AWS Wavelengths Does Not Create a Platform Opportunity for Telcos

One of the most-common suggestions for connectivity service providers selling to consumers is the notion that the business model has to evolve from “connectivity” (dumb pipe) to something else, up to and including “becoming platforms.”

So look at what telcos have been doing in the edge computing business so far. You might argue the approach is not “becoming a platform” but supplying dumb pipe (hosting, in this case). Amazon Web Services, for example, is partnering with several tie-one telcos to create edge computing as a service nodes. 

Wavelength is a physical deployment of AWS services in data centers operated by telecommunication providers to provide low-latency services over 5G networks. Operators signed up so far include Verizon, Vodafone Business, KDDI and SK Telecom.

Keep in mind, in this arrangement, it is AWS that becomes the platform. The telco participates as a supplier of rack space and related services, and benefits indirectly to the extent that its connectivity service adds value. 

Taxonomically, the telco acts as a “pipeline” business, creating a capability (server hosting) and selling it direct to a customer (AWS). Most businesses historically have been pipelines, creating products and selling to customers, so that is not unusual. 

The important fact to note is that, for this particular opportunity, telcos are not seeking to create a platform. AWS is the platform. Telcos sell a pipeline service, which, by definition, is sold to a single type of customer. 

A platform, also by definition, involves becoming a marketplace where services or products are sold to at least two different groups of constituents, and where the platform enables transactions. 

Ridesharing services, for example, are platforms, linking drivers and riders, but not owning or creating the resources used for fulfillment. 

The optimistic view on creating a platform is that any product can become a platform if information or community can create new value. The unstated corollary is that the “platform” activities must generate incremental revenue. 

And there is no shortage of recommendations that telcos become platforms. “Operators will have to shift from traffic monetization (relying mainly on connections) to traffic value monetization (inclusive of rate, latency, and slicing),” say HKT, GSA and Huawei. “In other words, operator business models must provide both intelligent platforms and services instead of merely traffic pipes.”

If you have been in the communications business long enough, you have heard that suggestion almost all the while you have been in business. “Value, not price” is the way forward, one hears. 

That is correct, up to a point. Any pipeline business can add, augment or replace the actual products it creates and sells to customers. It matters not what the product is that is created and sold to customers. Generally speaking, this is the meaning of the advice to “move up the stack,” supplying value beyond connections, bandwidth or minutes of use. 

The more-challenging notion is “become a platform.” The Wavelengths deal is not the only way telcos can participate in the edge computing business. But it is unlikely to create a platform for telcos, because, by definition, the sale of hosting to AWS is not a platform business model. 

Quite to the contrary, Wavelengths is both traditional “hosting” and also seems a direct outgrowth of the way AWS has in the past sourced computing infrastructure, including a mix of owned and leased facilities. Along the way, AWS has had to create and get comfortable with the idea of its servers operating in somebody else’s facilities.

Up to this point, the “somebody else” has been third party data centers. But edge computing requires even more decentralized facilities. Hence, Outposts, a rack of servers managed by AWS but physically on-premises. 

The customer provides the power and network connection, but everything else is done for them. If there is a fault, such as a server failure, AWS will supply a replacement that is configured automatically. Outposts runs a subset of AWS services, including EC2 (VMs), EBS (block storage), container services, relational databases and analytics. S3 storage is promised for some time in 2020. 

Local Zone, currently only available in Los Angeles, is an extension of an AWS Region, running in close proximity to the customers that require it for low latency. Unlike Outposts, Local Zone is multi-tenant. AWS deploys only when there is a critical mass of customers unable to take advantage of an established AWS region. 

All three services essentially are built on Outposts and local server facilities using third party sites. As AWS had to get comfortable with third party data centers hosting its servers, so Outposts extends that hosting to enterprises. 

A Local Zone is effectively a large group of outposts. 

Wavelength involves Outposts located inside a telco facility of some kind, likely often a central office. AWS is early to move, but the other hyperscale computing-as-a-service providers also are expected to make big moves toward edge computing facilities as well. 

By 2023, by some accounts, the hyperscale cloud computing firms will be spending $23 billion in a single year to create edge computing facilities, about half of total capex in that year. 

All interesting. And telcos are likely to experiment with other initiatives in edge computing. But Wavelengths does not achieve the objective of creating a platform.

Telcos May Not Even Try and Enter the General Purpose Computing as a Service Business at the Edge

It has to be said: in choosing to supply AWS with edge hosting facilities, a few tier-one telcos, likely to be followed by others, are making a considered bet that edge computing as a service is likely to be lead by, if not dominated, by the same providers in the ecosystem that dominate computing as a service. 

As they have found in other areas, winning a fight with Google, Facebook, Amazon and others in the application space is unlikely. That rational belief appears to condition strategies in the emerging edge computing space as well.

The AWS deal seems to signal belief that a general role as edge computing supplier will be lead by the hyperscalers. Hosting (the real estate role), on the other hand, might work. There are trade-offs. The highest-margin role likely will remain with the hyperscalers.

But a significant role in the hosting role would be a win for most telcos, who have generally not been able to carve out similar roles in the existing data center business.

It likely is too late for telcos to replicate the hyperscaler role in “as a service” computing, at the edge or elsewhere.

But edge data center hosting gives them another chance to carve out a role in the ecosystem. And the AWS partnership balances risk and reward, even if it signals belief in a smaller potential role in actual edge computing.

Telcos have not been hugely successful, outside of mobility or video entertainment, in creating big new businesses and revenue streams. Edge computing seems a promising area.

But many could recall that the data center business also was seen as a logical area of new revenue generation that meshed with the existing core competency of connections and data transport.

So recent deals between Amazon Web Services and a handful of tier-one service providers are instructive.

Basically, AWS Wavelengths creates AWS edge computing nodes at the edge of the telco network. So telcos act as providers of hosting (racks, power, security, cooling). 

In seeking that role in edge computing, the telco partners avoid the heavy capex required to emulate what the hyperscalers can provide their customers, instead choosing the simpler hosting role.

What they may be hoping is that the AWS moves lead to similar deals with many of the other hyperscale computing as a service providers, creating a data center hosting role some telcos tried and abandoned earlier. 

While other roles are not foreclosed, the AWS partnerships suggest that executives do not believe they are in position to invest in--or win--the battle for computing as a service. As many discovered earlier, the data center business has generally not been an area where telcos brought  significant advantages. 

On the other hand, perhaps many are betting that an early lead can be gained in the “edge facilities” part of the data center business, before potential rivals can scale their efforts. Of course, the hyperscale computing as a service suppliers are at the top of the list of potential leaders of the coming edge computing business. 

So the optimistic view might be that although not in position to lead edge-based computing as a service, telcos might secure a meaningful role in the edge data center hosting business, which requires distributed smallish data center locations.

Telcos of course have long considered former central offices or switching centers to be ideal real estate, in that regard. In metro areas where most of the edge computing demand will develop, central offices sit at the center of access networks running a few miles or so from end user locations. 

At least some mobile switching offices also are viable candidates for edge facilities as well.

Other roles are not foreclosed by the telco deals with AWS. It is conceivable that some vertical market services might develop where a few telcos are significant providers of the applications or capabilities. Vehicle communications and computing are logical candidates, for example. 

Still, the AWS deals are stark reminders that the edge computing ecosystem is, at the moment, most favorable for telcos as suppliers of rack space and communications. Most observers would probably agree with that assessment. 

That role also is arguably a capital-efficient and low-risk way  to enter the market. Other roles are not foreclosed. But perhaps few observers really believe the long-term telco opportunity is greatest anywhere but in the “pipeline” and “real estate” areas.

AWS Transit Gateway Gets AWS into the WAN Business

Amazon Web Services has launched Transit Gateway, a private network anchored by the nationwide AWS network. Among the advantages for enterprises is a reduction in the number of private lines required to connect branch offices and other remote locations. 

In essence, Transit Gateway puts remote locations on the AWS network, creating the equivalent of peering relationships. 

source: AWS

What if Bandwidth were Free?

The "original insight" for Microsoft was the question: "What if computing computing were free?" It might have seemed a ludicrous question. Young Bill Gates reportedly asked himself what his business would look like if hardware were free, an astounding assumption at the time, when owning a computer was an impossibility, as they cost several millions of dollars. 

In 1970, a computer cost perhaps $4.6 million, as there only were mainframes.

“The mainframe we played tic-tac-toe on in 1968, like most computers of that time, was a tempermental monster that lived in a climate-controlled cocoon,” Gates wrote in his book The Road Ahead. “When i was in high school, it cost about $40 an hour to access a time-shared computer using a teletype.”

When Micro-Soft was founded, Gates concluded that the cost of computers would drop so much that the cost of the hardware was not a barrier to using them. In turn, that meant a huge business could be built supplying software for those computers. But nobody should minimize the near-crazy assumptions made at the time: that million-dollar computers would become so cheap that the cost of computing was nearly free. 

Prices dropped by orders of magnitude in the personal computer era, however, confirming the original insight by Gates. In 1972, an HP personal computer cost more than $500,000. In inflation-adjusted terms, an Apple II computer in 1977 cost $5,174, for example. 

In 2004, Gates argued that “10 years out, in terms of actual hardware costs you can almost think of hardware as being free. I’m not saying it will be absolutely free, but in terms of the power of the servers, the power of the network will not be a limiting factor.”

You might argue that is a position Gates adopted recently. Others would argue that has been foundational in his thinking since Micro-soft (the original spelling of what became Microsoft) was a tiny company based in Albuquerque, New Mexico in 1975. But prices did, in fact, tumble. 

Microsoft's newer "insight question" was: "What if digital communication were free?" It's the same scenario, only this time it applies to the capacity to move data--audio and video as well as text--from one point to another. 

Communications industry executives hate the idea, but facts tend to support the notion that the cost of using bandwidth keeps dropping to the point where there is almost no barrier to using it. 

As Intel CEO Andy Grove once famously said, "If you think PC prices have plummeted, wait till you see what happens to bandwidth. 

As much as telecom executives might rue the observation, bandwidth is approaching the point where its use does not impede creation and use of applications, no matter how bandwidth-intensive they might be. 

Among the biggest problems telecom service providers face is that connectivity prices in the digital era have shown a “disturbing” tendency to drop relentlessly lower, in some cases even trending towards zero. Consider the price of mobile service, which has dipped since 1997 by about half, while prices for other products have increased 100 percent to 200 percent. 

source: U.S. Bureau of Labor Statistics

Also, some products sold by internet service providers, including entertainment video subscriptions, virtually require very-low bandwidth costs. According to Cisco, 80 percent of global traffic now consists of video. And that means virtually all networks must be designed to carry entertainment video at very low cost per bit. 

Bandwidth is not “free.” But it is affordable, and constantly getting more affordable. The key business implication is that internet bandwidth costs are, and will be, low enough so that use of internet apps is not impeded. 

Computing hardware, though not free, is no longer a barrier to widespread use. Neither is bandwidth. Though the trend has not yet reached ubitquity, that is the direction. A good analogy is electricity. It is affordable, not free, but costs are reasonable enough devices and applications based on its consumption are plentiful. 

So it will be with bandwidth.

What if Bandwidth Were Free?

The "original insight" for Microsoft was the question: "What if computing computing were free?" It might have seemed a ludicrous question. Young Bill Gates reportedly asked himself what his business would look like if hardware were free, an astounding assumption at the time. 

“The mainframe we played tic-tac-toe on in 1968, like most computers of that time, was a tempermental monster that lived in a climate-controlled cocoon,” Gates wrote in his book The Road Ahead. “When i was in high school, it cost about $40 an hour to access a time-shared computer using a teletype.”

Owning a computer was an impossibility, as they cost several millions of dollars. In 1970, a computer cost perhaps $4.6 million, as there only were mainframes. Importantly, when Micro-Soft was founded, Gates concluded that the cost of computers would drop so much that the cost of the hardware was not a barrier to using them. 

In 2004, Gates argued that “10 years out, in terms of actual hardware costs you can almost think of hardware as being free. I’m not saying it will be absolutely free, but in terms of the power of the servers, the power of the network will not be a limiting factor.”

You might argue that is a position Gates adopted recently. Others would argue that has been foundational in his thinking since Micro-soft was a tiny company based in Albuquerque, New Mexico in 1975. But prices did, in fact, tumble. 

In 1972, an HP personal computer cost more than $500,000. In inflation-adjusted terms, an Apple II computer of 1977 would have cost $5,174, for example. 

Microsoft's newer "insight question" was: "What if digital communication were free?" It's the same scenario, only this time it applies to the capacity to move data--audio and video as well as text--from one point to another. The technical term is bandwidth, and many other companies share the "insight." Says Intel CEO Andy Grove, for example, "If you think PC prices have plummeted, wait till you see what happens to bandwidth. 

As much as telecom executives might rue the observation, bandwidth is approaching the point where its use does not impede creation and use of applications, no matter how bandwidth-intensive they might be.

Can Telcos Capture New Platform Revenue?

Some observers now believe that about 70 percent of new value created through “digitalization” over the next decade will be based on platform-enabled, ecosystem-based business models, according to the World Economic Forum. 

That should raise questions about how much of that economic activity can be captured by telcos that mostly operate in non-platform markets. Basically, telecom is a “pipe” business, not only related to common parlance about selling connections, but also because of the “direct to customer” sales model. 

Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.” In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream. 

Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education. 

Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist. 

Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft. 

The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform. 

In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not. 

That can be glimpsed in service provider video subscription businesses, where revenue is earned directly from subscribers, but also from advertisers and in some cases from content suppliers. It is the sort of thing eBay must do, daily, in a more direct way. 

source: Platform Business Model 

To be sure, there are some differences between the traditional app provider platform and any possible connectivity provider platform. For starters, by definition, app platforms tend to be asset light. No surprise there. Software-based businesses almost always are less asset intensive than most other physical businesses. 

In general, however any “pipe” business that sells a set of products directly to its customers will tend to require more owned assets than a software business that operates in an ecosystem. 

source: Platform Business Model

At a high level, when executives and professionals in the connectivity business talk about dumb pipes, they almost always refer to commodity product business models selling undifferentiated carriage or delivery of bits. But there are other senses in which the “pipe” model also matters. 

If one believes that prices for telecom products are destined to keep declining, or that more for the same price is the trend, then there are a couple of logical ways to “solve” such problems. 

Connectivity providers can create and sell new or different network-based products or shift into other higher-value and different parts of the product ecosystem. That is one way to escape the trap of marginal cost pricing, which might be the industry’s existential problem. 

But it is not clear whether telcos can create platform business models, and if so, where and how. The traditional connectivity business seems destined to remain a pipe (create products sold direct to consumer) model. There are glimmerings, though.

Some service providers who now are video subscription providers can create an advertising venue or marketplace once the base of subscribers grows large enough. So that provides one example. 

Some data centers work on creating marketplaces or exchanges that enable transactions beyond cross connects, even if the revenue model is indirect (marketing potential, lower churn, higher tenancy, greater volume) 

So far, connectivity providers are mostly thinking about what could emerge with edge computing, beyond the pipe revenue model (selling compute cycles or storage). Some might envision a potential role in one or more internet of things use cases such as automobile IoT or unmanned aerial vehicle networks. 

Still, it never is easy for any company, in any industry to create a platform model, even if many would prefer it over a pipe model. 

But the potential path forward seems logical enough. The historic path to create a platform has often involved sale of some initial direct product, sold to one type of customer, before becoming the foundation for creation of the marketplace or platform that creates new value for different sets of customers. 

That strategy might be called stand-alone use, creating a new market by directly satisfying a customer need, before a different two-sided or multi-sided market can be created, where at least two distinct sets of participants must be brought together, at the same time, for the market to exist. Virtually any online marketplace is such a case. 

Others might call it single-player. OpenTable, which today has a marketplace revenue model, originally only provided a reservation system to restaurants, operating in a single-sided market mode, before it then could create a two-sided model where restaurants pay money for the booked reservations made by consumers. 

The first million people who bought VCRs bought them before there were any movies available to watch on them. That might strike you as curious, akin to buying a TV when there are no programs being broadcast. 

In fact, though commercialized about 1977, it was not firmly legally established that sales of VCRs were lawful until 1984, when the U.S. Supreme Court ruled that Sony could sell VCRs without violating copyright law, as Hollywood studios alleged. 

So what were those people doing with their VCRs? Taping shows to watch later. Time shifting, we now call it. Only later, after Blockbuster Video was founded in 1985, did video rentals become a mass market phenomenon. 

So here is the point: quite often, a new market is started one way, and then, after some scale is obtained, can develop into a different business model and use case. 

Once there were millions of VCR owners, and content owners lost their fear of cannibalizing their main revenue stream (movie theater tickets), it became worthwhile for Hollywood to start selling and renting movies to watch on them. 

Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. 

So OpenTable, which operates in a two-sided marketplace--connecting restaurants and diners--started out selling reservation systems to restaurants, before creating its new model of  acting as a marketplace for diners and restaurants.

The extent to which that also will be true for some internet of things platforms is unclear, but likely, even for single-sided parts of the ecosystem. 

The value of any IoT deployment will be high when there is a robust supply of sensors, apps, devices and platforms. But without many customers, the supply of those things will be slow to grow, even in the simpler single-player markets. Just as likely, though, is the transformation of at least some of the single-player revenue models to two-sided marketplaces. 

In other words, a chicken-and-egg problem will be solved by launching one way, then transitioning to another, more complicated two-sided model requiring scale and mutual value for at least two different sets of participants. In a broad sense, think of any two-sided market as one that earns revenue by creating value for multiple sets of participants.

Amazon makes money from product sellers and buyers, while at the same time also earning revenue from advertisers and cloud computing customers. 

Telcos have faced this problem before. 

Back in the 1870s and 1880s, when the first telephone networks were created, suppliers faced a severe sales problem. The value of the network depended on how many other people a customer could call, but that number of people was quite small. The communications service has a network effect: it becomes more valuable as the number of users grows. 

These days, that is generally no longer the case. The number of people, accounts and devices connected on the networks is so large that the introduction of a new network platform does not actually face a network issue. The same people, devices and accounts that were connected on the older platform retain connectivity while the new platform is built. 

There are temporary supply issues as the physical facilities are built and activated, but no real chicken and egg problem. 

It remains to be seen whether some connectivity providers also will be able to create multi-sided (platform) markets for  internet of things or other new industries. 

The initial value might simply be edge data center functions. Later, other opportunities could arise around the use of edge computing, the access networks, customer bases and app providers. It would not be easy; it rarely is. But creating new revenue streams for some customers who just want edge computing cycles could create foundation for other revenue streams as well. 

The point is that it is not so clear telcos will reap much of the bounty.