (ubiquitous) services.
Today, these services include not only voice, but IPTV, IP, wavelength and VPN services, and so forth. The rights questions to ask revolve around which parts of the cloud portfolio an operator should pursue, and how, both in terms of architecture and go-to-market.
This has gained increased urgency as cloud providers enter traditional telco businesses: Microsoft has acquired Skype; Google has bid on 3G spectrum and offers Google Voice; and Amazon essentially offers IPTV services.
Strategy, differentiators, go-to-market
There are many different strategy frameworks, but the one developed by Michael Porter of the Harvard Business School is as good as any. He concluded decades ago that for a product or service offer to be successful, it needed to either compete on low price, differentiated features or market focus.
CSPs have a different cost structure than over-the-top cloud providers. While large cloud providers may currently exhibit some scale economies, these may be transient, as CSPs are able to source the same containerized data centres and cloud services enablement software stacks that cloud providers are now deploying.
Moreover, carriers have the ability to bundle network and IT services with a facilities-based strategy, potentially offering compelling cost advantages.
The conventional wisdom is that the right architectural approach to be a cloud provider is to build mega data centres the size of multiple football fields. However, this is only one solution along a continuum of trade-offs between consolidation economies and customer experience enhancements and latency reduction via site dispersion.
An emerging approach is to extend content delivery into application delivery, via the same highly dispersed architecture. While new cloud players must invest in new data centres, incumbent CSPs can leverage depreciated, on-net facilities such as switching centres. This reduces cost and capex, and also helps differentiate latency-dependent interactive services and applications.
Such a dispersed architecture reduces cost in another key way. There is a current meme that supposes that networks will be free. Given the tens of billions of dollars spent annually by the major carriers and an industry total of hundreds of billions of dollars in annual capex, they are anything but. Any carrier that can offload networks by reducing transit distance can also achieve cost structure advantages.
Finally, from a segmentation perspective, it is clear that focusing on communications-centric applications voice, interactive video, M2M, IPTV, mobility is important to carve out a role in an increasingly crowded market. In many cases, CSPs will be able to go to market themselves, but in other cases collaboration with select business partners will be essential to accelerate time to market.
Due to the breadth of what may be called cloud, one can argue that cloud services are core, represent an adjacent market space, or are optional. From a defensive perspective, there is perhaps no greater strategic imperative for those carriers attempting to preserve voice margins which may be legacy, but certainly impact earnings before income taxes than developing and successfully implementing a cloud-based voice strategy.
For those carriers that have been pursuing IPTV services another imperative is preserving expected revenue flows from recent massive capital expenditures for IPTV build-outs, in the face of an onslaught of over-the-top players. In these areas, cloud may be viewed as a necessary defensive play.
So-called infrastructure-as-a-service servers and storage for rent is a natural adjacent market to core networking. Over-the-top players are positioning the internet, or virtual private clouds that tunnel through the public internet, as the connectivity for the cloud.
But wireline operators have a key strategic advantage: many emerging cloud scenarios require optical or MPLS/VPN networks. One large integrated provider has found 30-50% of network access to and virtual server usage in its hosting and cloud services to be via such carrier-grade networks.
Financials: revenue, margin, investment, risk
Commercial cloud services can be a source of revenue growth. Per the above analysis, however, investments in gaining expertise and deploying cloud solutions may be viewed partly as a defensive strategy to retain customers in the face of declining revenue streams for mature services, and partly as a growth strategy to exploit emerging markets.
In addition, leading companies are using a common infrastructure to service internal IT as well as deliver commercial services. This reduces opex and capex for infrastructure: unused commercial capacity during off-peak hours can be used to run, say, billing or network capacity planning applications. This is much more efficient that running internal and external workloads in separate silos.
In addition, companies such as HP are offering white-labelling and innovative financing options, such as a dual bursting capability that includes pay-per-use for on-premises resources. This can significantly reduce upfront investment and risk associated with cloud services.
Fit: culture, skills, organization, assets, branding, competencies
Except for virtual network operators, the most important asset that both wireline and wireless operators have is of course their network. This is an excellent fit for the cloud, which is, at its heart, network-enabled distributed computing. Moreover, whether spectrum licences, rights of way, rights of entry or the barrier to entry of matching such investments, the network can be a competitive differentiator relative to over-the-top players.
However, it is not enough to rest on accumulated investments in network assets. These assets must be upgraded with intelligence and flexibility to match that in the cloud. This includes end-to-end bandwidth on demand, end-to-end quality of service on demand and usage- and quality-sensitive pricing in fine-grained increments.
Securely exposing network information via platform services that enable advanced services is also needed. Examples include presence and location, but also network congestion, routing, future capacity reservations, dynamic pricing and the like. It also includes providing end-to-end holistic performance management backed up by SLAs.
It is evident that telcos strongest competencies are tied to their greatest asset: network operations, network planning and engineering, emerging network technologies, network maintenance, sales of network services. This means that IT skills will always be limited by comparison. However, the cloud can be a challenging paradigm shift even for IT professionals, requiring new approaches to architecture, design for scalability, performance management and the like.
Consequently, carriers at least for the foreseeable future will need to partner with firms that have the expertise and the embedded base of IT services, equipment and solutions. Such partnerships might not be disclosed, but public co-branding can offer a means to overcome perceptions and reality of limited breadth of commercial IT expertise.
Organization structure can also benefit from a review. Traditionally, internal IT was run by the CIO; commercial services by product management and the CMO; and network planning and operations by an SVP or EVP of network. Emerging cloud architectures and software-based network services including voice, video, unified communications and collaboration and the like are eliminating barriers between infrastructure silos and service silos, driving a redesign of organization structure and processes, or at least governance mechanisms to ensure cross-functional collaboration.
Cloud computing represents a sea change in IT and networks, on par with digital switching systems, softswitches, cellular telephony, the PC, the internet, mobile data and smartphones. However, strong leadership must be exercised by senior executives to develop and execute strategy in this arena.
While there are no doubt a number of interesting technological dimensions to cloud computing, ultimately strategy will depend on business and financial considerations. Moreover, there are extreme positions being promulgated by analysts and prognosticators, ranging from the view that cloud computing is at a peak of hyperbole, to the view that cloud computing will be the sole architecture for IT.
The truth lies in the middle: cloud computing is unquestionably a multi-billion dollar market, but is one of many approaches to IT that will coexist.
Moreover, the cloud ecosystem will shift dramatically over the next few years. Startups are being acquired by established technology firms, mid-sized pure-play cloud service providers are being acquired by telcos and pricing for infrastructure is beginning to resemble the race to the bottom that voice minutes experienced.
CXOs would be well served by conducting a situation analysis, defining a sustainable, differentiated strategy based on their current assets, competencies, financial wherewithal, strategic objectives, and risk tolerance and selecting complementary partners to help them on their journey forward. GTB
Joe Weinman is worldwide lead for Communications, Media and Entertainment Industry Solutions at Hewlett-Packard