In the last decade, the market value of web born companies grew many folds as compared to telecoms. Today, web based companies achieve market valuations up to 5.5 times greater than telecoms. Both segments could benefit from increasing service popularity; however web born companies could do more to increase their market value.
In the advent of cloud computing, web based companies such as Amazon, Google and SalesForce.com are utilizing their state of the art platforms and infrastructures entering the cloud computing market. They are offering once internal platform and infrastructure services to external customers. While cloud computing services still represent a minor share of their business today, this strategy potentially leaves telecoms in commodity space.
In our research we analyzed strategic opportunities for telecoms to take advantage of this disruptive technology and fight commoditization. However, to reap benefits from cloud computing, telecoms need to think software, not infrastructure.
The major findings of our research include:
- Mobile cloud computing has the potential to shift usage from PCs to mobile devices;
- Future on-demand business services with cloud computing propositions can disrupt today’s ICT business market;
- Competition in the cloud computing age is software, not infrastructure based;
- Telecoms need to formulate de-commoditization strategies to exploit market opportunities and fend off a new class of competitors.
Mobile (Consumer) Cloud Computing
We believe mobile cloud computing can create profitable data and application business for mobile network service providers (MNOs) and has the potential to shift usage from PCs to mobile devices. Mobile cloud computing promises seamless on-demand application experience on handsets, with granular usage-based pricing. Reaping benefits from this technology requires the development of superior software to enable mobile cloud computing or, in other words, a transformation from a NetCo to a WebCo.
There is a lot of hype on mobile app downloads today (Apple’s has 1.5 billion downloads in 12 months and currently 59, 000 active applications in its Apps Store). Apple’s success has competitors promoting their own online application stores. The download numbers reflect vital customer demand. Today’s mobile solutions come with a closed value chain, device operating system dependency, primarily simple applications, license fees and native apps running on devices. This is still far from the cloud vision; MNOs have to overcome today’s technical restrictions and come up with innovative ways to compensate:
- Develop solutions to make up for lack of mobile CPU power and length of latency;
- Innovate solutions that optimize network traffic between thin clients and the cloud;
- Develop security services that support holistic protection; and
- Develop and standardize open architectures that grant mobile application developers independency.
Breaking up closed value chains and delivering superior on-demand mobile application experience will increase the number of mobile applications available and accelerate uptake. Furthermore, technical innovations overcoming today’s restrictions will initiate usage shift from PCs to mobile devices. I am afraid supplier centric RFI initiatives will fall short this time. The challenge is to transform development lazy MNOs into specialized software powerhouses to exploit mobile cloud computing opportunities.
Managed On-Demand Business Services
Today CIOs are restructuring budget to meet required savings. After years of steady growth CIOs are planning to reduce their budgets for 2009 between 4 – 6% worldwide, with the goal of sustainable cost savings and increased flexibility. In parallel, the market trend towards managed network services continues. 40 % of businesses are considering outsource of network elements within two years as one way to achieve target savings. In today’s telecom world, network centric service deals still represent 77% of total market. With the arrival of web 2.0 services and unified communications, however, we believe IT and telecom services convergence will increase.
By carving out a new business market strategy, adopting new technology and the right business model telecoms can take advantage of this market situation.
Looking at the attractiveness of business models in market, we identified on-demand web based IT services superior to off shore IT services and incumbent IT services. On-demand web based IT service companies outscore the others in growth dynamic, impact (gross margin) and productivity per FTE. Adopting a web based IT services model also offers barriers of entry for other providers where it is very hard for them to adopt and risk today’s business.
Web based IT services are supported by technology like virtualization, open web standards, web services and semantic web. Applying these technologies promises IT solutions highly flexible, cost efficient, usage-based payment with the promise turning fixed IT cost into variable cost for business customers. In other words a truly disruptive ICT proposition.
Investing in extended infrastructure, the natural reflex of telecoms will fall short this time. Telecoms expanding their offers to infrastructure as a service (IaaS) are finding competition from the likes of Amazon, Google and FlexiScale. These web born service providers developed their web services adopting a green field approach beginning in the late 90’s. They offer web services they have developed for themselves and monetize excess capacity. One aspect which makes their backward integration strategy superior is the efficiency level they base their external offers on. Cloud computing centers report efficiency levels 3 to 15 times higher than today’s data centers. IaaS offerings from telecoms need to match these benchmarks. These include CPU utilization, power utilization effectiveness, relative H/R costs, system admin productivity and, ultimately, the real cost of a CPU hour. We believe a partnering strategy to learn and provide competitive offers to business customers offers the best chances of success for telecoms.
Indeed we see a strategic threat from cloud service providers like Amazon and Google to gain supremacy over telecoms by occupying the cloud computing value chain. Telecoms need to develop a de-commoditization strategy, identifying profitable spots in the value chain to counter their moves and even increase their share of ICT wallets of business customers.
Telecoms have core competencies like billing relations, location information, device details, full blown sales channels that are much needed in a cloud ecosystem. They should be used as an integral part of their cloud computing strategy.
Telecoms have a window of opportunity to adopt their business customer strategy. By building up a cloud ecosystem telecoms will be able to offer disruptive technology at unmatched simplicity, flexibility and price levels. Telecoms can create new profitable business with commercial customers leaving people intensive, complex, risky and project based ICT contracts to the past and reverse the historical growth rate for ICT budgets. However, creating a disruptive cloud ecosystem strategy for business customers requires telecoms to think beyond traditional services. They need to identify profitable spots in the cloud computing value chain and develop strategies for occupying them.
