Telco Cloud Computing Revenue Opportunity is Still on Training Wheels

CenturyLink, like many other telcos, sees cloud computing as a key opportunity in the enterprise and business services segment of the communications business. There are several reasons for that belief.

Data centers now are primary generators of capacity demand. For example, Cisco’s latest Global Cloud Index estimates that global data center traffic will grow nearly 300 percent between 2013 and 2018.

By 2018, 76 percent of all data center traffic will come from the cloud, while 75 percent of data center workloads will be processed in the cloud.

But that might not even be the most significant prediction. Quantitatively, the impact of cloud computing on data center traffic is clear, Cisco argues.

Most Internet traffic has originated or terminated in a data center since 2008.

Where in the past most traffic (voice) functionally originated and terminate at a central office, though that traffic was passively transmitted to an end user telephone, now most global traffic originates and terminates at a data center.

At the same time, it is possible to argue that “cloud” now is becoming the architecture for computing in the present era, directly embedding the need for wide area and local area communications into the basic fabric of computing itself.

Where one might have argued that the addressable market for WAN transport providers was perhaps $232 billion in 2012, the addressable market now is much bigger. In fact, Bill Barney, Global Cloud XChange CEO argues the addressable market is six times larger.

That includes involvement in the $600 billion "software" business, as most software now is delivered or used "in the cloud."

The market also touches the $965 billion enterprise "information technology" business and the $103 billion data center business as well.

That doesn't necessarily mean WAN transport and services will displace most of the revenue in the extended ecosystem, only that WAN providers now play more central roles in those other areas, and for that reason will be generating additional revenue within the ecosystem.

That noted, cloud services still represent only about five percent of enterprise information technology spending. That is virtually certain to grow, as public cloud remains the first option for a minority of enterprise IT managers at the moment.  

According to Gartner, 75 percent of organizations use public cloud services today, “though sparingly,” while 78 percent plan to increase their investment in cloud services in the next three years.

Some 91 percent of organizations across all industries plan to use external providers to help with cloud adoption, Gartner says. That accounts for the belief that cloud computing can be a new revenue source for capacity suppliers, directly or indirectly.

In some cases, capacity suppliers own data centers as a way of generating direct revenue from data center clients, not just profiting from the communications into and out of the data centers.

By 2018, “data center to end user traffic” will constitute 17 percent of total “data center” traffic. About nine percent of traffic will move from data center to data center.

About 75 percent of global data center traffic will stay within the building, moving from server to server. That illustrates the value of generating direct revenue from data centers. Even if most clients will move data between servers in the center, that in-building traffic still eventually moves out onto the wide area network.

For most suppliers,  the primary revenue opportunity therefore is capacity.

How Big a Deal is Edge Computing as a Revenue Driver for Connectivity Providers?

Edge computing possibly can grow to generate a minimum of $1 billion in annual new revenues for some tier-one service providers. The same might be said for service-provider-delivered and operated  private networks, internet of things services or virtual private networks. 

But none of those services seem capable of driving the next big wave of revenue growth for connectivity providers, as their total revenue contribution does not seem capable of driving 80 percent of total revenue growth or representing half of the total installed base of revenue. 

In other words, it does not appear that edge computing, IoT, private networks or network slicing can rival the revenue magnitude of voice, texting, video subscriptions, home broadband or mobile subscription revenue. 

It is not clear whether any of those new revenue streams will be as important as MPLS or SD-WAN, dedicated internet access or Ethernet transport services, for example. All of those can be created by enterprises directly, on a do-it-yourself basis, from the network edge. 

The point is that even when some new innovations are substantial generators of revenue and activity, it is not automatically connectivity providers who benefit, in terms of direct revenue. 

One rule of thumb I use for determining whether any proposed new line of business makes sense for tier-one connectivity providers is whether the new line has potential to produce a minimum of $1 billion in annual revenues for a single provider in some definable time span (five years for a specific product. 

By that rule of thumb, tier-one service providers might be able to create edge computing revenue streams that amount to as much as $1 billion in annual revenue for some service providers. But most will fail to achieve that level of return in the next five to seven years.

That is not to say "computing at the edge" will be a small business. Indeed, it is likely to account for a growing part of public cloud computing revenues, eventually. And that is a big global business, already representing more than $400 billion in annual revenues, including both public cloud revenues as well as  infrastructure spending to support cloud computing; the value of business applications and associated consulting and services to implement cloud computing.

The leading public cloud computing hyperscalers themselves represent about $72 billion or more in annual revenues already. All the rest of the revenue in the ecosystem comes from sales of software, hardware and services to enable cloud computing, both public and private.

source: IoT Analytics

It is likely a reasonable assumption that most public edge computing revenue is eventually earned by the same firms leading public cloud computing as a service.

Perhaps service provider revenues from edge computing could reach at least $20 billion, in about five years. By that standard, multi-access edge computing barely qualifies as "something worth pursuing," at least for tier-one connectivity service providers.

In other words, MEC is within the category of products that offers reasonable hope of payback, but is not yet in the category of “big winners” that add at least $100 billion to $200 billion in global service provider revenues. 

In other words, MEC is not “mobile phone service; home broadband. Perhaps it will be as big as MPLS or SD-WAN. For tier-one connectivity providers, perhaps MEC is more important than business voice (unified communications as a service). 

source: STL, KBV Research 

As with many other products, including Wi-Fi, SD-WAN, MPLS, 4G or 5G private networks, local area networks in general and  enterprise voice services, most of the money is earned by suppliers of software (business functionality) and hardware platforms, not end-user-facing services. 

The reason is that such solutions can be implemented on a do-it-yourself basis, directly by enterprises and system integrators, without needing to buy anything from tier-one connectivity providers but bandwidth or capacity. 

So one reason why I believe that other new connectivity services enabled by 5G likely do not have the potential to substantially move the industry to the next major revenue model is that none of those innovations are very likely to produce much more than perhaps one percent of total service revenues for the typical tier-one service provider. 

The opportunity for big public connectivity providers lies in use cases related to the wide area network rather than the domain of indoor and private networks. That is why the local area networks industry has always been dominated by infra providers (hardware platforms) and users who build and own their own networks (both enterprise and consumer). 

And most of the proposed “new revenue sources” for 5G are oriented towards private networks, such as private enterprise local area networks. Many of the other proposed revenue generators can be done by enterprises on a DIY basis (edge computing, internet of things). Some WAN network services--such as network slicing--attack problems that can be solved with DIY solutions.

Edge computing is a solution for some problems network slicing is said to solve, for example. 

None of the new 5G services--or new services in aggregate-- is believed capable of replacing half of all current mobile operator revenues, for example. And that would be the definition of a “new service” that transforms the industry. 

All of which suggests there is something else, yet to be discovered, that eventually drives industry revenue forward once mobility and home broadband have saturated. So far, nobody has a plausible candidate for that new service.

Edge computing might be helpful. So might network slicing, private networks or internet of things. But not even all of them together are a solution for industry revenue drivers once home broadband and mobile service begin to decline as producers of at least half of industry revenues.

It already seems clear that others in the edge computing ecosystem--including digital infra providers and hyperscale cloud computing as a service suppliers--will profit most from edge computing.

As Important as SD-WAN is, It Will Remain a Niche Market for Service Providers

With the caveat that it likely represents the future of most enterprise long-haul transport revenues, the SD-WAN market is a specialist segment of the market, very much akin to unified communications. It is important for enterprises and suppliers to enterprises.

It is a fundamental product for sellers of long-haul enterprise networking capacity. But the global SD-WAN market is rather a smallish part of total spending on public network communications services.

As for how big a revenue stream SD-WAN might eventually represent, just assume it displaces most of the present MPLS market.

source: Aryaka

For long-haul business connectivity providers, SD-WAN is as important as MPLS is, and private line used to be. As the humorous adage goes, "it may be a one-trick pony, but it's a good trick."

source: IHS

source: ITBrand

source: Transparency Market Research

Is There Competition in Special Access, or Not? We Still Cannot Agree. FCC Will Act, Either Way

Since the late 20th century, U.S. market contestants have argued about the need for regulation of special access services. We are still arguing.

But the U.S. Federal Communications Commission is planning to act, broadening the rules and extending them to cable TV operators and Ethernet services for the first time.

The particulars of the proposed new policy are not yet available. Debate will be vigorous, but Chairman Tom Wheeler has the votes to do what he wants, no matter how many in the marketplace might object.

One reason some competitors and policymakers want stronger regulation of special access services is the claimed advantage incumbent carriers have over most other competitors (other than cable TV companies, which also have ubiquitous networks), in terms of network facilities coverage.

The stated problem: “competitive carriers reaching less than 45 percent of locations where there is demand,” according to FCC Chairman Tom Wheeler.

On the other hand, AT&T has argued that “facilities-based competitors are serving 95 percent of all MSA census blocks (on average, about one seventh of a square mile in an MSA) nationally where there is demand for special access services, and, second, that 99 percent of all business establishments are in those census blocks.”

For the first time ever, the U.S. Federal Communications Commission also is seeking to extend some special access obligations to cable TV networks for the first time.

And some argue that it is impossible to fully do a data-driven analysis because the FCC is not releasing the full results of its earlier survey of facilities, an exercise intended to provide some rationale for assessing the existence of facilities-based competition.

Some might find the emphasis on extending regulation to a declining service curious.

AT&T’s access lines have declined by almost 65 percent since 2009.

So the issue is application of older rules, shaped in an era of limited competition, to Ethernet access markets that already are largely competitive, and getting more competitive.

“The new approach must be technologically neutral. Rules need to reflect today’s economy and the differences between products, places or customers, and can’t be based on artificial distinctions between companies or technologies,” Wheeler argues.

Some argue new rules, or more-extensive rules are needed in the special access market because a few incumbents still are able to exercise market power to extract higher profits.

The Consumer Federation of America, for example, argues in a study that incumbents have “overcharged” business customers about $75 billion between 2010 and 2015 as a result of market power.

But some argue the reverse case, that ubiquitous networks now mean stranded assets that are a disadvantage in competitive markets, where cable TV and other competitive local exchange carriers have higher profit margins.

Both the traditional U.S. CLECs and the cable companies who have entered the business broadband market are in good financial health and are generating higher free cash flow than the wireline segments of the largest ILECs, says Anna-Maria Kovacs,  Visiting Senior Policy Scholar at the Georgetown Center for Business and Public Policy.

CLECs and cable operators also have higher stock valuations, says Kovacs. Stranded assets, one might argue, are a large part of the problem.

“The ILECs’ low cash flows reflect the continuously increasing cost of sustaining a ubiquitous network that is now serving roughly a third of the lines for which it was engineered,” Kovacs argues. In other words, 66 percent of the deployed network does not actually generate revenue.

Traditional CLECs have focused on the business market exclusively and built out only in areas where high-density makes construction-cost relatively low and attainable-revenue relatively high.

Oddly, the “data provided publicly by U.S. CLECs and cable operators confirms the few facts that have so far emerged from the FCC’s special access data collection, i.e. that there is extensive facilities-based competition in the business broadband market,” Kovacs notes.

source: Anna-Maria Kovacs

Stranded assets are a big business model problem that has become far worse as the number of fixed networks in any market have increased, and as traffic has moved off the fixed networks and onto mobile and other networks.

“At the 2015 ILEC penetration level of 35 percent of peak, total network cost per remaining subscriber has essentially doubled and the networks passed the inflection point beyond which penetration losses result in catastrophic cost increases,” Kovacs notes.

By way of contrast, cable TV networks still are operating in the flat part of the cost curve. That means any cost-per-subscriber increase due to penetration loss is minimal.

Cable companies also are gaining share in the business communications market. Business revenues constituted roughly 11 percentof the combined revenues of Cablevision, Charter, Comcast, and Time-Warner Cable in 2015.

Their combined $9.5 billion in business revenues were up 42 percent in just two years and  MoffettNathanson Research projects that by 2019, cable business revenues will nearly double from their 2014 total.

Some argue the issue is not the existing special access market, but a maneuver by the FCC to extend regulation to more parts of the fast-growing Ethernet services market.

The U.S. Ethernet market grew 20 percent in 2015, according to Kovacs. Gartner Group estimates that enterprise spending over the 2014 to 2019 period on leased lines will decline by 18.6 percent annually.

As a result, leased lines will amount to only $3 billion, or six percent of enterprise spending by 2019.

Legacy packet services will disappear by 2016, and even IP VPN will begin to decline by 2.3 percent annually. Spending on Ethernet services, on the other hand, is estimated to grow by 9.1 percent  annually and reach $18.6 billion by 2019.

At the same time, while the prices of TDM-based services are essentially flat, Gartner expects the price of Ethernet access to fall by about nine percent per year over the 2015 to 2018 period.

The price of Ethernet WAN services will drop by about five percent per year over that timeframe.

Substitution of Ethernet for legacy leased lines makes it possible for an enterprise to increase bandwidth while cutting cost.

For example, a 45 Mbps T-3 that costs $1,400 to $2,200 could be replaced by a 100 Mbps Ethernet that costs $850 to $1700.

Savings are even greater at higher bandwidths: a 622 Mbps OC12 that costs $15,000 to $25,000 could be replaced by a 1 Gbps Ethernet that costs $1,500 to $5,200.

Given the combination of savings with greater bandwidth and better performance, it is not surprising that Gartner Group recommends that its enterprise clients replace legacy TDM with Ethernet services

Global WAN Business has Bifurcated

The global capacity business has bifurcated. Hyperscale data center operators, media and content providers have one set of needs while enterprises have different sets of needs. 

Hyperscalers need to connect with other data centers (including cable landing sites, internet points of presence, owned and third party data centers). The hyperscaler requirements are almost exclusively internet data volumes, and video entertainment represents the bulk of that demand. 

source: Cisco 

Enterprises not in the content business, on the other hand, need to connect headquarters locations with branch offices and workers with cloud or premises-based applications. 

source: Aryaka 

Hyperscalers require optical transmission and IP bandwidth. 

Non-content enterprises need quality of service networking (MPLS) and virtual network support (SD-WAN and VPNs), plus voice services. 

Much of the hyperscaler need is met by owned facilities. Nearly all the non-content enterprise demand is met by retail services. Very little hyperscaler bandwidth demand is access network related (connections to end users), while almost all non-content enterprises require access network connectivity.

Hyperscalers require relatively less collaboration support (in terms of bandwidth volume or spending). Enterprises always need significant amounts of unified communications support.

So MPLS and SD-WAN are important non-content enterprise concerns and purchases. That is virtually never true for hyperscalers and content enterprises (in terms of bandwidth demand and spending).

MPLS Approaching Maturity?

It is not yet clear whether developing software-defined wide area networks (SD-WAN) will represent the next generation data network, displacing MPLS, but that is a logical argument for enterprise branch network connections.

Global enterprise spending on WAN business services represents about $40 billion in annual spending.

Included in that bucket are MPLS virtual private networks (VPNs), virtual LANs, Ethernet connections, digital subscriber line, cable TV and LTE connections as well. The arguments for using SD WANs, in place of MPLS, is that recurring costs are lower, while provisioning intervals potentially are much better.

To be sure, MPLS prices are dropping about five percent to 10 percent per year, but so are internet access costs, with faster declines expected as 5G comes online.

In the separate content delivery networks business, SD WANs might also have a role, allowing private network (MPLS) performance over public internet connections.

The next generation CDN should move beyond caching and include client self-management and quality of experience capabilities, especially playing a role for mobile CDN applications, some argue.


source: Ovum

Long Term Revenue Growth of "Access" and Transport Cannot Exceed Low Single Digits, Annually

Despite current growth of mobile revenues in some markets (Asia, Africa in particular), it will be difficult to sustain long-term mobile operator growth at rates much higher than growth of gross domestic product (GDP).

Eventually, every customer that wants to use mobile services will do so. Eventually, every customer that wants to use the internet will do so, and will pay only so much for that privilege.

And competition will not lessen. New platforms and new suppliers, with lower price points, will keep coming.

source: GSMA

Subscriber growth in developed markets is largely over, and while there is some incremental revenue growth from higher mobile internet spending, long term growth will largely be limited to growth of gross domestic product, which tends to be in low single digits.

For public companies, and most tier-one telcos are public, that is insufficient to retain investor support at a level that drives up equity value.

source: GSMA

That means most public service providers will have to look beyond connectivity services to grow revenue faster. As hard as that will always be, there is no practical alternative.

Some might argue telcos are misguided in deploying resources to gain new positions in the content and applications parts of the ecosystem. Some regulators seem intent on preventing such vertical integration.

Those views arguably are misguided. Without investment beyond “dumb pipe,” providers of retail telecom services face a difficult future. A public company growing revenue at one to three percent annually is not going to get attractive valuations.

Beyond that, it is not clear that even those rates of revenue growth are possible on an organic basis. In other words, without major acquisitions, even low-single-digit rates of revenue growth might be difficult.

The old “telecom” business is changing. Survivors in the retail segment will have multiple revenue streams beyond data access.

Even in the wide area networks business, including the subsea segment, much of the revenue potential now (growth) now is capped by the growing reliance on enterprise owned and operated  private networks.

By 2016, more than 70 percent of all internet traffic across the Atlantic was carried over private networks, not on public WAN networks.

On intra-Asian routes, private networks in 2016 carried 60 percent of all traffic. On trans-Pacific routes, private networks carried about 58 percent of traffic.

That is one manifestation of how important it ultimately will be to move revenue streams away from a sole reliance on bit transport (internet access, WAN data transport) supplied to end users (business and consumer).