AWS, Azure, and Google Cloud Redefining Telecoms Commercial Models

The industry is at the beginning of a profound structural shift to an increased consumerization of telecom technologies

LONDON, June 14, 2022 /PRNewswire/ --5G is the first 'G' in cellular technologies that paves the way for Communications Service Providers (CSPs) to operate in the software layer. Software represents a departure from transactional model characteristic of telecom equipment manufacturing. Software points toward a recurring revenue model that is more consistent and predictable akin to that of hyperscalers. According to global technology intelligence firm ABI Research, that has implications on the commercial models that underpin the industry.

"With a growing importance of software, the commercial imperative from a vendor's perspective is stark: depart from a finite supply of (3G and 4G) equipment, characterised by scarcity, to monetization models based on (5G) software where the supply is essentially infinite," states Don Alusha, Senior Analyst 5G Core & Edge Networks at ABI Research.

With 3G and 4G networks, commercial arrangements revolve around a CAPEX purchase model. CSPs pay a specific price to own an asset. It could be hardware (cellular antennas) or software predicated on perpetual licensing. The value can be paid in cash, financed, or leased. But what is most relevant, however, is that there is a set price. Once the deal is agreed, Network Equipment Vendors (NEVs) like Ericsson, Huawei, Nokia, and ZTE are guaranteed an upfront payment at the point of signing a contract. In a CAPEX model, NEVs have one stress point: winning the deal. The risk of implementing the purchased technology falls to CSPs. A key point to note is that, in general, by the time a product is adopted and used, the bulk of the budget has already been spent upfront for the installation, integration, and other professional services needed to get the product operational.

By contrast, in a 5G ecosystem, and by extension, cloud and software world, there may not be a 'product' sale. Technology suppliers still need to channel the required Research and Development (R&D) to build the technology and win a deal. They need to invest in marketing, execute the sales cycle in the hope they win the deal. In that respect, there is not much difference from the CAPEX model. The difference lies in the fact that OPEX models are associated with recurring (micro-) transactions—extra compute, more storage, more modules, etc. "Further, businesses built on OPEX models typically invest a significant amount of capital upfront and then try to make up with volume because of a superior cost structure that is associated with software; the marginal cost of producing an extra copy is very small. That underpins hyperscaler's (Amazon, Google, and Microsoft) business model and strategy," Alusha explains.