Ways Cloud Computing Is, and Isn't a Big Revenue Driver for Telcos

Cloud computing was the fastest-growing category of U.S. service provider infrastructure spending in 2011, with a 28.4 percent increase, according to the Telecommunications Industry Association. 


The TIA also expects cloud computing will continue to be the fastest-growing category of network and facilities investment during the next four years, averaging 20.3 percent compounded annually.

As new cloud-based end-user services emerge and as existing services expand, end user spending will more than double to $12.1 billion in 2015 from $5.8 billion in 2011, according to the TIA. 


So cloud computing is a slam dunk opportunity for service providers? Opportunity, yes. "Slam dunk," perhaps not. Some reasonable caution always is in order when looking at cloud computing revenue. 


For starters, there are multiple types of revenue, not all easily earned directly by service providers. There is a reason industry observers talk about "infrastructure as a service," "platform as a service" and software as a service." They are different businesses.


Also, there are some businesses underpinning cloud computing, such as hosting, broadband access and transport, that might always represent more accessible revenue, in the cloud computing space, than the infrastructure, platform or software offerings.
In fact, most of the revenue upside appears likely to accrue to hardware and software suppliers, at least initially, according to a Morgan Stanley analysis. 


In other words, if Salesforce.com books revenue for sales to end users, can telecom service providers tap in? Maybe. But not automatically.

In the infrastructure end of the business, telecom service providers might make a business out of rental of computing cycles, storage and ancillary services. But what has to be done to market and support that business, and should effort be put elsewhere?

Keep in mind that cloud computing also is likely to reduce some existing telecom revenue streams, making its net revenue contribution more speculative. Any "cloud" moves by business customers that reduce needs to buy local access services or wide area private line services are examples.

In the telecom space, the analysts expect key winners to include Rackspace, Equinix and competitive local exchange carriers and metro bandwidth suppliers. In other words, hosting and access will be where the telecom revenue lies, possibly not in the infrastructure, platform or software as a service businesses.

The point is that assessing cloud computing revenue contributions for various ecosystem participants is complicated.

The core "cloud computing" business is about rental of computing cycles and storage, rental of development platforms, and rental of actual business apps. It isn't always clear that telcos have clear advantages, compared to other suppliers, in these businesses.

The software as a service business means suppliers will have to master what we used to call the packaged software business. Historically, telco and cable personnel haven’t been notably good at that. 


That is not to deny the attraction. One reason content delivery networks are an attractive business is that CDNs provide a new reason to buy transport services. It might turn out that cloud computing is interesting for telcos precisely because it increases demand for transport and access, and not because telcos actually sell so much IaaS, PaaS or SaaS.