AWS, Azure and Google Cloud are redefining telecommunications business models, platforms and digital services
5G is the first “G” of cellular technologies that paves the way for communications service providers (CSPs) to operate in the software layer. The software represents a break with the transactional model characteristic of telecommunications equipment manufacturing. Software points to a more consistent and predictable recurring revenue model, similar to that of hyperscalers. According to global technology watch firm ABI Research, this has implications for the business models that underpin the industry.
“With the growing importance of software, the business imperative from a vendor perspective is clear: move from a finite supply of equipment (3G and 4G), characterized by scarcity, to monetization models based on software (5G) where the supply is essentially endless,” says Don Alusha, principal analyst 5G Core & Edge Networks at ABI Research.
With the 3G and 4G networks, the commercial arrangements revolve around a CAPEX purchase model. FSCs pay a specific price to own an asset. This can be hardware (cellular antennas) or software based on a perpetual license. The value can be paid in cash, financed or leased. But what is most relevant, however, is that there is a fixed price. Once the deal is done, Network Equipment Vendors (NEVs) like Ericsson, Huawei, Nokia and ZTE are assured of upfront payment upon signing a contract. In a CAPEX model, NEVs have one point of tension: winning the deal. The risk of implementing purchased technology rests with the CSPs. A key point to note is that usually by the time a product is adopted and used, most of the budget has already been spent on installation, integration and other professional services needed to get the product operational. .
In contrast, in a 5G ecosystem, and by extension, in the cloud and software world, there may not be a “product” sale. Technology vendors have yet to channel the research and development (R&D) needed to develop the technology and win a market. They have to invest in marketing, run the sales cycle in hopes of winning the deal. In this respect, there is not much difference with the CAPEX model. The difference is that OPEX models are associated with recurring (micro) transactions: additional compute, more storage, more modules, etc. offset volume due to a higher cost structure associated with software; the marginal cost of producing an additional copy is very low. This underpins the business model and strategy of hyperscalers (Amazon, Google and Microsoft),” says Alusha.
Although very subtle, there is a growing consumerization of telecommunications technologies due to growing cloud and software adoption. The software business is an economic enterprise of scale. A considerable investment is made initially to develop a software product, and then the marginal cost of producing each is very low. The fundamental difference between construction software and manufacturing equipment is that the latter involves the creation and transfer of ownership of a product, while the former is much more intangible. There are benefits from a balance sheet perspective, as CSPs now pay for software based on a rough approximation of usage over time – an operational expense – as opposed to a fixed cost basis in a CAPEX-centric world. . This improves their return-on-investment (ROIC) metrics.
In the new world of cloud and software, in addition to selling a transaction, NEVs must also have a material and positive impact on the recipient of the service to create value. “It allows the industry to explore new business models that look beyond where the money is in the value chain, to see where it will be in the years to come. Cloudification of telecommunications equipment offers unprecedented opportunities (eg innovation, better economics, business agility, etc.) but it is inherently new technologies for the industry and carries risk. There will be challenges, given the lack of maturity and many unknowns around performance, best practices, and control of technology assets. But those operators who address these challenges first may well gain a competitive advantage in the market,” concludes Alusha.
These findings are taken 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 in-depth primary interviews, application analytics reports present an in-depth analysis of trends and key market drivers for a specific technology.