Channel partner ecosystems evolve to support digital disruption

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Over the past several months, TBR has seen increased activity and interest around the topic of channel and alliance strategy across our 12 ICT industry coverage domains. While channel and alliance strategy is a pervasive topic, the intensity and tenor of the questions posed recently signal an increased focus around deploying industry-leading partnering strategies to pursue long-term growth.

Some of the common recent questions we’ve fielded from our clients include:

  • We’ve been partnering with global systems integrators (GSIs) for years, but our relationship in this emerging technology or service area is new. What is the right engagement model for this new area? What revenues can we expect? How do we establish a stronger relationship than our peers?
  • Our competition in this new portfolio area has stronger relationships than we do. How do we develop programs, incentives and recruitment strategies to secure partner engagement?
  • What are the right partners to engage with to achieve our objectives in this area? What type of programs, engagement models, incentives, benefits and management structure will resonate with those partners?

While these questions themselves aren’t entirely new territory, the systemic market forces that underpin them are certainly disruptive to partnering models for many ICT providers. The quote below, from TBR’s 1H18 Cloud Applications Customer Research, speaks to how the economics of cloud and digital IT consumption impacts the role of the services partner in applications deployment:

“Partners are still an integral part of almost every deal we do, but most deployments are no longer $10 million to $20 million to get it installed — now [it’s] just about $1 million. Many companies have shrunk their IT departments over time because of cloud, leading to skills gaps, so partners are so important.”

— Senior Director of Procurement, Telecommunications

Partners will continue to fill a critical role for enterprise customers and, by proxy, leading technology companies, but digital disruption will continue to shift how vendors think about partner roles. A few ways we are seeing technology disruption impact vendors’ partner programs and strategies include:

  • Self-developing Partner Ecosystems: Firms are creating formal programs and incentives to encourage partner-to-partner relationship development and joint go-to-market activity (i.e., a marketplace ISV engaging with a reseller to jointly support a customer).
  • Partner Stickiness and Specialization: Leaders use partners as a conduit to specialize by industry, use case or region, and are encouraging partners to expand portfolios and enhance industry and/or solution specialization (i.e., cross-training ISV partners as implementers in an industry).
  • Partner Journeys: Vendors are reconsidering traditional partner tier structures and aligning program tier requirements and benefits to reclassify partners around long-term value opportunity versus purely revenue generation.

I’ll be conducting a webinar on Wednesday, April 17 at 1 p.m. EDT that will dive into these trends and others in greater detail. Click here to register for the webinar. For questions on this or anything else, you can contact me at [email protected].

CSPs focus on supporting advanced use cases and network technologies to maximize IoT revenue

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Industry 4.0 will spark the adoption of advanced IoT use cases as well as the integration of network slicing and private 5G networks

TBR projects global CSP IoT revenue will increase at a CAGR of 24.9% through 2023 as the launch of mobile 5G services contributes to revenue growth acceleration starting in 2020, and operators, particularly in China, begin capitalizing on advanced use cases. As the 5G and digital ecosystems develop, advanced IoT use cases will emerge that can leverage the unique performance characteristics 5G offers, specifically high bandwidth and low latency. Connected transportation, AR/VR, and mission-critical IoT are all likely to be preliminary use cases for 5G technology, but the commercialization of these use cases will take a couple of years to unfold.

Though advanced IoT use cases that require the precision promised by 5G, such as remote surgery, are being explored, many of these services will not become commercially available until the mid-2020s at the earliest. Additionally, solutions such as remote surgery and V2X (vehicle-to-everything) automotive services will be burdened by significant regulatory and societal challenges.

TBR anticipates Industry 4.0, which includes mass 5G adoption globally, will ramp up around the 2022 to 2025 timeframe and result in heightened spend on ICT infrastructure as demand for new use cases, including advanced IoT solutions, increases. As Industry 4.0 progresses, leading enterprises in certain verticals such as manufacturing, logistics and warehousing will likely opt for private 5G networks that they buy, own and control. Private 5G networks will provide enterprises enhanced data security and the precision needed to support advanced IoT solutions. Private 5G networks will provide new revenue opportunities as customers will in many cases be purchasing these networks directly from telecom vendors rather than CSPs.

Though some larger enterprises will opt for private 5G networks, TBR expects most smaller companies will need to support advanced IoT solutions via a slice from a CSP. Though network slicing solutions will provide revenue opportunities for telecom vendors, adoption will be limited initially as most global operators will delay migrating to 5G core networks, which is essential to support network slicing, for another several years. Though many operators outside of China and South Korea will delay upgrading the 5G core because the system will be costly to install, early adopters will gain a time-to-market advantage capitalizing on advanced IoT use cases requiring the accelerated data speeds and ultra-low latency enabled by network slicing.

TBR Weekly Preview: March 25-29

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We’re in a slower earnings period, which means fewer vendor-centric reports and more benchmarks and market landscapes. And at the end of the week, Accenture gets the early jump on 1Q19, as we analyze the company’s cloud-centric portfolio and overall performance.

Thursday

  • Accenture will kick off the 1Q19 earnings season for services companies. While we expect Accenture’s revenue growth to taper compared to the company’s year-ago performance, investments in platforms such as SynOps, which addresses key pain points such as augmentation of human labor through automation across IT operations processes, strengthen the company’s position for long-term digital transformation opportunities. Additionally, we continue to closely monitor Accenture’s relationship with its Big Six partners, such as the recent launch of Accenture Microsoft Business Group (AMBG). While AMBG is a natural extension of the relationship between Accenture and Microsoft, it raises questions about the future of Avanade. (See Boz Hristov for additional details on Accenture.)
  • In TBR’s 4Q18 Devices and Platforms Benchmark, we found that total benchmarked revenue declined 2.4% year-to-year to $142.6 billion as the device market ran up against global economic challenges, increased device saturation, and reduced consolidation opportunities. The biggest driver of devices revenue decline was sluggish sales for legacy smartphone vendors Apple and Samsung as the Western premium market becomes saturated and device life cycles lengthen. Outside Western markets, legacy smartphone vendors are being pressured by aggressive, more recent market entrants such as Huawei and OPPO, which are eroding share by offering aggressively priced midrange devices with premium features. Outside smartphones, the PC market grew despite silicon shortages. However, TBR predicts the Windows 10 refresh opportunity will begin to wane as PC vendors exhaust worldwide opportunities. Read more about the smartphone, PC, tablet and smart device markets, as well as the impacts of platform and solution trends, such as DaaS, in our full report. (See Dan Callahan for more.)

Friday

  • TBR’s Accenture Cloud report will highlight Accenture’s evolution around key investment initiatives such as Journey to Cloud, as well as the company’s managed services positioning within the infrastructure management domain. Additionally, we continue to asses Accenture’s relationships with cloud buyers through the use of standardized, price-competitive offerings supported by highly specialized and certified talent.
  • This month’s Digital Transformation Insights report focuses on two leading vendors, Accenture and IBM. Using TBR’s extensive coverage of these companies across IT services, management consulting, cloud, software, IoT, and even telecom, we stand these companies side-by-side to examine their financial performances, strategies, investments and approaches to the digital transformation market.

Once again, we have multiple TBR analysts traveling this week, so expect special reports on PwC and Accenture as early as next week.

Pivoting to industry offerings and managing disruption: Not everyone can keep pace

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Over the last two weeks, TBR has spent time with three leading IT services and consulting vendors, discussing their strategies for evolving digital transformation and hearing from their clients about what has worked and where frustrations remain. Two common themes came out of these discussions: industry-specific offerings and market disruption.

While we’ve frequently commented on the industry-centric culture and mindset of some leading IT services vendors and consultancies, we’ve typically seen their partnerships with technology vendors revolve more around horizontal solutions and emerging tech capabilities. One substantial shift of late has been a new focus on coinnovating, developing, and taking to market offerings and solutions designed specifically for industries, or even subverticals within an industry. This isn’t completely new, although the emphasis may be, and a sustained investment would solidify this trend. But the real implications, we think, will come for the IT services vendors amid their pivot to an industry focus. One of the leading vendors, a company as deeply ingrained with industry expertise as any of the Big Four firms, discussed its plans to roll out new industry-specific offerings with a leading software provider, noting that the companies together chose industries best suited to match their combined strengths. In contrast, we understand other large IT services vendors continue to struggle in pivoting to an industry-centric organization (never mind an industry-expertise culture). If these large vendors cannot identify their strengths and opportunities as well as their best-match software partners, they’ll fail to differentiate as the market moves to industry-centric digital transformations.

The second theme, disruption, is something that everyone is talking about. No analyst event, client meeting, or tour of an innovation, immersion or experience center passes without the discussion turning to how disruption in the market forces quicker decision making and faster actions. What emerged during my discussions with all three vendors these past two weeks was the clear distinction between internal and external disruption and the role an IT services vendor or consultancy can play in assuaging one and stoking the other. Clients spoke at length about the role their IT adviser played in ensuring core systems and operations would not be disrupted, even as the enterprise itself, including IT, went through a digital transformation. The three companies we met with described their role in providing trust, assurance, hyper-care attention to issues and problems, and everything from the road map to the running-at-speed implementation for clients both ready to change and nervous about the risks involved. Clients also expressed their fears of external disruption from traditional and nontraditional competitors, technology partners unable to deliver, and market forces moving faster than their systems can manage. While IT services vendors and consultancies haven’t created these fears, TBR can appreciate that a little uncertainty isn’t such a bad thing.

We will explore both issues in greater detail in our upcoming Management Consulting Benchmark as well as in the monthly deliverables in our Digital Transformation Insights portfolio. Stayed tuned.        

Cloud marketplaces are small in revenue impact but mighty in market impact

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Cloud marketplaces are more of a slow burn compared to pronounced market impacts in books, retail and music

To predict the impact of cloud marketplaces, it is worth evaluating how similar changes in go-to-market strategies have impacted other markets. Sears (Nasdaq: SHLDQ), Amazon (Nasdaq: AMZN) and Apple (Nasdaq: AAPL) are three very different companies that illustrate just how profound an impact sales motions can have. Sears rode the impact of its mail-order catalog for nearly 100 years in a wave of success that only recently petered out. Amazon and Apple have much broader business strategies, but both owe a considerable amount of their success — which has them jockeying for the title of the world’s largest company in terms of market capitalization — to their selling methods. Both Amazon and Apple entered well-established markets and disrupted them, not by competing on the merits of their offerings but by challenging the existing sales motion with a marketplace approach. Amazon’s online approach to the book market is a very pronounced example of marketplace disruption, as Figure 1 illustrates. Amazon began selling books online in mid-1995, overtook traditional market leader Barnes & Noble less than eight years later, and subsequently expanded and dominated the market. Today, Amazon controls over 50% of the total book market in the U.S., including both physical and digital titles.

Market overview: Online marketplaces, where customers can browse, search and then buy or subscribe to software titles, have been around for quite some time. Salesforce (NYSE: CRM) rolled out the first cloud app store in 2005, and a wide variety of new options have been introduced since. Despite their longevity, the impact of these marketplaces is still uncertain. Salesforce AppExchange is a standout success, but the impact is more nuanced for most other marketplaces and the industry overall. Marketplaces have not yet become a prominent distribution model for software and cloud services, but they play a niche role in overall go-to-market strategies that include traditional direct sales, partner-driven sales and customer self-service sales. Although marketplaces currently hold a small portion of overall cloud and software revenue share, trends could bolster their role in the market moving forward.

India-centric professional services firms jockey for position in the digital world

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Position as trusted advisers for enterprise customers’ modernization efforts

Technology specialists such as Salesforce and ServiceNow recognized the need of enterprises to have a trusted adviser for their modernization efforts and re-geared their service teams to capitalize on this opportunity. For instance, by verticalizing its service teams, Salesforce now provides industry-specific services to customers modernizing their infrastructure, architecting its portfolio against customers’ needs. While addressing customer needs around deploying Tier 1 provider solutions is critical to professional service firms, partnering with smaller technology specialists such as Tableau, Intuit and Epicor that lack the resources to become trusted advisers to prospective customers creates an avenue for growth in the digital realm. Within the applications space in particular, this represents a significant partner opportunity for professional service firms aiming to root themselves in the enterprise C-Suite undergoing digital transformation.

Where will tomorrow’s Greenfield opportunities exist?

The software-driven world has rapidly accelerated the presence of next-generation technologies in customer IT environments. Having software-defined architectures — from AI to blockchain — accelerates time-to-market for next-generation solutions. TBR believes this is especially true with containerized applications that technology vendors are increasingly targeting, evidenced by IBM’s acquisition of Red Hat for $34 billion, and VMware’s recent acquisition of Heptio.

However, rising adoption of hybrid architectures creates additional challenges for customers seeking to deploy containerized applications, as they must ensure the compatibility of on- and off-premises IT infrastructure with containers. This challenge has given rise to managed services around solutions like Kubernetes, with Platform9 announcing the first fully managed service for Kubernetes on VMware infrastructure in February 2019. TBR believes professional service firms that can foster relationships with various open-source container groups, or leading vendors like Red Hat, will be well positioned to work with enterprise customers seeking to deploy the solutions.

To date, India-centric services firms such as Cognizant, HCLT and Infosys have reference architectures, DevOps and advisory services related to leading containerized application frameworks, such as Kubernetes. While these services help educate prospective customers on the benefits of containers, TBR believes that without skilled headcount, such as senior DevOps application engineers, India-centric services firms risk missing out on the opportunity to partner with technology specialists with robust service teams like Microsoft and Google that are better positioned to guide prospective customers through deployments of emerging technology on their infrastructure. 

TBR reports quarterly on five India-centric IT services giants and includes analysis of their strategies and performances in the quarterly IT Services Vendor Benchmark. This special scenario has been drawn from and complements the most recent reports on these vendors. For further questions, see the TBR team.

WWT’s innovation center shines a spotlight on the company’s evolution from product reseller to outcome enabler

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The rise of the innovation center as a platform for digital storytelling

Enabling customers’ digital transformations has become the holy grail opportunity for companies across the technology ecosystem. In a world in which everyone from server and storage vendors to technical services providers professes to be a “technology solutions provider,” marketing alone is insufficient to convince customers to entrust their digital futures to just a run-of-the-mill technology company. TBR’s research on the private and public sector consulting and IT services providers that typically deliver the expertise necessary to enable transformation shows that to do digital effectively for customers, providers must be digital internally.

Being digital means engaging in self-disruption by integrating internally the same innovative technologies that customers demand externally. It means adopting cloud operating models, developing IP and embracing new monetization cycles. These are difficult tasks, and not all technology companies are up to the challenge. Those that let fear paralyze action face the prospect of becoming irrelevant as more adventurous competitors build credibility around customer zero use cases leveraging partner-developed technology and come to clients armed with their own digital transformation success stories. Customers do not always care about a provider’s platinum-level certification from vendor X, Y or Z, but they will likely find something compelling in a provider’s story about navigating their own self-disruptions.

If customer zero is the story that successful services providers tell clients, then innovation centers are the stage on which the story is told. Innovation centers, digital studios, design studios, centers of excellence: There are almost as many names for these centers as there are examples of companies integrating them into their sales and marketing efforts. While it began with the leading consultancies, the innovation center trend has proliferated across all corners of the IT sector. A key component of providers’ overall innovation programs, the innovation center is where technology providers make digital transformation tangible for their customers. Innovation centers offer a neutral space to discuss business outside typical office settings, bring stakeholders to the table to identify and find solutions to problems, and develop blueprints for a successful transformation, enabled by collaboration between provider and customer. Innovation centers, when run correctly, evolve the conversation from one between buyer and seller to one between equal partners co-invested in enabling a successful digital initiative.

TBR recently spoke with World Wide Technology’s senior vice president of public sector sales, Bryan Thomas, to discuss the technology solutions provider’s new innovation center in Washington, D.C., and its connection to the company’s Advanced Technology Center in St. Louis. The conversation focused on how these centers improve client engagement and enhance go-to-market performance, as well as the importance of expert talent and the shift toward a consulting-led model to meet the specific mission objectives of federal clients.

TBR Weekly Preview: March 18-22

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In addition to this week’s vendor analysis, TBR Senior Analyst John Caucis will host a webinar Wednesday, March 20, sharing his insights on the state of the healthcare IT services market and the 2019 HIMSS mega-event. 

Furthermore, TBR analysts will be attending several events this week, so be on the lookout for special reports on Accenture, SAP and Oracle as early as next week.

Monday

  • Despite its top-tier innovation and optimistic messaging, Oracle struggles to find incremental growth outside its cloud ERP portfolio. While traction around autonomous database builds, these ERP inroads present an opportunity for Oracle to more effectively craft a story across its integrated cloud applications and platform capabilities. TBR’s initial findings can be accessed today, but read more on the subject in our 1Q19 Oracle Cloud full report publishing in April. (Meaghan McGrath leads TBR’s analysis of Oracle.)

Wednesday

  • HP Inc. delivered corporate growth of 1.3% year-to-year, a significant slowdown after five quarters of double-digit growth. During the company’s 4Q18 earnings call, executives discussed challenges within HP Inc.’s profitable print supplies business, but slowed growth in its commercial printing and overall PC businesses indicates the problem is broader. Slowing consolidation opportunities and rising opposition from its peers in the PC market will increasingly challenge HP Inc., whose PC business composes most of its top line. In addition, the CPU shortage has been more impactful to HP Inc.’s wider portfolio. Read our full report to find how HP Inc. will navigate these challenges throughout 2019, including growing its Device as a Service portfolio and supporting its sales channels to build a bulwark for upcoming PC share wars. (See Dan Callahan for more analysis.)

Thursday

  • According to TBR estimates, Dell Technologies achieved $23.8 billion in revenue, up 8.6% year-to-year in 4Q18. Gross profit increased 20.7% year-to-year, highlighting Dell Technologies’ successful improvement in overall profitability. In TBR’s 4Q18 full report on the company, we will dive into the performance of key business units. Within Infrastructure Solutions Group (ISG), TBR believes aggressive market share expansion in both servers and storage will be a key focus for at least the first half of 2019, which will result in investments in direct sales, ISG’s channel partner program and portfolio enhancements. In Client Solutions Group, Dell Technologies will continue to benefit from shrinking memory prices as well as the CPU shortages, which will drive profitability up during 2019. From a corporate perspective, 2019 will see tightened integration between the vendor’s strategically aligned companies. (See Stephanie Long for more analysis.)
  • In this quarter’s analysis of Dell EMC Services, TBR will highlight how Dell Technologies integrating preconfigured services solutions around core infrastructure technology competencies enables Dell EMC Services to attach profitable and recurring services revenue streams. (Kevin Collupy leads TBR’s analysis of Dell EMC Services.)
  • In 4Q18 Hewlett Packard Enterprise (HPE) reported corporate revenue of $7.6 billion, down 1.6% year-to-year. TBR estimates total cloud revenue reached $1.9 billion, up 3.1% year-to-year, as HPE continued to invest in its cloud portfolio and capitalize on customer demand for hybrid IT solutions. HPE’s leaner business and ongoing restructuring efforts through HPE Next allow HPE Cloud to focus on and invest further in its core areas of strength, namely hybrid infrastructure and edge computing for IoT and telecommunications use cases. (Cassandra Mooshian leads TBR’s coverage of HPE Cloud.)
  • VMware’s top-line growth continues to outpace that of its software peers in TBR’s Infrastructure Management Software Vendor Benchmark. In 4Q18 VMware experienced its strongest quarter since 3Q14, with revenue growth of 16.4% year-to-year to $2.6. Revenue growth was buoyed by strong adoption across VMware’s emerging product lines, with vSAN revenue growing 60% year-to-year and Hybrid Cloud and SaaS revenue growing 35% in the same time period. Further, the company is successfully packaging solutions around hybrid management to increase deal sizes and reported a company-record 23 deals in excess of $10 million during the quarter. (Cassandra Mooshian leads TBR’s coverage of VMware.)
  • Huawei is taking a prominent role in setting standards for 5G and launching solutions to help operators implement 5G services, which has led to key early commercial 5G-related contracts in EMEA and APAC. While security concerns around 5G will persist, Huawei will continue to grow revenue in 2019 largely due to its Consumer and Enterprise business units, which are taking share from incumbents.(Michael Soper leads TBR’s coverage of Huawei.)

Friday

  • According to TBR’s 1Q19 Telecom IoT Market Landscape, TBR estimates global communication service provider (CSP) IoT revenue rose 25.6% year-to-year to $22.3 billion in 2018. Despite sustaining strong revenue growth, TBR estimates global CSP IoT revenue accounted for only 1% of consolidated global CSP revenue in 2018, which is insufficient for most service providers to offset erosion within challenged segments such as legacy network services. To maximize IoT revenue opportunities long term, CSPs are focusing on attracting customers by implementing more cost-efficient network technologies such as NB-IoT and LTE-M, targeting high-value contracts in areas such as smart cities and healthcare, and by positioning to support next-generation IoT solutions integrating technologies such as 5G and edge computing. (Steve Vachon is TBR’s lead analyst covering the Telecom IoT space.)

IBM makes major strides in quantum with Volume and AI

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  • IBM Quantum Volume creates a new way to assess a quantum computer’s capabilities as a whole system, rather than just based on its number of qubits.
  • IBM unveils research into the intersection between quantum computing and machine learning.

IBM, ever present in the development of cutting-edge technology, is a leader in the quantum computing space and brought its IBM Q System One to market in January. This came after the company provided access to three of its quantum systems through the cloud. TBR notes that providing access to actual quantum systems, and not simply quantum simulators via the cloud, differentiates IBM’s capabilities from those of peers. Currently, a key purpose of providing access to these quantum systems through the cloud is education. IBM is learning from past challenges by getting out ahead of innovation and making internal and external learning and development a priority. This will ensure that trained internal personnel are in place once IBM Q achieves commercial application and research viability as well as help accelerate the rise of IBM Q by educating those outside IBM who might be involved in developing technological advancements, at least at the algorithmic level.

Quantum Volume assesses quantum capability of a whole quantum system

IBM unveiled Quantum Volume, which is a way to measure the capabilities of an entire quantum system, including qubits, software and overall functionality. IBM aptly demonstrated the value in measuring the functionality of a quantum system by more than just the number of qubits. Qubits are very complex, and factors including the quality of the qubit and the impact of unwelcome external stimuli need to be assessed as qubits are highly sensitive to environmental influences.

Aspects such as gates, connectivity, algorithm errors and compilers are all assessed by Quantum Volume. The capability of the computer is then determined, and it is categorized with a number, which serves as a rating of sorts. This rating is a key to the entire quantum computing market, TBR believes, because it provides a relatively unbiased way to measure the capability of a quantum computer. The current process, in which the number of qubits is used to measure capability, omits essential factors.

More significantly, IBM contends it has discovered a metric for quantum advancements comparable to Moore’s Law for classical computing advancements. Given quantum computing will be adopted essentially algorithm by algorithm, this new metric could help guide the broader user community about when a given algorithm will be ready to move to quantum computing based on the advancements in the technology and the complexities of the algorithm in question. This information can then be used to optimize the deployment layer based on mapping the algorithm to the known performance of the different qubits within the systems.

IBM evaluates the parallels between quantum computing and machine learning

IBM published some of its research, in which it evaluated the applications of quantum computing in conjunction with AI and machine learning to address additional emerging demands. Further details regarding this research can be found in an article published in Nature titled, Supervised learning with quantum—enhanced feature spaces. At its core, AI is simply the evaluation and analysis of massive data volumes that help train a system. In classical computing this process can be time-consuming, but when digital transformation is added to market offerings such as connected cars, time is of the essence and cannot be squandered performing these types of tasks. Quantum computing would not only reduce time to insight but also improve the accuracy of the insights gathered.

Quantum computers can analyze and evaluate data much faster than a classical computer and can also process more complex data sets. These increased levels of speed and complexity will enable machine learning to be more insightful and, therefore, more applicable to more complicated use cases. Key use cases that IBM highlighted for these capabilities initially are model training, pattern recognition and fraud detection. These use cases are fundamental to a connected world, where bad actors would have the potential to cause great harm if they tamper with systems, as would machine malfunctions. If data can be evaluated and extrapolated into real-time applications faster, the potential dangers of an increasingly connected world can be mitigated more quickly.

The market implications of quantum developments are vast and will be rapid

Although individually these announcements may seem small in the scheme of quantum computing, when combined with IBM’s existing breakthroughs in the technology, they demonstrate the breadth of the market IBM’s quantum capabilities will be able to impact once quantum advantage is achieved. Quantum Volume enables IBM to determine use-case efficiencies for quantum computers once commercial availability is attainable. The ability to combine the capabilities of quantum computing with AI will accelerate digital transformation dramatically and launch society into the next technological revolution much faster, as more rapid time to insight will open new avenues of exploration.

Webscale capex growth will decelerate, though dollar volume will continue to climb, as data center builds slow

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According to Technology Business Research, Inc.’s (TBR) 1Q19 Webscale ICT Market Landscape, webscale ICT capex for the Super 7 will grow at an 8.1% CAGR to nearly $58 billion in 2023. Most U.S.- and China-based webscales began pulling forward significant investment in data center and network capacity in 2018, which will lead to moderating — or even declining — capex levels for some U.S.-based players beginning in 2020. China-based webscales will continue to ramp ICT capex through the forecast period, however, to catch up to Western rivals in key areas, particularly public cloud.

The entrance of Rakuten, a Japan-based e-commerce company, to the mobile industry could be a game changer and provides a glimpse into what a digital service provider will look like. Rakuten’s mobile network will blanket Japan with LTE coverage by year-end. Not only will Rakuten’s network be agile, flexible and dynamic to provide digital services, it will also enable a dramatic reduction in the cost of connectivity. Rakuten’s ultimate intention is to be more than just another mobile network operator in the highly competitive Japan market; it aims to provide a foundational connectivity platform from which to sell a host of digital services. Rakuten’s acknowledgment that it needs its own network could lead to other webscales trying to take a more active ownership and control stance toward having a connectivity platform from which they can leverage their digital businesses. Alphabet, Facebook and Amazon, among other webscales, have all experimented with how to address last-mile connectivity, not only to bridge the digital divide but also to serve as a conduit to give them more control over their destinies without relying on communication service providers (CSPs) to provide the connectivity layer.

The OEM landscape continues to see disruption due in part to the power webscales hold over their suppliers. The vast number of suppliers taking part in Rakuten’s network build demonstrates that webscales hold the power when soliciting vendors for connectivity initiatives. When engaging with webscales, which have few legacy encumbrances, incumbent OEMs are being relegated to commoditized hardware and services. Should the 5G era bring about this trend in the CSP customer segment, incumbents will see more widespread disruption. Vendors must be wary of the webscale procurement model taking hold with their traditional customers.