AWS, Azure, and Google
Cloud Redefining Telecoms Commercial Models
The industry is at the beginning
of a profound structural shift to an increased consumerization of telecom
technologies
5G is the first 'G' in cellular technologies that
paves the way for Communications Service Providers (CSPs) to operate in the
software layer. Software represents a departure from transactional model
characteristic of telecom equipment manufacturing. Software points toward a
recurring revenue model that is more consistent and predictable akin to that of
hyperscalers. According to global technology intelligence firm ABI
Research, that has implications on the commercial models that underpin the
industry.
"With a growing importance
of software, the commercial imperative from a vendor's perspective is stark:
depart from a finite supply of (3G and 4G) equipment, characterised by
scarcity, to monetization models based on (5G) software where the supply is
essentially infinite," states Don Alusha, Senior Analyst 5G Core
& Edge Networks at ABI Research.
With 3G and 4G networks, commercial
arrangements revolve around a CAPEX purchase model. CSPs pay a specific price
to own an asset. It could be hardware (cellular antennas) or software
predicated on perpetual licensing. The value can be paid in cash, financed, or
leased. But what is most relevant, however, is that there is a set price. Once
the deal is agreed, Network Equipment Vendors (NEVs) like Ericsson, Huawei,
Nokia, and ZTE are guaranteed an upfront payment at the point of signing a
contract. In a CAPEX model, NEVs have one stress point: winning the deal. The
risk of implementing the purchased technology falls to CSPs. A key point to
note is that, in general, by the time a product is adopted and used, the bulk
of the budget has already been spent upfront for the installation, integration,
and other professional services needed to get the product operational.
By contrast, in a 5G ecosystem,
and by extension, cloud and software world, there may not be a 'product' sale.
Technology suppliers still need to channel the required Research and Development
(R&D) to build the technology and win a deal. They need to invest in
marketing, execute the sales cycle in the hope they win the deal. In that
respect, there is not much difference from the CAPEX model. The difference lies
in the fact that OPEX models are associated with recurring (micro-)
transactions—extra compute, more storage, more modules, etc. "Further,
businesses built on OPEX models typically invest a significant amount of
capital upfront and then try to make up with volume because of a superior cost
structure that is associated with software; the marginal cost of producing an
extra copy is very small. That underpins hyperscaler's (Amazon, Google, and
Microsoft) business model and strategy," Alusha explains.
Though very subtle, there is an
increasing consumerization of telecom technologies because of a growing
adoption of cloud and software. The software business is a scale economic
business. A considerable investment is made upfront to develop a software
product and then the marginal cost of producing each one is very small. The
fundamental difference between building software and manufacturing equipment is
that the latter entails the creation and transfer of ownership of a product,
while the former is much more intangible. There are advantages from a balance
sheet perspective, as now CSPs pay for software in a rough approximation for
their usage over time—an operational expense—as opposed to a fixed-cost basis
in a CAPEX-centric world. This improves their Return-on-Invested Capital (ROIC)
measurements.
In the new world of cloud and
software, in addition to selling a transaction, NEVs must also make a material
and positive impact on the recipient of the service to create value. "This
enables the industry to explore new business models that look beyond where the
money is in the value chain, to where it will be in the years to come.
Cloudification of telecom equipment offers unprecedented opportunities (e.g.,
innovation, better economics, business agility, etc.) but it inherently
constitutes new technologies for the industry and there is a risk attached.
There will be challenges, given the lack of maturity and many unknowns around
performance, best practices, and control of technology assets. But operators
that rise to these challenges first may well gain a competitive market
advantage," Alusha concludes.
These findings are from ABI
Research's Cloudification of Telecom
Technologies and Equipment application analysis report. This report
is part of the company's 5G Core & Edge
Networks research service, which includes research, data, and
analyst insights. Based on extensive primary interviews, Application Analysis reports present in-depth
analysis on key market trends and factors for a specific technology.
Source: ABI Research media announcement
