Hyperscalers are killing the traditional telecom software model — that’s not a bad thing

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Joy King, VP, GTM Strategy for Optiva, argues that if telcos want to innovate and build new revenue streams, there are important lessons to learn from hyperscalers.

Most industries have had their “digital disruption” moment. From factories to brick-and-mortar retail to banks, plucky startups with big ideas or tech companies with resources to match their hubris moved in on the patch of establishment players. Every time this happens, traditional companies tend to run into a “do or die” moment, where they must adapt their traditional operations or run into serious, sometimes existential trouble.

Look at how the fintech unicorns blasted apart everything we thought we knew about banking — and how big banks were forced to meet the challenge and digitize. A large part of this ability to implement necessary and rapid change is the role that the public cloud plays.

But one sector that has been stubbornly resistant to this change is telecoms. Now, the time has come because giant hyperscale cloud operators have spotted an opportunity to move in on their turf, and so have a range of smaller startups that can operate far more nimbly without all the baggage that comes with being a legacy player. This baggage is more than technology — it includes culture, process and leadership.

In addition to the well-known Silicon Valley disruptors like Google, Amazon and Azure, smaller businesses have also cropped up in recent years to pursue a more agile way of doing things. While some larger operators have spotted the need to change and embarked on a massive mission around shifting internal culture — like T-Mobile, which recently bought newer player Mint Mobile for $1.35 billion — others seem paralyzed in the face of newer upstart companies, like Cogeco and Telus, which have unearthed opportunities outside of their domestic markets.

Sometimes, businesses that don’t have a telecom heritage have noticed an opportunity too. Take Colombia’s Movil Exito, which became the first MVNO in the country. Movil Exito is an innovative company owned by Grupo Exito, a retail operator with more than 2,600 stores in South America.

What’s stopping the telecoms industry from digitizing like the hyperscalers? 

But what is holding the large carriers, with their reach and resources, back? One challenge lies in the fact that those in the telecom industry were the original hyperscalers. For a long time, nothing competed with their reach. They delivered the lifeblood of modern society — connectivity — and defined scale. As such, they have a long tail of building systems in a highly customized way because no off-the-shelf products were available. They invented scale.

However, this old model is under threat. It’s slow, lumbering, everything a digitized organization shouldn’t be. A quick history lesson for context about a company you may have heard of called Amazon: When Jeff Bezos’ bookish pet project ballooned from his original idea — to download a book in 60 seconds — and started to include other goods, third-party vendors began to request a way to leverage this new “Amazon Marketplace.”

In response, the company created a customized integration model for individual merchants but quickly learned that this would not scale. Instead, it created automated, productized, documented APIs, allowing as many merchants as were interested in plugging themselves into the marketplace. At the same time, Amazon realized its underlying computing and storage infrastructure was well optimized for scale and started to sell its available infrastructure. This was back in 2006, when Amazon launched what was then called AWS Elastic Compute, and the rest is history.

Unlike telcos, hyperscalers were determined to pursue an automated, productized path, never believing custom designing would meet their needs. They operated differently, refusing to bog down their customers with 12-18 month RFI/RFP decisions. They delivered intuitive, digitized experiences for consumers and businesses.

This departure from the traditional telecom software model has snowballed, and the public cloud operators are now among the world’s biggest companies, let alone the most prominent technology players.

This upset has put operators at a fork in the road with two clearly defined paths. Where they might end up depends on how much they’re willing to learn from the hyperscalers.

The two ways forward for telecoms carriers

On the one hand, telcos can keep doing what they’re doing, viewing themselves as commodity players — low margin, high volume, slow but steady, where revenue doesn’t increase by much and businesses are forced to search for ways to cut costs constantly to maintain profitability. Some might even seek regulatory support for cost mitigations (sound familiar?).

That is a valid business model. It’s not particularly sexy, but it is a business model. It’s unlikely that the large operators who remain on this path will go out of business. Still, they will miss out on business because the other path lies in creating new revenue opportunities for themselves on top of their core connectivity offerings while more thoroughly digitizing along the way.

Once upon a time, the finance industry found it unthinkable to move its complex systems and legacy tech to the cloud. When fintech companies started challenging the traditional business models, they had to adapt and change. Every major bank has digitized and identified systems and applications that run efficiently and securely in public clouds.

Larger carriers need to recognize and embrace this need for rapid change because, unlike the banks, hyperscalers — with all their resources — will be the main competition rather than fintech unicorns and other plucky disruptors. The hyperscalers have the reach and technology capability to outpace them if they want to, but only if they take action now.

Carriers would benefit from first identifying which applications and systems can be migrated to the cloud, whether public or private, such as billing systems and BSS. They must separate legacy systems that are very hard to migrate and implement new and contemporary BSS and partner monetization platforms for opening additional revenue streams.

They need to leverage the treasure trove of customer data to give them insight into new opportunities, which is exactly what Amazon is doing for its consumer marketplace and what Google is doing with its advertising data. These new services, offerings, and procedures must be built with separate billing and support systems and moved to the cloud. This agility will mean some new offerings and services might fail while others will succeed, but without the ability to try them, they’ll never know.

After all, if legacy industries like finance, healthcare and retailers have transformed into fully digitized providers, there’s no reason telcos can’t do it, too.

Joy has three decades of software industry experience. Previously, she led Product & GTM Strategy, including Product Management & Marketing, for Vertica, a high-performance unified analytics platform leveraged by the telecom industry. Before Vertica, Joy led telecom industry marketing for HP and HPE for over a decade.

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