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ABI Research: Hyperscalers Redefining Telecoms Commercial Models

June 14, 2022

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.

According to Akshay Sharma, CTO, Kovair Software, and former Gartner Analyst on 5G and Telco Cloud Strategies, “We agree with the ABI Research findings that telecom service providers will shift from CAPEX to OPEX from equipment spend, to newer virtualized software solutions spend, that is orchestrated as needed, using newer Closed Loop Automation solutions, and Intent-based Networking solutions. These will be delivered using innovative Hyperautomation Platforms supporting the orchestrated use of multiple technologies, tools or platforms like DevSecOps orchestration solutions, iPaaS: integration Platform as a Service, Workflow Process software and other types of decision support tools, which Kovair uniquely provides. Additionally, this will require Cloud-based Service Mesh solutions, with security, resiliency and process compliance engineered in.”

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.

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