Extending the Wholesale Economy Into the Cloud Ecosystem

Extending the Wholesale Economy Into the Cloud Ecosystem

The Delta Perspective

Like much of the global telecoms business, the international wholesale carrier market is entering a period of transformation.

A new economy is emerging where the extra demands that global cloud providers are placing on traffic are failing to bring the expected financial rewards.

Despite global cloud internet traffic rising 54 percent annually from 2011 to 2016, revenues generated from handling these services are expected to fall by half to $1.8 billion by 2022. All the while, enterprise purchasers are shying from “one-stop-shop” and preferring to buy from multiple specialist providers.

For carriers to be successful, they need to tap into the cloud economy by investing in local and regional infrastructure that’s relevant to global cloud providers and to advocate a partnership model. International carriers can deploy and manage sea cables, fiber networks and data centers, which are all vital resources for global cloud providers.

Through these “Infrastructure-as-a-Service” (IaaS) partnerships models, international carriers can help cloud providers overcome cost issues and regulatory barriers in under-penetrated markets. International carriers have the scale to encourage traditionally low-capex internet players into new partnerships such as revenue sharing, pay-as-you-grow and valued-based pricing.

Take the Internet of Things, for example. The explosion in connected and smart devices has seen greater importance placed on fraud prevention and cloud-based communications. However, these smaller, regional players cannot afford to build their own networks, so would favor outsourcing the infrastructure to an established carrier with scale.

This infrastructure can also serve multinational corporations, such as those offering Virtual Private Networks and Security-as-a-Service, as well as those with on-going digital transformation strategies. Last year, more than 50 percent of enterprise IT budgets were spent on new technologies and 67 percent of the world’s top 200 businesses have made digitalization a priority for this year.

Typically, pure-play digital services have favored OPEX over CAPEX but the importance of proprietary network infrastructure is increasing as it helps companies get to market faster and reduces the overall cost. Facebook, Google and Amazon have invested heavily in subsea cables and drones to boost connectivity. At the same time, they are also investing in data centers to offer their own cloud services.

This has enabled platforms to enter the infrastructure space and use their international reach to provide global coverage that rivals many well-established carriers.

While they are developing an international network infrastructure outside of the traditional wholesale economy, global cloud providers are using these assets to offer IaaS. This allows companies to rent, as needed, basic computing, data storage and networking services. Amazon Web Services is the world’s largest IaaS provider with revenues of $9.8 billion last year, while Microsoft’s Azure Platform is the second largest with $1.6 billion. This shows that the global cloud providers are increasingly competing with wholesale carriers for international enterprise business and carriers will need to respond by understanding where they can partner and who with.

For international carriers to become more attractive to cloud providers, they must consider developing a “Cloud and Connectivity Enablement” business model, which leverages data centers and international carriers’ fixed infrastructure to enable digital services. This new approach, which is also known as the “fifth carrier business model”, helps global cloud providers by offering co-location, network capacity, managed networking and network security solutions.

This “fifth carrier business model” will require international carriers to further diversify their portfolio of services. It will also force carriers to facilitate the real-time provisions and settlement of services to meet the needs of cloud providers.

At a technical level, NFV/SDN interoperability to be a key networking requirement and carriers must be able to support these services across network infrastructure. On a commercial level, carriers will need to ensure their settlement frameworks are advanced enough to handle and charge for a wider range of services.

In the cloud-driven ecosystem, the boundaries between retail and wholesale will become ever more blurred and to incentivize cloud providers to enter the wholesale economy, carriers need to respond. They must strengthen their approach to host of growing areas, like data centers, managed networks, cyber security, hybrid cloud and IaaS. They must build the commercial framework to enable settlement for an expanded set of products and services. But most importantly, they must organize themselves so that they can effectively engaged with cloud providers.

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Delta Partners - TMD Advisory and Investment