Troubling Telco Trends: Will CSPs Be Next on Hyperscalers’ Menu?

If you pay close attention to the annual reports and strategic updates from companies in the communication service provider (CSP) industry, you will see that most, if not all, focus on four strategic pillars:

1. Digital transformation. CSPs find themselves in a unique situation, at the intersection of several telco trends. They serve as the very platform that so many digitally native companies depend upon—providing the world's electronic backbone for digital applications and services. At the same time, CSPs find that they too must digitally transform in order to remain relevant.
2. Cost reduction. CSPs must challenge the fundamentals of their business models. Incremental cost improvements are not enough to turn the tide. CSP leaders must strategize to find ways to remove complexity from their networks, portfolio, and business models. This is the only way they’ll be able to face the various challenges of the years ahead, including broadband, content, digital, and more. To meet these demands, they need to accelerate simplification of their portfolio, rationalization of their legacy networks and IT, and the introduction of an all-IP, software-defined network that supports converged fixed-mobile traffic.
3. Strengthen and grow core business. Revenue and margins are under pressure from regulations, new market entrants, including over-the-top (OTT) players, and the high cost associated with legacy networks and IT. To protect and grow their core businesses, CSPs must bolster customer relationships through innovating their networks and products, delivering superior services and value, and improving the quality of operations.
4. Increase strategic value. New technologies bring new opportunities. CSPs should develop new business models, ecosystems, and services in such areas as 5G, IoT, blockchain, and, longer term, quantum internet.

To be honest, these have been the priorities for the past several years. Given the struggles most CSPs have had with transformation and other troubling telco trends, my sense is these will continue to be the top priorities for several years to come. Gartner analysts predict that by 2024, only 10% of CSPs will develop greater efficiency and growth, and a better competitive environment, by separating infrastructure and service operations. They also predict only 5% of CSPs that commercially launch 5G services will be able to generate new business opportunities on top of enhanced mobile broadband.¹

CSPs Struggle With Their Business Models

To survive the threats posed by current and greenfield challengers, CSP executives can consider several business model strategies. For example, they can pursue operating as a pure-play connectivity provider, become a services aggregator, or expand capabilities through mergers and acquisitions.

Different CSPs have taken these different routes, with varying levels of success. Success depends not only on organizational readiness (such as establishing the right culture and skills), but also on the architectural transformation of technology and business platforms. CSP teams need to establish a highly scalable and dynamic factory model that offers clear separation of network and infrastructure, service and product functionality, and logic. In this model, provisioning and assurance are zero-touch by design, infrastructure is interchangeable, and services are composable.

Do these capabilities sound familiar? This is the realm of hyperscale cloud providers like Amazon, Microsoft, and Google. This is the core of their existence. And this is where the threat to CSPs comes from. In my opinion, these hyperscalers will eat CSPs piece by piece, bit by bit, potentially until they get absorbed completely.

The Dawn of the Hyperscalers

Hyperscalers have been investing heavily in expanding their global platforms and new technology and services. The speed of innovation that they accomplish is phenomenal. As a consequence, CSPs are increasingly switching to public cloud offerings from the hyperscalers, reducing investments in their own private clouds to free up funds for other strategic programs, such as 5G roll-out.

Deutsche Telekom is an example of one of the CSPs that has made this move. In early 2019, the company moved about 60% of its applications to the public cloud. In the process, they reduced the number of data centers from 89 to 13 and realized savings of hundreds of millions of euros.² At the same time, CSPs are also teaming up with these hyperscalers to provide local public cloud services to their business customers. For example, Telecom Italia teamed up with Google, and Telstra partnered with Microsoft. In the process, these telcos started slowly migrating part of their business capability to the hyperscalers.

The current wave of coopetition signals telco trends that look to be unstoppable. Due to the fact that it is still uncertain how and when they will be able to monetize 5G and IoT, and the increasingly dynamic and complex nature of these ecosystems, CSPs are willing to collaborate with these same hyperscalers, hoping to stay ahead of the competition and divert some of the huge investments that need to be made.

Amazon, Microsoft, and Google all have developed edge infrastructures as an extension of their own cloud platforms. They have visions and strategies, and they have executed upon them. Take Amazon, for instance, which has at least 15 products lined up, including edge control services, edge infrastructure, IoT services, and personal edge offerings. Plus, Amazon has already teamed up with Verizon, KDDI, SK Telecom, and Vodafone, to name a few.

Looking at it from a distance you see the hyperscalers now being present in the CSP’s data centers, the edge network, and on their customers’ premises. The real part that is missing for the hyperscalers is the CSP’s core network, which is the fundamental piece that brings it all together.

Slowly, but Surely?

This is exactly why I think the hyperscalers will devour the CSP industry. Without the internet, hyperscalers wouldn't exist. So if you are already firmly rooted in most of that infrastructure, what would it be worth to you to get that last, fundamental piece? With the hyperscalers’ influence, revenue, and cash growing every quarter, and CSP’s control and revenue mostly declining, there comes a point where it would not be unthinkable for a company like Amazon to buy T-Mobile USA. Then you could easily imagine Amazon delivering free internet services to all customers that opt for a “Premium” Prime subscription. For sure, Amazon already has enough cash (~$70B) to buy the Vodafone Group or other major CSPs. It would not be the first industry they disrupt… Piece by piece, bit by bit, this is the future that’s being built. The question for CSP leadership is how to respond and prepare.