Are carriers going 'soft'?

Carriers in mature markets like the U.S. and Europe are adapting to cope with the prospects of saturating mobile phone adoption and slower revenue growth.

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Carriers are increasingly looking to supplement the connectivity subscriptions that they sell in order to increase per user revenues and return to the impressive growth days of the past.

However there is a fundamental business challenge facing all carriers: Just how many more phones and phone subscriptions will people buy in a maturing/saturating market? And while the future potential revenues from consumer IoT is large due to the sheer volume of devices, it doesn’t have the same premiums or margins as a relatively pricey smartphone plan. So carriers are left searching for other revenue opportunities.  

The combined entertainment offerings meant to boost carrier “stickiness” (e.g. AT&T/DirectTV and probably Time/Warner, Verizon/AOL and soon Yahoo) are important. And it’s likely we’ll continue to see such tie-ups.

But there is an equally important change taking place that is less recognized by the marketplace, but has even more potential to fundamentally shift the carrier business. As a result, the notion of what a carrier is and can provide customers is changing dramatically. And it has major implications for the enterprise.

Historically carriers concentrated on deploying towers and cellular base stations, with dedicated infrastructure and huge data centers operating behind the scenes to make it all work. But that’s becoming ancient history. Carriers now are mostly software companies. They define and deploy new services with Software Defined Networking (SDN) and Network Function Virtualization (NFV), unlike the past when specialized and often expensive hardware investments would have been required for each service offering. 

This fundamental change in business model started for most carriers about three years ago and is still a work in progress, and most carriers are moving aggressively to accomplish this transition. I expect it will take another three or four years before its fully rolled out.

But this capability is critical to making new technologies like 5G, NB-LTE and the specialized wireless services that will be rolled out over the next three years, work. However updating the architecture also ushers in a whole new opportunity and way of doing business that the carriers, now driven by services that can be added at-will as market demands emerge, can monetize and turn into a growth engine. And many are already well down that path.

As an example of this transition, let’s briefly examine some AT&T moves in this direction. As critical as connectivity is, most organizations (and individuals) deem security as mission-critical. AT&T is tapping into this need by providing a broad level of security services. Indeed, AT&T is the second largest managed security services provider (by revenues).

The company sees tremendous amounts of traffic, with 118.8 petabytes of data flowing through its network every day. This gives it insight into threat vectors and spam origination. As a result it can leverage machine learning to detect and proactively prevent many attacks and offer protective services generally not available internally to companies. These are services AT&T can provide relatively easily layered on its SDN and NFV capabilities. It would have had great difficulty doing this in the “old days.” 

According to AT&T, malware incidents affected 87% of enterprises last year and DDoS attacks affected 70%. It’s a $1 billion business. Security requires protection of both the device and the network.

While businesses are willing to pay for such services offering AT&T a significant revenue opportunity, most consumers are not. Yet establishing such network capability could give AT&T a competitive advantage by leveraging the business security assets it has in place at a highly reduced rate (or free) for consumers. This is a potential competitive advantage. 

And AT&T as well as other carriers are reaching out to new markets for revenue growth. In years past it would have been nearly impossible for carriers to go “cross-border” to offer services outside of its base hardware infrastructure locations and home territory. Now they can offer virtual internet services to almost any location through layered SDN and NFV capabilities.

These network virtualization services are popular with organizations that want to focus on their businesses and not have to deal with keeping their networks running, freeing up valuable resources to apply to other areas. AT&T is leveraging this trend to successfully offer services to multi-nationals and to geographies where it never could have competed in the past, and obtaining attractive revenues as a result.

Of course these trends are not limited solely to the carriers. The big infrastructure providers (e.g., Cisco, Ericsson) have spent considerable resources providing SDN and NFV infrastructure products to the carriers, and this will comprise an increasing share of their marketing efforts and revenues going forward. It’s a fundamental shift taking place as all forms of networks “go soft.”  But these companies will often overlap with carriers, as they also offer services directly to their installed base of enterprise users. The border between carrier and traditional networking vendors offering enterprise services remains grey and shifting, and will do so for the foreseeable future.

The future seems clear. Carriers are morphing from large hardware infrastructure players into cloud-based providers of a variety of services they never could have offered with the old hardware-centric models. This bodes well for the carriers as some of their legacy operations face stagnation. But it’s also an indication that carriers are changing to compete, and the larger players (e.g., AT&T, Verizon) have a distinct advantage, particularly in offering more lucrative business functions and services, while the smaller players lag behind in the new business-oriented offerings.

As a result, the shift from hardware to software and services is well underway, and many enterprises will have new and more competitive services available. Its “networks in the cloud,” and it will impact almost all businesses.

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