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Telefonica models the transition of a traditional telco to a digital service provider

Telefonica represents a prime model of the opportunities and challenges telecom operators will experience as they evolve into digital service providers. The digital era will enable telecom operators to become more agile and profitable as they transition away from more costly legacy network technologies and business models. The digital era will place greater expectations on telecom operators, however, as customers will turn to digital service providers to support a broader range of services and use cases.

Telefonica will benefit from recognizing that it is just a single entity competing in a vast digital ecosystem composed of a multitude of players, including other telecom operators, webscales and OTT video providers. Collaborating with the broader technology industry will enable Telefonica to reduce the cost of developing in-house solutions while enabling the company to more effectively support customers’ digital ambitions.

The 2019 Telefonica Industry Analyst Day showcased Telefonica’s (NYSE: TEF) evolution from a traditional telecom operator to a digital service provider (DSP). Telefonica is positioning as a leading global DSP through its progress in virtualizing and cloudifying its network and IT systems as well as the company’s capabilities in emerging technologies, including AI, machine learning (ML), big data and edge computing. Telefonica’s digital transformation initiatives are yielding significant cost savings as the company modernizes its network infrastructure and customer service platforms while creating new services to enhance user experience and support advanced use cases. Telefonica will face challenges in the digital era, however, including growing competition from webscales, regulatory hurdles, and unproven demand for use cases in areas including 5G and edge computing.

CSP spend on edge compute infrastructure will grow at a 76.5% CAGR to over $67B in 2023

TBR estimates over 100,000 mini data center (edge) locations will be built out globally by CSPs through 2023. The primary driver of edge build-outs during the forecast period is CSPs’ network transformations, which entail migrating to a cloudified and virtualized network. In this new architecture, network functions will be virtualized and housed in NFVI, which is essentially data centers. Central office overhauls will be the primary edge compute location in the early years of the forecast period, with the build-out of the capillary system required to support revenue-generating low latency use cases expected to begin in the middle years of the forecast period.

CSP spend on edge compute infrastructure will grow at a 76.5% CAGR to over $67B in 2023

According to TBR’s 2Q19 Telecom Edge Compute Market Landscape, cost optimization of the network is the primary initial justification for CSPs to build out edge compute infrastructure, with new revenue from low latency use cases expected to materialize in a few years. This initial edge build-out will lay a foundation for CSPs to support new business models as they emerge, particularly as it pertains to low latency services.

Cost savings from the use of edge sites stem from infrastructure virtualization and real estate footprint consolidation as well as bandwidth optimization. One of the key areas of cost savings for CSPs is the use of white-box hardware in their virtualized networks. According to TBR’s research, white-box hardware can cost up to 50% less than black-box hardware. This represents significant cost savings to CSPs that adopt white boxes at scale. Webscales already widely use white boxes in their central data centers, and leading CSPs such as Rakuten, AT&T, Verizon and Telefonica are beginning to build their edge sites using almost exclusively white boxes. The use of white boxes will make it economically feasible for the capillary network to be built out, as cost feasibility is one of the primary inhibitors to edge build-outs.

CSPs are in the experimentation phase of testing new business models that leverage edge compute, with low latency services being the focus area. Though there are myriad potential use cases that would require low latency connectivity, such as connected transportation and AR/VR gaming, the business case remains unclear and the theoretical investment to enable and support said use cases is high. TBR believes it will take a few more years before new revenue-generating use cases for the network that require edge compute become commercialized and begin to contribute to CSPs’ revenue.

Cost of ‘intelligent connectivity’ must decline significantly for intelligent world to unfold

TBR perspective

Realizing the intelligent world presented by the mobile industry at Mobile World Congress Barcelona 2019 (MWC19) will require a fundamental change in how networks are architected, including a radical reduction in the cost of providing connectivity. It will also require business transformation for companies tied to the old world, namely communications service providers (CSPs) and their incumbent vendors.

It was readily apparent at the event that technology is advancing at a much faster pace than the establishment of business cases that economically justify deployment of the technology. The reality for the mobile industry is that the cost of building, owning and operating networks is too high and networks are too inflexible to support the business realities of the digital era, whereby connectivity is relegated to a commodity service and the value lies in the platforms and applications that run over the network. The industry has known this for years, but changes have been minimal, until maybe now.

The entrance of Rakuten to the mobile industry could be a game changer and provides a glimpse into what a digital service provider will look like. In what could arguably be the most important takeaway from the entire event, Rakuten’s approach to building and operating a network could signify a paradigm shift in the industry. 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.

The theme of MWC19 was “intelligent connectivity” and centered on how 5G, IoT, AI and big data are coming together to enable the intelligent world. Against this backdrop, Rakuten stole the show with the evangelization of its end-to-end virtualized and cloud-native network, which is being deployed across Japan this year. Rakuten’s network provides a glimpse into what the intelligent network of the future will look like.

Webscale competition increases among carrier cloud providers

Combined Cloud as a Service revenue for telecom operators in Technology Business Research Inc.’s (TBR) 2Q18 Carrier Cloud Benchmark rose 26.3% year-to-year in 2Q18 due to strategic acquisitions and alliances, investments in new data centers, and portfolio expansion in growth segments such as SaaS and hybrid cloud. All benchmarked companies sustained year-to-year Cloud as a Service revenue growth in 2Q18 as significant opportunity remains for carriers to target businesses seeking greater cost savings, scalability and efficiency by migrating traditional infrastructure and applications to the cloud.

Certain Asia- and Europe-based operators including China Telecom, Telefonica and Orange accelerated Cloud as a Service revenue growth in 2Q18 as the companies benefit from data sovereignty laws, such as General Data Protection Regulation (GDPR), requiring cloud data to be stored in local data centers, which is slowing the growth momentum of U.S.-based webscale providers in these regions. Pressure from U.S.-based webscale providers will continue to increase over the next five years in Asia and Europe, however, as they ramp up data center investments and partner with local data center providers to gain traction in these regions.

Graph showing total Cloud as a Service revenue and year-to-year revenue growth for benchmarked carriers in 2Q18

 

TBR’s Telecom Practice provides semiannual analysis of Cloud as a Service revenue in key segment splits and regions for the top global carrier cloud operators in its Carrier Cloud Benchmark. Operators covered include Bharti Airtel, British Telecom, CenturyLink, China Telecom, Deutsche Telekom, Korea Telecom, NTT, Orange, Singtel, Telefonica and Vodafone.

Telecom operators drill down on IoT opportunity in logistics

Despite the hype to the contrary, in commercial Internet of Things (IoT), not all verticals are created equal in terms of opportunity. There is near-term opportunity in some verticals, while opportunity in other verticals will take a few years to mature. The verticals with the longest and deepest histories of using IoT are oil and gas, utilities, manufacturing (including automotive), and logistics. Because these verticals have a long history of using primitive IoT, mostly in the form of telematics, customers in these areas are more familiar with what IoT can offer, how it can be applied to their businesses and where measurable ROI can be found. Unsurprisingly, segments that have most experience with IoT continue to generate the greatest amount of IoT-related revenue.

Telecom operators were early to advertise that they were leaders in the verticals mentioned above. However, now that the chips are down, TBR believes operators are focusing on real, mature IoT opportunity, leading to them drilling down on logistics. Logistics aligns well with telecom operators’ capabilities due to the mobile and distributed use cases. Verticals such as manufacturing provide less opportunity to telecom operators due to the more static and condensed nature of factories. Here are some examples of commercial logistical moves from leading operators:

  • In March 2017 Verizon announced the combination and rebranding of its Verizon Telematics, Fleetmatics and Telogis acquisitions into Verizon Connect. Verizon notes that the rebranding completes the integration of its connected vehicle division with its acquisitions of fleet and mobile workforce management companies Fleetmatics and Telogis. TBR believes the rebranding of Verizon’s telematics businesses into Verizon Connect was a smart move because focusing its IoT business around connecting mobile workforces differentiates Verizon, letting customers clearly know what they can use Verizon Connect for, highlighting its expertise and also making it more partner-friendly. Verizon Connect is now a module that can enhance a broad IoT platform such as Azure IoT.
  • In May 2018 AT&T entered into a partnership with operational technology (OT) behemoth Honeywell to develop IoT solutions for aircraft and freight deployments worldwide. AT&T delivers Honeywell worldwide connectivity, and Honeywell gives AT&T a larger door into industrial engagements.
  • In February AT&T launched two comprehensive solutions with Geotab’s fleet tracking platform, AT&T Fleet Management for Enterprise and AT&T Fleet Management for Government, to provide customers with a holistic view of their transportation assets to improve costs, productivity and safety.
  • TBR believes Telefonica, Vodafone and Orange are also competing for logistics engagements using well-populated landing pages touting their ability to provide logistics-based IoT solutions. Orange, for example, signed a three-year multimillion-euro agreement with Finland-based Cargotec in 4Q17 to codevelop an IoT-based cargo solution.

While vendors will compete for logistics business opportunities worldwide, TBR believes Verizon will try to consolidate and win share of the field service and trucking industries in North America; AT&T will focus on air and sea shipping or asset tracking worldwide and leverage its advantage in connected car gained through multiple contracts with leading automakers; and Telefonica, Vodafone and Orange will battle it out for EMEA and LATAM share.

 

Portfolio and network enhancements showcase Telefonica’s evolution to digital service provider

Telefonica’s (NYSE: TEF) progress in evolving from a traditional communication service provider to a digital service provider was highlighted at the company’s 2018 Industry Analyst & Customer Day. Telefonica’s digital transformation initiatives will yield internal cost savings and increased operational efficiency for the company while enhancing connectivity, scalability and customer experience for consumers and businesses. Telefonica is also expanding its portfolio in emerging technologies, including artificial intelligence (AI), machine learning (ML), big data and advanced Internet of Things (IoT) use cases that will increasingly become a part of businesses’ and consumers’ daily lives over the next decade. However, Telefonica will face difficulties in its journey, including balancing network and technology investments while managing the company’s high debt load, the challenging regulatory environment for telecom companies, and competitive threats from webscales and rival carriers that are also aggressively expanding their digital portfolios.