Thursday, April 23, 2020

Hyperscalers enter telco battlefront

We have, over the last few weeks, seen a flurry a announcements from hyperscalers investing in telco infrastructure and networks. Between Facebook's $5.7B investment in India's Jio Reliance, to Microsoft's acquisition of Affirmed Networks for $1.35B or even AWS' launch of Outpost and Google's Anthos ramp up.

Why are hyperscalers investing in telecom gear and why now?

Facebook had signalled its intent as far as 2016 when Mark Zuckerberg presented at mobile world congress his vision for the future of the company.

Beyond the obvious transition from picture and video sharing to virtual / augmented reality, tucked-in in the top right, are two innocuous words “telco infra”.
What Facebook realized is that basically anyone who has regular access to broadband will likely use a Facebook service. One way to increase the company’s growth is to invent / buy / promote more services, which is costly and uncertain. Another way is simply to connect more people.
With over 2,5 billion Facebook products users, the company still has some space to grow in this area, but the key limiting factor seems to be connectivity itself. The last billions of broadband unconnected are harder to attain because traditional telecom networks do not reach there. The last unconnected are mostly in rural area. Geographically disperse, with a lower income than their urban counterparts.
Looking at this problem from their perspective, Facebook reached a similar conclusion to the network operators operating in these markets. Traditional telco networks are too expensive to deploy and maintain to reach this population sustainably. The same tactics employed by operators to disaggregate and stimulate the infrastructure market can be refocused and better stimulated by Facebook.
This was the start of Facebook Connectivity, a specific line of business in the social media’s giant empire to change the cost structure of telco networks. Facebook connectivity has evolved to encompass a variety of efforts, ranging from the creation of TIP (an open forum to disaggregate and open telco networks), the co investment with Telefonica in a Joint Venture dedicated to connect the unconnected in latin america and this week, the announcement of its acquisition of 9.9% of Jio Reliance in India.

How about Microsoft, Google and others?

Google had, before the recent open source cloud platform Anthos dug their toes in telco water with project Fi and its fiber businesses.
Microsoft has been trying for he last 5 years to exploit the transition in telco networks from proprietary to IT. Even IBM's Redhat acquisition had a telco interest, as the giants also try to become a more prevalent vendor in the telco ecosystem.

So... why now?

Another powerful pivot point in Telecom is the emergence of 5G. As the latest telephony technology generation rolls out, telco networks are undeniably being re-architected and redesigned to look more like cloud networks. This creates an interesting set of risks and opportunities for incumbents and new entrants alike.
For operators, the main interest is to drastically reduce the cost of rolling out and maintaining complex telco networks by using powerful virtualization, SDN and automation techniques that have allowed hyperscalers to dominate cloud computing. These technologies, if applied correctly can transform the cost structure of network operators, particularly important at the outset of multi billion dollars investment in 5G infrastructure. The radical cost structure disruption comes from disaggregation of the network between hardware and software, the introduction of new vendors in the value chain who drive price pressure on incumbents and the widespread automation and cloud economics.
These opportunities bring also new risks. While they open up the supply chain with the introduction of new vendors, they also allow new actors to enter the value chain, either to substitute and dominate legacy vendors or create new control points (see the orchestrator wars I have been mentioning in previous posts). The additional risk is that the cost of entry into telco becomes lower for cloud hyperscalers as the technology to run telco networks transitions from proprietary closed ecosystem to open source, cloud environment.

The last pivot point is another telco technology that is very specifically aimed at creating a cloud environment in telco networks: Edge computing. It creates a cloud layer that can allow the provision, reservation and consumption of telco connectivity, together with cloud computing. As a greenfield environment, it is a natural entry point for cloud operators and new vendors alike to enter the telco ecosystem.

Facebook, Google, AWS, Microsoft and others seem to think that 5G and edge computing in particular will be more cloud than telco. Network operators try to resist this claim by building a 5G network that will be a fully integrated connectivity and computing experience, complementary to public clouds, but different enough to command a premium, a different value chain and operator control.

In which direction will the market move? This and more in my report and workshop Edge computing and Hybrid Clouds 2020.

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