The FAANGs are out for CSPs
Podcast episode 35
The FANGS are out and telecom companies don’t want to get bitten. But as giants like Facebook, Apple, Amazon, Netflix, and Google build their next generation services on 5G, how does a telecom company go from “dumb pipe” to smart collaborator? Stephen Rose of Bell Labs says the industry has to sharpen its teeth.
Michael Hainsworth: The FAANGs are out and telecom companies don't want to get bitten. But when companies like Facebook, Amazon, Apple, Netflix, and Google want to build their next generation services to leverage the speed, low latency and reliability of 5G, there's going to be an opportunity for “dumb pipes” to become very smart collaborators. But how can the swords be beaten and digital plowshares that serve both the CSP and the customer. I took a virtual trip to the story to Bell Labs in New Jersey to speak with Stephen Rose. And I kind of admit, I geeked out a bit. I love this building, this storied institution.
Stephen Rose: Yes, it is an incredible place and it's great and we're very fortunate to be part of it. So, I run the consulting business for the European and Americas business. We work with two types of customers. We work with communication service providers, and we also work with enterprise customers. And what we try to help them do, is to envision the future potential for their business anchored in network technology. And we do that with three different domains. We look at the network architecture. We also look at the operations and we do techno-economic modeling off the back of those two things, to then understand what is the social economic and services potential within those businesses. And then we model that for customers.
MH: At no point did you explain that you were also a crystal ball reader!
SR: Yeah, well, we have a unique set of individuals in the organization and future bank modeling is something that we pride ourselves on. We try to envision the future. We try to understand what would be the state of this particular outcome that our client was looking to achieve. And then we work backwards from there. The way we do that is we try to envision what would be the market dynamics and those market dynamics at a future point in time, to say five or 10 years. To what extent have you got resources today? And to what extent do you need new resources? And to what extent can you bring in a value chain, or create a value chain? And once you get the tightest fit between those three things, you normally have good strategy.
MH: That value chain is critical because the telecom sector has been struggling to find new growth since 3G. When a communication service provider executive comes to you and asks you to look into that crystal ball, what's the big question they're looking to get, or more importantly, I suppose the answer?
SR: It's been a difficult road. And the challenge for this industry is effectively, if you look at the demand, which is traffic on the network, that is effectively decoupled from the ability to charge for it, and that's been a problem that's been around for quite some years, and that is because no matter how much you've pumped in, you will always have people taking on new services. But the willingness to pay hasn't been as strong as we like. So I think that is ultimately the problem.
How do you drive new willingness to pay inside of the marketplace? To what extent can you find services, uniqueness, and differentiation? And to what extent do I achieve that uniqueness and differentiation without putting a ton of cost on the bottom line? So customers are really looking for that dual competitive advantage and to find a new way, a new path to achieve new growth in their business. It's a difficult journey, but I think it's very much possible with the advent of 5G.
MH: When we're talking about the customer, it strikes me that 4G was about the consumer customer. Is it fair to say 5G is more about the enterprise customer?
SR: There is a way in which 5G networks will radicalize enterprise businesses. So there is no question that there is a huge potential in the enterprise, but it doesn't mean that it is exclusive for those enterprise customers. We will still see a lot of use cases in the consumer space. Not just faster broadband access, but what we will really see, especially with the advent of COVID, is we're going to see a lot more people, of course, working at home in the long term. So of course, everybody's working at home, in the short term right now, but many, many people will stay working like that. And then that sacred sort of break between all the threshold of your front door, which was your home versus your work, that is now forevermore broken for many people. And so what we will need to see is a whole vast array of new services that will support working from home. And that's a mixture of applications to do things like collaboration, as well as obviously increased quality of service and speed on networks.
The thing that the industry needed to break that it wasn't able to break by itself was cultural inertia.
MH: But how has COVID changed the CSP 5G game plan in a way that would allow that increase in ARPU, because you're providing that value add? At this point in the game, is the CSP benefiting from the work from home experience, or are we just at the early stages?
SR: Well, I think we're still at the early stages, but the thing that the industry needed to break that it wasn't able to break by itself was cultural inertia. And if you look at the cultural inertia in many firms, they are stuck to old ways of working, whether it be old IT systems or old ways of communicating or whatever it happens to be. And COVID came along and it rewrote the rules.
One of my neighbors just happens to be working in a communications firm himself. And he was talking to me about the fact that as a CTO, he'd been trying for years to get his organization to work in new ways. COVID came along and solved that problem for him, as much as it's a terrible disease. The reality is that there was a new forced way of working. And so what does that really mean for CSPs? It means two things. One is, people actually need a redundancy in their systems. I'm often talking to customers using LTE, and I'm often presenting in the same meeting using WiFi. And that's so there will be opportunities just in terms of having better standards of communication and more redundancy in my communication, because it's pivotal. I'm no longer using it just for gaming or for communicating with my friends or whatever happens to be social media, but I'm actually using this now to make a living.
In the future, what we will see is a lot more partnerships. And those partnerships really will be where connectivity providers and applications providers will come together to figure out, what would be the future use cases together. And you can imagine the Zooms of this world or other types of communications platforms like that cannot be static video communications, the kind of transactional way in which you would use those applications today. They're going to be completely radicalized. And what will happen to them is that they will need to be collaboration tools. So there'll be a lot more collaboration built into that, so that as people are sat in remote locations and they're trying to interact with each other, they'll be able to emulate the first person experience as much as they can with a real-world experience, as much as they can through AR, VR and other integrated platforms in there. So you'll see much, much more systems of activities and systems of application providers coming together to create that service matrix or that service mesh.
MH: Is that what you're talking about when you refer to constellations of value?
SR: It's a great sort of phrase because it's easy then to envisage what will happen. If we think about traditional value chains that have been existing in our industry, most of the value chains have been in a sort of CSP at the top of the chain and everybody else sort of supplying into that. But I can see vast reorientation from communication services providers, to understand that, first off if they want to address the enterprise sector uniquely, they need to understand the enterprise business. So what they're doing is they're hiring people and they're partnering with people or different firms around the world, to actually have a much better understanding of the vertical that they're trying to address. And therefore, they can actually define use cases. And the only way to do that, unless you're going to hire everybody yourself, or unless you're going to be very, very dominant in the way in which you want to have partnerships strategies, the best way is to create constellations. And those constellations do two things. They try to figure out in the immediate term, what is available as an opportunity in the marketplace. But the other thing is, they co-invent and they co-create together. And because they co-create and co-invent, they actually create those constellations of value where not only do they figure out today's services, but they figure out what are the future services. And then they reap the benefits together in new forms of commercial constellation, as much as it is a technical constellation.
MH: Let's talk a little bit more about how you reorient yourself as a CSP to, first of all, make those constellations possible in the first place.
SR: Yeah, it's a difficult journey because if you look at the makeup, or if you look at the structure of the telco sector, it's typically done most of its procurement in massive cycles. We buy an entire lump of the network at a single point during the year. There's intense rivalry to obviously bid amongst that, for that particular piece of business. And therefore, you don't often get the best out of that. It's not the most inventive or creative process because it is really a process that drives the value chain down to the lowest common denominator, which is price per X, whatever that X happens to be.
One of the things that the CSPs are doing is, they're starting to take a different shift in the way in which they think about procuring and partnering. So partnering is suddenly something which we can now share benefits. We're talking about shared models, changes in the terms and conditions that enable a different type of behavior in the capitalist structure, that those two companies are trying to run. So that's one way. The other way is really having to think about what are the completely different types of services that will happen in the future? And if they happen, what is the network architecture and the operations around that?
The network architecture obviously has to change. If you want to provide low latency, high-performance services, and you want to be able to assure a type of SLA, then not only do you have to be willing to put yourself out in front of the end customer, the end use case and commit to the SLA, but everybody through the chain has to commit to that too. That is a complete operational change that comes with it. As you back to back the commercial agreements between all of those in the value chain, you also have to do that operationally. And that becomes a very, very complex thing, because then once you have interdependent vendors that are providing their hardware and software together, they will have critical interdependencies between them and then the service levels and the OLAs or operative level agreements that enable you to support hardware and software, have to be back to back throughout the value chain. So it becomes quite complex. And therefore, that's a big, big shift in the way that you would operate a telco network in the future.
MH: So then let's talk about that partnering, and let's talk about it in relation to the FAANGs, Facebook, Apple, Amazon, Netflix, Google. Most of these players have, for example, their own cloud offerings. And we know edge cloud is a critical component to 5G. Should a CSP view the FAANGs as competitors, or are they the partners we're talking about?
The network architecture obviously has to change.
SR: Well, they're potentially both. I think again, we're at an early stage, but we are seeing very significant progress in the way that CSPs are partnering with scale providers. And we can see that in a range of announcements all across the world. The challenge for CSPs is ensuring that their value in that chain is such that the willingness to pay is something that they're very much more able to control and influence. And therefore, they are not overly commoditized by offerings that come out from the FAANGs. And so at the edge cloud, there is the compute and storage, of course, that comes at the edge cloud. And there's a great deal of competitive rivalry already in that particular space. But if you're going to move into the next layer, where you want to assure a service level beyond what the web scale providers are prepared to do today, then that moves the CSP into an altogether different set of use cases. And those use cases are really tied to either some sort of business benefit that is going to change the way in which an end customer can go to market, or it's going to shave a lot of costs off of the way in which their existing operations are working today.
There's a great deal of opportunities for CSPs, but they have to ensure that they have the technical capabilities that keeping them one step ahead of the web-scale players, such that the web-scale players are willing to take, contribute to that value chain at the edge cloud space. But the CSPs will still be in control of the high-performance functions. And those high performance functions is where the complexity comes in. And if the CSPs control the complexity, naturally, that's where their value-add comes in, in the overall chain.
MH: That then sounds like outside expertise. That you can't just hire from within, when you are building them to 5G network with the intent of leveraging it, to turn a lot of those former competitors into cooperators to help build your ARPU.
SR: Yes, and it is very interesting. We are seeing CSPs rethink their strategies at pretty spectacular levels. So, if we imagine what it was like to go from being a 3G operator into becoming a 4G operator, the transition was still there. It needed new marketing and new sales and new value propositions. But ultimately, what we were doing was, we were putting a level of technology into the marketplace and the market was able to understand that, and it didn't necessarily change the entire value chain in terms of that complexity.
But if you're going to offer the kinds of SLAs that we were talking about earlier on, then you have to completely rethink, what are the ways in which you would hire, fire in your own organization, or repurpose, if you want to call it a bit more kindly, but also what is the core and context for the rest of the organization? And if you are going to move into particular spaces, you have to be quite ruthless about that. And I see that the FAANGs have done that particularly well. They understand what is their core business. They understand the core fit theory of their firm, and they ruthlessly hire around that, or they ruthlessly partner around that. And they don't get encumbered by the idea of legacy systems or legacy services or whatever else there is. And CSPs have to think in the same way, what is the core and context? What do they want to be five years from now? And then they need to shape their organization in such a way that they can achieve that particular outcome. And there's some great examples around the world where structure and separation has been happening, and some of the CSPs are still sticking with the same value proposition, but they're structurally separating because the core theory of their firm is, at one end you've got a Servco and that Servco is obviously then taking more of a challenge of monetizing spectrum and ensuring that their go-to market is more sophisticated as they go towards enterprise. And then the Infraco underneath, is providing the services to support a range of different services that are coming up.
But if you look in other markets, you've got some firms that have decided that they're out of the existing business, they're moving themselves into becoming an Infraco business because they see the competitiveness for future services is too high in a certain way. They've got the assets or they've got the capillarity, or they've got the skills and the culture that suits to become an Infraco. And so they're moving themselves into there. So we're seeing very, very strong changes. And a lot of it really depends on geographically where you are, but also the competitive rivalry within a particular market.
MH: So if a CSP finds itself speaking to an enterprise customer that's say already using an Amazon web services or something similar, I suppose then, we have to reorient our thinking away from how do I steal that enterprise customer away from that Amazon people to, how do I provide value added to their existing relationships?
SR: Yeah, it is. And I typically use a very simple model with our customers. I draw a straight line, which represents the willingness to pay, and above line, I show where the customer is, that I'm talking to, and we map out what the value chain is. So their value chain plus their own assets. And we see to what extent that drives willingness to pay from their perspective. And then what we do is we map the competition below that, and you see, to what extent they have a value chain and how well organized that value chain is. And to what extent do they have their own assets. And to what extent are those assets, once they're coupled with the value chain, create a level of competitiveness between the customer and all of the competitors in the marketplace. And if you can continuously understand that, then you've got a good chance of understanding to what extent you've got an ability to command a premium, or to what extent you've got differentiation.
That is a very, very strong mindset shift. When you think about going into coopertition models and you start thinking about, well, to what extent am I willing to share my resources and my assets? And of course, if we've seen Sweden, Denmark and many other markets, for example, these coopertition models are quite prevalent, especially on the RAN networks, but it's not a typical mindset that exists in our industry, but it is maturing and the hand is being forced. If you're a very, very small, if you're existing in a very small country, and you've got a finite amount of customers that you can address, you really have to start thinking differently about how do you continuously do that and do that profitably, whilst you've got all that competitiveness around you.
MH: But I can just imagine those old school telecom executives saying, "You're telling me I have to become interdependent. That takes control away from me and in the long run, my customer gets the upper hand."
SR: Well, it's funny. And I would say that I'm probably one of those old school telecom executives. I've been in this industry for 25 years or so. But I do see major shifts in the mindsets. And I do see major shifts in the willingness of CSPs to rethink their business and to rethink how they need to orientate themselves as individuals and their teams and their organization. So, I am very hopeful for this industry. And it has survived some tumultuous waves. And if we look at not just the OEMs, but also the CSPs themselves, they have managed to still find growth, even through enormous amounts of competition.
I think it is an increasing problem, and it is a rapidly increasing problem, that the levels of competitiveness that this industry is under will accelerate. And then the problem is, of course compounded by the fact that we will probably see a 10x increase in traffic over the next years with the explosion of the fourth industrial revolution. So the hand is being forced one way or the other.
MH: Well, it sounds like what you’re saying is, the innovation cycle inside a CSP needs to change. They need to be able to create services, then go to market, instantiate those services, more quickly than we’ve ever done before. But how do you A/B test what works and what doesn’t?
SR: Yeah, I think it's important we go back to the original problem statement, which is CSP's need to find growth whilst being under huge competitive pressure and ultimately regulators set the conditions for success and that includes of course, the huge sums of money that get spent on spectrum. If we think about the industry and government ambitions to deploy digital fabric, it's clear that the policy and intervention of regulators must be considerate of all of these issues, and then weigh that off against future investment scenarios.
So if we turn to lat, as an example we can see that there's been more intervention around tariff and controls and that might make some sense in the short term especially around this COVID crisis. But potentially long term might be a shot in the foot when we see that the CSP's get the short term profit problem of course, but second that the long term there may be dissuasion around inward investment and of course that would ultimately see the technologies deployed at slower rates and in turn we would see slower GDP growth, so not a great ripple effect.
If we look to Europe we can see the ARPU is a lot lower than compared to the U.S. and there's already been some coopertition efforts around sharing, so that's a great example of that. But there's an obsession around, certain obsession around consumer protection and you can draw quite a straight line between regulatory intervention to protect that consumer to protection policy and MNA scenario. So I think we need to have regulators appreciate the CSP challenge, work within the nuance of trading off issues of consolidation and accelerated technology deployment and therefore, ultimately achieve the country level agendas that unlocks billions of dollars of telco-enabled GDP growth. All that said, regulators clearly have a huge role to play.
MH: At some point when spectrum assets become depleted, you've argued that there would be an inflection point, where one of the big push backs that we've gotten from the industry, wholesale the idea of letting others use your spectrum. Once those spectrum assets become depleted, you are either as an inflection point where wholesale will actually become attractive. That seems counterintuitive to me, I would have assumed that the less spectrum you have, the more likely you are to guard it.
SR: But then the problem is that what you do is whoever holds that spectrum ultimately puts society into a holdup position. And of course, that's not the intention of the CSP. That's not the outright intention. But if somebody’s strangled, held by regulatory conditions or notions of pure profit, then naturally there are going to be limitations. So I don't advocate for this utopian idea that everybody should share everything, but I think there is potential for governments to encourage the idea that resources are finite. And therefore there are social responsibilities that come along with the idea of building, operating and owning network assets, which are of extreme national importance.
I think we will see nudging towards the right types of conditions. I don't think it should be wholesale shifts in terms of regulatory intervention. Because I think that if you put a violent action, you'll get a violent reaction. But I think a constant encouragement and nudging from a regulatory standpoint, would enable at some point the resources to be shared. And everybody still benefits in the way that they need to. I also see that, as you said, there will come an inflection point when resources run out and you still want to grow your business, how are you going to do that without the resource? Well, you are going to have to somehow pull it or be more clever.
MH: If a CSP only had 30 seconds to listen to this program, what would be the big takeaway you'd want them to focus upon?
SR: Great question. The one thing that I would say is, understand and set yourselves up for an emergent journey. 5G is an emergent journey. It isn't a journey that starts now and is understood now. So once you actually partner properly, you orientate your organization to be able to sense opportunities, shape them and seize them. Then you have a great chance to monetize on 5G. But it's setting yourselves up for that emergent journey. And I think they'll succeed very well.