Joe Weinman: Carriers have the ability to bundle network and
IT services with a facilities-based strategy, potentially
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,
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
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
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
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
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
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,
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
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
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
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
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
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
Joe Weinman is worldwide lead for Communications, Media and
Entertainment Industry Solutions at Hewlett-Packard