New Growth from Telco Cloud · 2017-10-19 · Telco Cloud also enables the creation of new...

Executive Briefing

Telco Cloud: Translating New Capabilities into New Revenue

APRIL 2016

Kindly supported by:

New Revenue Growth from Telco Cloud | APRIL 2016

© STL Partners EXECUTIVE BRIEFING 2

Preface

The telecoms industry is embracing network virtualisation and software defined networking, which are

designed to both cut costs and enable greater agility. Whilst most operators have focused on the operating

and capital cost benefits of virtualisation, few have attempted to define the range of potential new services

that could be enabled by these new technologies and even fewer have attempted to forecast the associated

revenue growth.

This report outlines:

Why and how network functions virtualisation (NFV), software defined networking (SDN) and

distributed compute capabilities could generate new revenue growth for telcos.

The potential new services enabled by these technologies.

The revenue growth that a telco might hope to achieve.

This report does not discuss the cost, technical, organisational, market or regulatory challenges operators

will need to overcome in making the transition to SDN and NFV. STL Partners (STL) also acknowledges that

operators are still a long way from developing and launching some of the new services discussed in this

paper, not least because they require capabilities that do not exist today. Nevertheless, by mapping the

opportunity landscape for operators, this report should help to pave the way to fully capturing the

transformative potential of SDN and NFV.

To sense-check our findings, STL has tested the proposed service concepts with the industry. The new

services identified and modelled by STL were shared with approximately 25 telecoms operators. Hewlett

Packard Enterprise (HPE) kindly commissioned and supported this research and testing programme.

However, STL wrote this report independently, and the views and conclusions contained herein are those of

STL.



Executive Summary

Software defined networking (SDN), network functions virtualisation (NFV) and distributed compute

capabilities have the potential to catalyse telco transformation, simultaneously reducing costs and enabling

greater agility.

However, to realise the potential agility gains (enabled by more programmable and virtualised infrastructure)

and grow new revenues, telcos must change their way of working, adopting more cloud-like business

practices. In particular, they need to revamp internal processes to rely more on automation, act on insight

from data-analytics and scale resources to meet demand. This will allow operators to more efficiently

develop and launch products and services that more readily meet the needs of their customers.

STL defines the adoption of virtualisation technologies and cloud-business practices as Telco Cloud (see

Figure 1).

Figure 1: Defining Telco Cloud

Source: STL Partners analysis

We believe that Telco Cloud could drive new revenue growth in two ways:

1. Increased service agility

2. The ability to create new, network-integrated services

Operators will be able to create products faster than in the past using more-readily programmable

infrastructure. Products will be continually refreshed, up-to-date and more readily customisable, better

meeting the needs of customers. Furthermore, operators will be able to adopt more flexible commercial

models, such as offering free trials for services, due to lower fixed costs and less need for on-site installation.

As telcos are able to address new opportunities faster, creating more and better products and services, they

will be able to grow revenues.

Telco Cloud also enables the creation of new network-integrated services – services that are either uniquely

possible or significantly enhanced by programmable network virtualisation, and the adoption of cloud

business practices. STL has defined four categories of services enabled by Telco Cloud (see Figure 2).



Figure 2: Overview of Telco Cloud categories and services


The first three categories (Connect; Perform; Capture, Analyse & Control) shown in Figure 2 are network-

integrated services and this report explores these new propositions in detail. The three categories have

different levels of complexity, with Connect services more readily implementable that some Capture, Analyse

& Control services that are dependent on the implementation of more advanced technologies.

Connect: These services involve the optimisation of connectivity and networking. Services in this category

are similar to existing connectivity and networking services, but are delivered and consumed in a more

cloud-like way. Programmable network virtualisation enables operators to scale up and down the service to

meet customer needs and to add new functionality and features on-demand.

Example service: Virtual customer premises equipment (vCPE) for enterprise customers.

Perform: This category describes services that ensure optimised delivery of content and applications to the

consumer/end-user; this is particularly important for services that require high bandwidth and/or low-latency.

Current broadcast models/approaches can generate significant lag for content/applications or require lots of

caching. In the future, this could become a bigger issue as increasingly immersive content services may

require high bandwidth and low-latency in order to deliver the promised user experience.

Example service: Enabling the broadcast of live sport to virtual reality devices.

Capture, Analyse & Control: Services within this category are less mature and are often dependent on the

implementation of more advanced technologies. They typically involve some form of ‘smarts’ or analytics

across the network. They may employ smarter upload or ingestion of information, analytics/filtering applied to

uploaded information and real-time instructions – undertaken right up to the edge of the network – in

response to inbound data.

Example service: Field force augmented reality solutions interacting in real-time with field equipment.



Digital Agility: This category refers to new (digital) services that operators will be able to launch more

successfully having embraced Telco Cloud. These digital services may rely only partially on operators’

specific infrastructure and may compete directly with so-called over-the-top (OTT) digital service providers.

To succeed here, operators will need to adopt cloud practices in order to orchestrate wider ecosystems and

effectively leverage their other assets, such as billing, distribution and branding.

Example Service: Consumer smart home solution

To explore the transformative nature of Telco Cloud, STL modelled the revenue opportunity associated with

the launch of these Telco Cloud services over a six-year period for a converged operator in an advanced

market. We estimate such a telco could potentially increase revenues by 10.5% above the base case in

December 2021 through the launch of Telco Cloud services.

Figure 3: Telco Cloud could boost revenues 10.5% higher than the base case


The model assumes a staggered launch of Telco Cloud services over the six-year period, with harder-to-

implement services deployed later. Whilst this illustrative telco launches potentially more services over this

period than some telcos might realistically elect to do, our forecast highlights the potential magnitude of the

changes enabled by Telco Cloud.

Figure 4 further breaks down the new revenue growth from Telco Cloud. STL forecasts that the majority of

new revenue will come from Connect services, such as vCPE and network-as-a-service (NaaS). New Digital

services also have the potential to become significant sources of revenue growth. As the telco would be

likely to launch Perform and Capture, Analyse and Control services close to the end of this six year period,

these two categories of service won’t make as big a revenue contribution as Connect services. Nevertheless,

they hold significant revenue potential.

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Figure 4: Breakdown of Telco Cloud revenues in 2021


These forecasts highlight the transformative nature of Telco Cloud. Whilst there could be significant costs, as

well as technical, human and organisational challenges in managing the implementation of Telco Cloud, the

reward should be significant revenue growth through the creation of unique services and through the

enablement of greater service agility. Finding new sources of revenue and growth is a critical ongoing

challenge for operators as their core business comes under significant pressure. A Telco Cloud

transformation has the potential to help operators return to a growth path.

Monthly revenue uplift of 10.5%

(Dec. 2021)



Contents Preface .............................................................................................................................................................. 2

Executive Summary ......................................................................................................................................... 3

Introduction .................................................................................................................................................... 10

The end of growth in telecoms...? ....................................................................................................... 10

New technologies can be a catalyst for telco transformation .............................................................. 11

Defining ‘Telco Cloud’ ......................................................................................................................... 12

How Telco Cloud enables revenue-growth opportunities for telcos ....................................................... 16

Connect services ................................................................................................................................. 16

Perform services.................................................................................................................................. 17

Capture, Analyse & Control services .................................................................................................. 18

Digital Agility services .......................................................................................................................... 19

Telco Cloud Services .................................................................................................................................... 20

Service Overview: Revenue vs. Ease of Implementation ................................................................... 20

Enterprise vCPE .................................................................................................................................. 22

Consumer vCPE .................................................................................................................................. 23

NaaS (network-as-a-service) ............................................................................................................... 24

Enterprise VMNO ................................................................................................................................ 25

Low-power machine communications ................................................................................................. 26

Optimised content delivery networks (CDNs) ..................................................................................... 27

Edge infrastructure-as-a-service (IaaS) .............................................................................................. 28

Software-as-a-service (SaaS) optimisation ......................................................................................... 29

Low latency media ............................................................................................................................... 30

Network-aware application programming interfaces (APIs) ................................................................ 31

Video production solution .................................................................................................................... 32

Enterprise augmented reality .............................................................................................................. 33

IoT sensor gateway ............................................................................................................................. 34

IoT control node................................................................................................................................... 35

(Enterprise) premise location-based services ..................................................................................... 36



The Revenue Opportunity ............................................................................................................................. 37

Model overview.................................................................................................................................... 37

Sizing the revenue potential from Telco Cloud services ..................................................................... 37

Timeline for new service launch .......................................................................................................... 40

Breaking down the revenues ............................................................................................................... 41

Customer experience benefits ............................................................................................................. 44

Conclusions ................................................................................................................................................... 45

Appendix ........................................................................................................................................................ 46

Modelling Assumptions & Mechanics .................................................................................................. 46

Service Descriptions: Index of Icons ................................................................................................... 50



Figures:

Figure 1: Defining Telco Cloud .......................................................................................................................... 3

Figure 2: Overview of Telco Cloud categories and services ............................................................................. 4

Figure 3: Telco Cloud could boost revenues 10.5% higher than the base case ............................................... 5

Figure 4: Breakdown of Telco Cloud revenues in 2021 .................................................................................... 6

Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market ............................... 10

Figure 6: Virtualisation can redefine the cost structure of a telco ................................................................... 12

Figure 7: Defining Telco Cloud ........................................................................................................................ 13

Figure 8: Telco Cloud Service Categories ....................................................................................................... 16

Figure 9: Telco Cloud will enable immersive live VR experiences .................................................................. 18

Figure 10: Telco Cloud can enable two-way communication in real-time ....................................................... 19

Figure 11: Overview of Telco Cloud categories and services ......................................................................... 20

Figure 12: Telco Cloud Services: Revenue versus ease of implementation ................................................... 21

Figure 13: Telco X - Base case shows declining revenues ............................................................................. 38

Figure 14: Telco X – Telco Cloud services increase monthly revenues by 10.5% on the base case by Dec

2021 ................................................................................................................................................................. 39

Figure 15: Telco X - Timeline of Telco Cloud service launch dates ................................................................ 40

Figure 16: Telco X (converged) – Net new revenue by service category (Dec 2021) .................................... 42

Figure 17: Telco Y (mobile only) – Net new revenue by service category (Dec 2021) ................................... 43

Figure 18 Telco Z (fixed only) – Net new revenue by service category (Dec 2021) ....................................... 43

Figure 19: Modelling Mechanics ...................................................................................................................... 49



Introduction

The end of growth in telecoms...?

Most telecoms operators are facing significant competitive pressure from rival operators and players in

adjacent sectors. Increased competition among telcos and Internet players has driven down voice and

messaging revenues. Whilst demand for data services is increasing, STL forecasts that revenue growth in

this segment will not offset the decline in voice and messaging revenue (see Figure 5).

Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market


Figure 5 shows STL forecasts for revenues over a six-year horizon for an illustrative converged telco

operating in an advanced market. The telco, its market characteristics and the modelling mechanics are

described in detail later in this report.

We believe that existing ‘digital’ businesses (representing consumer digital services, such as IPTV and

managed services for enterprises) will not grow significantly on an organic basis over the next six years

(unless operators are able to radically transform their business). Note, this forecast is for a converged telco

(mobile and fixed) addressing both enterprise and consumer segments; we anticipate that revenues could

face a steeper decline for non-converged, consumer-only or enterprise-only players.

Given that telcos’ cost structures are quite rigid, with high capex and opex requirements to manage

infrastructure, the ongoing decline in core service revenue will continue to put significant pressure on the

core business. As revenues decline, margins fall and telcos’ ability to invest in innovation is curbed, making it

even harder to find new sources of revenue.

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New technologies can be a catalyst for telco transformation

However, STL believes that new technologies have the potential to both streamline the telco cost structure

and spur growth. In particular, network functions virtualisation (NFV) and software-defined networking (SDN)

offer many potential benefits for telcos.

Virtualisation has the potential to generate significant cost savings for telcos. Whilst the process of managing

a transition to NFV and SDN may be fraught with challenges and be costly, it should eventually lead to:

A reduction in capex – NFV will lead to the adoption of generic common-off-the-shelf (COTS)

hardware. This hardware will be lower cost, able to serve multiple functions and will be more readily

re-usable. Furthermore, operators will be less tied to vendors’ proprietary platforms, as functions will

be more openly interchangeable. This will increase competition in the hardware and software

markets, leading to an overall reduction in capital investment.

Reduction of opex through automation. Again, as services will be delivered via software there will

be less cost associated with the on-going management and maintenance of the network

infrastructure. The network will be more-centrally managed, allowing more efficient sharing of

resources, such as space, power and cooling systems.

Product lifecycle management improvements through more integrated development and

operations (devops)

In addition to cost savings, virtualisation can also allow operators to become more agile. This agility arises

from two factors:

1. The nature of the new infrastructure

2. The change in cost structure

As the new infrastructure will be software-centric, as opposed to hardware-centric, greater levels of

automation will be possible. This new software-defined, programmable infrastructure could also increase

flexibility in the creation, management and provisioning of services in a way that is not possible with today’s

infrastructure, leading to greater agility.

Virtualisation will also change the telco cost structure, potentially allowing operators to be less risk-averse

and thereby become more innovative. Figure 6 below shows how virtualisation can impact the operating

model of a telco. Through virtualisation, an infrastructure player becomes more like a platform or product

player, with less capital tied-up in infrastructure (and the management of that infrastructure) and more

available to spend on marketing and innovation.

Redefining the cost structure could help spur transformation across the business, as processes and culture

begin to revolve less around fixed infrastructure investment and more-around software and innovation.



Figure 6: Virtualisation can redefine the cost structure of a telco


This topic is explored in detail in the recent Executive Briefings: Problem: Telecoms technology inhibits

operator business model change (Part 1) and Solution: Transforming to the Telco Cloud Service Provider

(Part 2).

Defining ‘Telco Cloud’

Whilst NFV and SDN may allow operators to run and manage their operations more efficiently, telcos should

not focus solely on the cost-saving and technology aspects of virtualisation. Telcos must also focus on how

they can use the greater agility made possible by these programmable technologies to grow revenues.

To realise the benefits of greater agility, telcos must also adopt cloud business practices:

create and deliver products and services with increased flexibility and speed

better understand usage and behaviour through analytics and to adapt accordingly

scale up and down resources to meet/match consumer needs

develop new commercial models

enable the creation of new ecosystems

http://www.telco2research.com/articles/EB_Problem-Telecoms-technology-inhibits-operator-business-model-change-Part-1

http://www.telco2research.com/articles/EB_Problem-Telecoms-technology-inhibits-operator-business-model-change-Part-1

http://www.telco2research.com/articles/EB_Solution-Transforming-to-the-Telco-Cloud-Service-Provider-Part-2

http://www.telco2research.com/articles/EB_Solution-Transforming-to-the-Telco-Cloud-Service-Provider-Part-2



Adopting these cloud practices will begin to change how telcos run and manage their business – simplifying

processes, increasing automation, more effectively managing resources – allowing telcos to move faster to

capitalise on new opportunities.

Furthermore, cloud practices also change the delivery and consumption model for customers. There is the

potential to drive a change in customer behaviour, encouraging greater usage of a service, if it is required,

and increasing the ‘stickiness’ of services. Unlike most transformation programmes where it is often sensible

to adopt a ‘fast follower’ approach, telcos will be most successful if they are first to achieve a Telco Cloud

transformation. In STL’s view, those telcos that are first to successfully offer new ways to consume services

are likely to gain significant market share.

Operators that embrace both virtualisation technologies and cloud business practices will create more

streamlined, cost-efficient organisations that can innovate to drive new revenue growth and better meet the

needs of customers. STL defines the adoption of these two elements, virtualisation and cloud business

practices, as ‘Telco Cloud’ (see Figure 7).

Figure 7: Defining Telco Cloud


Embracing Telco Cloud can lead to revenue growth in two ways:

1. Greater service agility – the ability to create products faster, in a more cloud-like way

2. The ability to create new network-integrated services

Greater service agility Adopting cloud business practices allows operators to create products and services that better meet

customer needs. This applies to both core communications products and services that aren’t integrated into

the network. As operators begin to embrace cloud practices in their core business, they will have knock-on



effects across the rest of the business, making it easier to test, launch, refine and grow services. This could

lead to:

Faster product creation due to a more readily-programmable infrastructure and reduced

requirements for on-site install.

Continually up-to-date products as there will be faster turnaround of change requests/bug fixes

due the nature of software.

Quicker order turnaround as telcos can process orders more autonomously.

Mass customisation: Products that better meet the precise needs of customers, as telcos will be

able to easily modify and customise products/services. Through a better understanding of customer

and usage data, operators can further improve product offerings.

More innovation: Products can be created faster and with less resource, enabling more products to

be tested and launched.

Faster failure of products as more information will be available sooner to support the product

proposition and less investment sunk into the product upfront.

More flexible commercial models as telcos will be able to offer free trials for services – currently

there are installation and operational costs that prevent operators offering free trials, but the

virtualisation of services removes this barrier.

More elastic services: Operators can provide more or less resource on demand, potentially driving

a change in customer behaviour, encouraging customers to use more if/when required (and less

when not required). Greater elasticity has the potential to increase overall consumption and

engagement.

Greater accessibility: Easier access to services – customers can potentially access the service via

a number of interfaces/portals, encouraging usage and engagement.

Increased stickiness of services: Online storage and services create consumer loyalty. This

reduces churn and lowers customer retention costs.

By enabling telcos to address new opportunities faster and create more and superior products, Telco Cloud

should drive revenue growth. However, as discussed earlier in this section, telcos must also change their

culture and way of working.

New network-integrated services

Telco Cloud could also allow operators to increase revenues by launching new differentiated/unique

services. Virtualising the network (and operations) and adopting cloud practices can lead to the creation of

new network-integrated products and services. These services can be new products in their own right or they

can be new ways of delivering existing services.

Virtualising the network creates a number of potential competitive advantages for telcos:

Telcos can retain end-to-end control of the service. As the network is software-defined, it can be

manipulated to deliver against Service Level Agreements (SLAs) and can provide ‘carrier-grade’

compliance, security and privacy. Furthermore, telcos can ensure that data is kept at a sovereign-



level where necessary. A number of industry sectors, such as public services and healthcare, have

requirements to keep data within national borders. Telcos can provide cloud-computing capability

and meet the requirement to keep data at a sovereign-level.

The distributed infrastructure of the network creates the potential to take advantage of edge

computing; rather than data having to transverse across the network, computation and analytics can

happen at the ‘edge of the network’ near to the source of the data. This allows telcos to better

support services that require low latency data transfer (e.g. autonomous vehicles).

Telcos can also offer greater localisation compared to other players. Telcos can offer a single point

of service and billing, including self-care, while providing more flexible, elastic services.

For example, telcos can offer consumer content services through vCPE, such as virtual set-top boxes in the

home. Telcos can modify and enhance the service virtually, providing a better customer experience and

offering additional functionality and services, potentially driving new revenue and reducing churn. Similarly,

distributed compute capabilities can allow telcos to offer services that require low-latency, such as real-time

safety applications within the industrial Internet of Things (IoT).

The subsequent sections of this report explore in detail the potential new services enabled by Telco Cloud.



How Telco Cloud enables revenue-growth opportunities for telcos

STL has developed and tested a framework that groups together the potential services enabled by Telco

Cloud. The framework defines four key service categories from a customer perspective (Figure 8), with

services falling into each category based on how a customer would consume or use that service. The first

three categories (Connect; Perform; Capture, Analyse & Control) refer to network-integrated services –

services that are either uniquely possible or significantly enhanced by Telco Cloud (network virtualisation

and the adoption of cloud business practices).

The complexity increases as you move across these three network-integrated service categories, with

Connect services more readily implementable that some Capture, Analyse & Control services that are

dependent on the implementation of more advanced technologies.

The final category, Digital Agility, refers to new (digital) services that operators will be able to launch more

successfully once they have embraced Telco Cloud. These digital services, which rely less on operators’

unique infrastructure, will compete directly with so-called OTT providers. To succeed here, operators will

need to adopt cloud practices in order to orchestrate wider ecosystems and effectively leverage their other

capabilities and assets, such as billing, distribution and branding.

The next section of the report details the characteristics of 15 network-integrated services and forecasts the

revenues for illustrative telcos that have launched services across the four categories shown in Figure 8.

Figure 8: Telco Cloud Service Categories


Connect services

Connect services refer to the optimisation of connectivity and networking. Services in this category are

similar to existing connectivity and networking services, but are delivered and consumed in a more cloud-like

way. Network virtualisation enables operators to scale up and down the service to meet the customer’s

needs and to add new functionality and features on-demand.

Many operators are already exploring and launching services in this category. For example, many fixed

operators are trialling or launching vCPE services, particularly for enterprise customers.



Another example of a Connect service is providing the capability for an organisation to run its own virtual

mobile network. Today’s mobile virtual network operators (MVNOs) are almost wholly dependent on the host

provider’s network set-up (and underlying network functions), offered as a wholesale service. MVNOs are

typically heavily restricted in what they can manage and modify on the network and, in most cases, operate

as little more than a differentiated brand to that of the network operator. However, multi-tenanted network

virtualisation would enable MVNOs to run their own network functions.

This service could also be offered to enterprises and other organisations. For example, public sector

services may see real benefit in operating their own virtual network. Typically, emergency service

organisations manage their own communications infrastructure (e.g. Tetra networks). These dedicated

networks run their own hardware/infrastructure (including user devices), making them expensive, slow to

evolve and application-inflexible. The capabilities of these dedicated networks typically lag those of public

networks by a decade, sometimes more. To meet ever rising demand, emergency services would benefit

from being able to use public networks to provide high-bandwidth data connectivity services accessible via a

range of devices and at a lower cost.

Mobile operators could allow dedicated virtual networks to run over their (virtualised) infrastructure to

address “routine” communication requirements, leaving the existing dedicated emergency service networks

as the fall-back in the event of a major disaster (until public mobile networks have proven such a fall-back

isn’t required). This approach would ensure that emergency services are able to operate a secure, state-of-

the-art network, with full end-to-end control, but without the requirement to invest in expanding their existing

network. Potentially a number of mobile operators within a country could offer this as a joint proposition,

providing greater resiliency and the best possible coverage. The operators would benefit as they receive

additional revenue that would otherwise be spent by emergency services on building and managing their

own infrastructure. Furthermore, this new model could allow some spectrum, previously set aside for

emergency services, to be made available to public service operators (thereby generating income for the

public purse).

Perform services

This category describes services that ensure optimised delivery of content and applications to the

consumer/end-user; this is particularly important for services that require high bandwidth and/or low-latency.

Current broadcast models can generate significant lag for content/applications (or require lots of caching). In

the future, this could be even more problematic as many new content services (e.g. immersive broadcasts

using virtual reality interfaces) will require high bandwidth and low-latency in order to deliver the promised

user experience.

A compelling use case for optimised Perform services is the broadcast of live sports consumed via virtual

reality (VR) headsets. A vantage point in the middle of the action during a live game would be a compelling

proposition for many sports enthusiasts; with advances in VR and broadcasting technologies, it will become

possible to create this kind of experience. For example, with cameras positioned on player’s helmets,

American football fans will be able to assume the viewpoint of the quarterback, spotting open receivers and

feeling the pressure as defensive ends spring off the line of scrimmage. Whilst the majority of VR

applications, such as dedicated gaming, will not require Telco Cloud, applications that combine live

broadcast streaming with a requirement for low latency response will require new approaches. Furthermore,

Telco Cloud will help reduce the cost and extend the life of VR headsets as more processing can occur in the

network as opposed to the device.



Figure 9: Telco Cloud will enable immersive live VR experiences

Source: New Mexico Lobos

SDN, NFV and distributed computing could allow operators to deliver low-latency live broadcast services,

either as a retail consumer content offering or as a capability for competing content providers and/or third

party delivery networks.

Enterprises could also pay for the optimised/prioritised delivery of certain software-as-a-service (SaaS)

applications, enabling an enhanced user experience and greater workplace productivity. Again, this could be

either as an enhanced business SaaS offering from the operator, or as a capability for competing SaaS

providers and/or third party delivery networks.

As some of the services in the Perform category may give rise to concerns over net neutrality in some

markets, telcos may need to provide these solutions to third party content distributers (e.g. Akamai) to sell on

to content providers. Operators will need to ensure that they address potential regulatory concerns in an

open, constructive way.

Perform services will take longer than Connect services to come to fruition as they rely on more virtualisation

of the network, as well as operators having to work closely with third party content distributers, media

companies, SaaS providers and enterprises to create and deliver these solutions.

Capture, Analyse & Control services

This is the final category of network-integrated services. Services within this category are less mature and

are often dependent on the implementation of more advanced technologies. They typically involve some

form of ‘smarts’ or analytics at the edge of the network. Services can include smarter upload or ingestion of

information, analytics/filtering applied to uploaded information and real-time instructions at the edge of the

network in response to inbound data. This category refers to networks that are designed to support

upstream/ingest and be ‘two-way’, with the potential for response and action at the edge of the network; this

contrasts with existing networks that tend to be downstream, broadcast and one-way orientated.

For example, autonomous vehicles that rely on network data will require response and action in near-real

time. If a vehicle has to make a decision (e.g. change direction, slow-down) the relay of information from the

car to the edge of the network and back again has to be nearly instantaneous. Whilst autonomous vehicles

are unlikely to rely entirely on networked data exchange (they will also employ vehicle-to-vehicle and sensor

technology), low latency data transfers will play a key role in supporting dynamic IoT applications. Other

services, such as augmented reality devices that can receive and display location-based information, as well



as interacting in real time with the environment, would also benefit from low-latency Control services. For

example, if a field worker’s augmented reality goggles can interact with other devices, they could potentially

shut down machinery, as appropriate, to ensure the worker’s safety.

Figure 10: Telco Cloud can enable two-way communication in real-time


Many services in this category are Internet of Things (IoT) applications. The majority of IoT services do not

functionally require the high-performance that Telco Cloud promises, as typically only relatively small

amounts of data are transmitted intermittently. However, cellular operators will struggle to compete in the

market for low power machine-type communications without being able to support the “network slicing”

enabled by a combination of 5G, NFV and SDN.

As the IoT expands, the potential for this category of services is huge – however, to what extent the telco

plays a role in the delivery of these advanced services depends on how effectively they can implement this

Telco Cloud transformation and capture a significant share of the market for high density, low-cost and low-

power connectivity, as well as the high-performance, high-bandwidth and low-latency connectivity market.

Digital Agility services

In addition to the three categories of network-integrated services, we have also defined another category that

does not rely as directly on the virtualised network or distributed computing that Telco Cloud brings. Many of

these digital services can and are already being developed and launched by telcos, often as “OTT” services.

However, historically, telcos have struggled to successfully launch new digital services due to cultural and

structural challenges, particularly around creating compelling “ever-fresh” user experiences and effective

ecosystem engagement.

In this report, we explore this opportunity from the premise that a telco has successfully embraced Telco

Cloud practices across its organisation. Such a transformation should enable operators to become more

successful at launching these digital services, creating services faster (through quicker processes and

improved development skills) and engaging more effectively with partners to create ecosystems.



Telco Cloud Services

STL has identified 15 network-integrated Telco Cloud services that telcos could seek to launch over the next

six years (see Figure 11). This section describes the characteristics of each of these services in detail, while

the following section models the potential related revenues for an operator from 2016-2021. This model

includes a further six digital services that telcos could launch over this time horizon.

Figure 11: Overview of Telco Cloud categories and services


Service Overview: Revenue vs. Ease of Implementation

Figure 12 shows STL’s view of the revenue potential and ease of implementation for the 15 network-

integrated services shown in Figure 11.

Revenue potential reflects the potential value of the service to the operator in December 2021

(giving the services time to become more mature).

Ease of implementation depends on both the technology change required and the readiness of

partners, ecosystems and users to adopt the given service.



Figure 12: Telco Cloud Services: Revenue versus ease of implementation


Connect services are generally easier to implement that the other categories of services. For example, vCPE

services are easier to implement than IoT services – indeed operators and other players have already begun

to launch vCPE services. More advanced services (e.g. IoT control node), which are dependent on future

technologies and require a change in user behaviour, are naturally harder to implement.

Enterprise vCPE and NaaS represent potentially significant revenue opportunities in their own right.

Enterprise networking is a large marketplace – telcos that are able to address this opportunity could

potentially gain considerable market share from managed service providers (MSP). NaaS could redefine how

networking and connectivity is consumed by enterprises, representing a significant revenue opportunity.

Furthermore, as these services are relatively easier to implement, they will be more mature in December

2021 and, therefore, more likely to be bigger sources of revenue

Below, we have given more detailed descriptions of the 15 network-integrated Telco Cloud services shown in

Figures 11 and 12. We have also outlined the relevance of the Telco Cloud and the potential business

models that would underpin each of these services.



Enterprise vCPE



Consumer vCPE



NaaS (network-as-a-service)



Enterprise VMNO



Low-power machine-type communications



Optimised content delivery networks (CDNs)



Edge infrastructure-as-a-service (IaaS)



Software-as-a-service (SaaS) optimisation



Low latency media



Network-aware application programming interfaces (APIs)



Video production solution



Enterprise augmented reality



IoT sensor gateway



IoT control node



(Enterprise) premise location-based services



The Revenue Opportunity

Model overview

STL has modelled the potential Telco Cloud revenues for illustrative telcos over a six-year horizon (2016-

2021) using the following approach:

1. Base Case: Modelling revenues for a telco that does not embrace Telco Cloud

2. Modelling revenues for the same operator, adding in new Telco Cloud services over the time horizon

3. Modelling the revenue impact of Telco Cloud for telcos with different characteristics

We have built a flexible modelling tool that can introduce some/all of the new Telco Cloud services at

different dates (between 2016-2021), allowing telcos to more accurately assess the potential revenue impact

for their own operations.

The objective of this exercise is to demonstrate the potential revenue growth attributed to Telco Cloud

(virtualisation and the adoption of cloud business practices). Note, we did not analyse the cost-impact of this

transformation.

The model works firstly by estimating the monthly revenues of the base case, modelling ARPU and net-adds

for the various customer segments (enterprise, SME and consumer) across the lines of business (fixed and

mobile). Then, as new Telco Cloud services are introduced, revenue is re-modelled on a monthly basis;

revenue is generated either as direct service revenue and/or from uplift on core services. In the appendix to

this report, we present more detail on how the model works.

To demonstrate the potential revenue transformation of Telco Cloud, we selected an illustrative telco – ‘Telco

X’ – and modelled revenues from 2016 to 2021 without and with the launch of Telco Cloud services. Our

illustrative telco is a converged telco, addressing both the enterprise and consumer segments.

Telco X operates in an advanced market, similar to the UK, and has a significant market share of the

enterprise, SME and consumer segments for both fixed and mobile. We, therefore, estimate that there is

no/relatively little annual market growth. We also assumed that voice ARPUs will fall significantly over the

period across all customer segments. The market and telco characteristics are further detailed in the

appendix to this report.

Telco X is assumed to be a ‘first mover’ in its market - the first operator in the country to begin the Telco

Cloud transformation and to deploy new Telco Cloud services. As mentioned previously, first mover

advantage is significant when evaluating the revenues from Telco Cloud services, as it will likely lead to

greater market share, bolstering core revenues by reducing churn and increasing gross adds. Some new

Telco Cloud services, which are linked to the core business (e.g. vCPE), will have a greater initial impact

than others on core revenues through the ‘first mover’ advantage. Our model captures this effect.

Sizing the revenue potential from Telco Cloud services

Figure 13 shows the base case scenario, without the launch of any Telco Cloud services. It highlights the

revenue decline Telco X faces over the next six years (January 2016 – December 2021); STL estimates a

monthly revenue decline of c.12% in December 2021 compared to January 2016. Most of the revenue

decline is due to the predicted decline of communications revenues, as voice and messaging ARPUs fall for



both fixed and mobile telephony. We expect revenues from data and digital (e.g. managed services and/or

consumer digital services) to increase (with digital growing at a significantly slower rate than data) due to

continued rising demand for these services over the six-year period.

Figure 13: Telco X - Base case shows declining revenues


Figure 14 shows revenues for Telco X over the 2016-2021 period after the launch of a number of Telco

Cloud services. As a direct result of these Telco Cloud services, Telco X’s monthly service revenues are

forecast to increase by 10.5% above the base case in December 2021. This translates into potential net

monthly revenues of $145 million in December 2021.

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Mon

thly

Rev

enue

(U

SD

mill

ions

)

Voice Data Existing Digital / Managed Services



Figure 14: Telco X – Telco Cloud services increase monthly revenues by 10.5% on the base case by Dec 2021


Each service generates monthly direct service revenue shown in the purple segment of Figure 14. In the final

month, December 2021, total monthly gross revenue from Telco Cloud services amounts to $161 million.

However, other factors affect the total net revenue from the services:

Positive impact on core revenues

In Figure 14, the paler segments, above voice and data revenues respectively, capture the core

service revenue generated as a result of the introduction of the Telco Cloud services. As mentioned

previously, some services are closely linked to the telco’s core products (i.e. voice and data fixed

and/or mobile services); the introduction of the new service can therefore reduce customer churn

and increase ARPU for those who have taken up the service. In addition, the telco could also receive

an uplift in core revenues from an increased number of gross-adds attracted by the new services.

Service cannibalisation

Customers who take up certain services may be migrating from existing services. One example of

this would be Enterprise vCPE, where a proportion of the new service customers will drop their

current managed service (provided by Telco X) and take up the vCPE offering instead. Another

example is in the case of new digital consumer fixed services, where a TV offering based on virtual

set top box will replace the telco’s current IPTV offering. The declining digital revenues (in blue) in

Figure 14 reflect this effect.

The net revenue for Telco X from Telco Cloud services of $145 million in December 2021 represents

approximately 9.5% of Telco X’s monthly revenues. We estimate 16.1% of this new revenue would be due to

the increase in core revenues (i.e. decreased churn, increased gross adds and higher ARPUs for certain

services).

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Mon

thly

Rev

enue

(U

SD

mill

ions

)

Voice Voice core effect Data Data core effect Existing Digital / Managed Services Telco Cloud revenues



The model is ambitious in the number of services Telco X launches over this period, modelling the launch of

21 services in a staggered-manner between 2016 and 2021. Figure 15 shows the timeline for the

introduction of these Telco Cloud services. In reality, few telcos would seek (or be able) to launch as many

services in this timeframe. However, the model is intentionally ambitious for two reasons:

1. Telcos that embrace this Telco Cloud transformation will be able to do more as they will be more agile

2. The lion’s share of new service revenue will go to telcos that seize the opportunity and act first

Later in this report, we explore the revenue impact of Telco Cloud for other illustrative telcos, with different

characteristics, launching different numbers/types of Telco Cloud services.

Timeline for new service launch

Given the nature of Telco Cloud services, which often require the implementation of new technologies (some

of which are yet to be completely developed), it is important to consider certain factors when deciding how

and when services are launched.

For example, a number of the Telco Cloud services (particularly in the Capture, Analyse and Control

category) will support IoT applications and require sophisticated edge compute technologies and, therefore,

cannot be deployed in the short term. Similarly, there are services that assume the availability of 5G

networks (e.g. low-power machine-type comms.), which won’t be deployed for several years. On the other

hand, some Telco Cloud services have already been piloted (e.g. Enterprise vCPE), or implemented in a

preliminary form (e.g. SaaS and CDN optimisation.)

Figure 15: Telco X - Timeline of Telco Cloud service launch dates




Our roadmap for the introduction of new Telco Cloud services (as shown in Figure 15) assumes that Telco X

will start with easier-to-implement ‘Connect’ services, then begin offering ‘Perform’ services and finally

introducing more sophisticated ‘Capture, Analyse and Control’ services’. As Telco X begins to embrace Telco

Cloud and transforms its operations and processes, it will also adopt more cloud-like practices, ensuring

greater likelihood of success in launching new digital (non-network integrated) services. We, therefore,

introduce a number of ‘Digital Agility’ services across this time horizon.

Below is a snapshot of the deployment of these new technologies and the storyline for Telco X’s

transformation:

2017: Telco X is beginning to introduce SDN, virtualising network functions and adopting cloud

practices, within the constraints of evolving systems and organisational challenges. It implements

new opportunities, such as vCPE and CDN optimisation, alongside its legacy ones.

2018: Telco X is now becoming more adept at utilising cloud and distributed computing. It can offer

Edge IaaS and SaaS optimisation services. The push into cloud will enable Telco X to offer more

Digital Agility cloud-related services, such as specialised cloud services (e.g. sovereign cloud) and

cloud brokerage solutions (e.g. SME suites).

2019: Telco X now has a 4.9G network (getting close to 5G). Previously confined to new services,

new cloud practices are now being applied to the migrating core. Telco X has now virtualised many

of its network functions. It can offer VMNOs to enterprises and other organisations. It is getting to

grips with relatively easier-to-do IoT use cases (e.g. IoT sensor gateway). Having embraced agile

and cloud-business practices, it is able to partner effectively across ecosystems, now tackling

consumer IoT services (e.g. connected car / smart home).

2020: 5G is here. Telco X can readily provide IoT solutions, both for low-power IoT devices via

network slicing and for smarter IoT applications (e.g. IoT control node). Enterprise location services

can be rolled out, building on enterprise vCPE and 5G mobile. There is now potential to develop and

offer new digital mobile services. Although not all its network functions are virtualised and the

operator must still contend with managing a hybrid infrastructure, Telco X is now becoming a cloud

business.

Breaking down the revenues

Figure 16 breaks down Telco X’s revenue from Telco Cloud in the final month, December 2021. We forecast

that enterprise vCPE and NaaS will be the largest sources of revenue; this is due to the timing of service

introduction, the nature of the telco (converged) and the outright potential opportunity for these services.

The lighter shaded regions in Figure 16 highlight the effect of Telco Cloud services on core revenues. As

mentioned earlier, we estimate core-uplift will represent 16.1% of net Telco Cloud revenue in December

2021. The services which show significant additional revenue from core effects are: enterprise vCPE,

consumer vCPE (revenue wholly from core impact), SME suites and vertical solutions, smart home, digital

mobile services, connected car and consumer fixed services.

Connect



Figure 16: Telco X (converged) – Net new revenue by service category (Dec 2021)


As mentioned, our model assumes an ambitious launch roadmap for Telco X. However, we have also

modelled revenues for telcos with different profiles, Telco Y and Telco Z, operating in the same advanced

market, but with the following characteristics:

Telco Y: Mobile only telecoms operator, offering enterprise, SME and consumer mobile services

Telco Z: Fixed only telecoms operator, providing enterprise (and SME) fixed services

Figure 17 shows STL’s estimates for the impact of Telco Cloud on Telco Y’s revenues in December 2021,

while Figure 18 shows the equivalent forecasts for Telco Z.

Perform Monthly revenue

uplift of 10.5% (Dec. 2021)



Figure 17: Telco Y (mobile only) – Net new revenue by service category (Dec 2021)


Figure 18 Telco Z (fixed only) – Net new revenue by service category (Dec 2021)


Monthly revenue uplift of 12.4%

(Dec. 2021)

Monthly revenue uplift of 8.4% (Dec. 2021)



Due to the more specialised nature of these two operators, Telco Y and Telco Z are unable to provide all the

potential Telco Cloud services, skewing the spread of services. Telco Z, as a fixed-only player, is limited to

fewer services with over three-quarters of its new revenues in December 2021 from Enterprise vCPE and

NaaS.

Customer experience benefits

Note, this modelling exercise has focused on the specific new services enabled by Telco Cloud and has not

captured the revenue uplift that could occur through improved customer experience and marketing; a

cautious assumption that could be re-considered as part of the wider business case for network

virtualisation.

Telcos X, Y and Z could all see a revenue uplift from other factors that we have not modelled, but could arise

from the transformation to Telco Cloud. These include:

Better self-care tools with more (granular) customer control

More “elastic” pricing models (e.g. scaling up and scaling down services on demand)

More insight through big data analytics providing more timely and relevant up-selling (and down-

selling) propositions

These other factors would help improve the overall customer experience of core services, which could

reduce churn and increase customer acquisition, creating core revenue up-lift.

In summary, Telco Cloud has the potential to lead to significant revenue growth for operators. Whilst there

will be significant challenges embracing this transformation (that we have not detailed in this report), we

believe that mapping the opportunity landscape for operators and demonstrating the revenue potential is an

essential part of fully capturing the transformative potential of SDN, NFV and cloud business practices.



Conclusions

Telco Cloud (network virtualisation and the adoption of cloud business practices) has the potential to

generate costs savings and enable operators to become more agile.

To fully embrace the potential of programmable virtualised networks, operators need to begin

changing their ways of working, adopting more cloud-like business practices.

This transformation will not be easy, as operators will need to tackle issues with legacy technology

as well as changing internal processes, skills and culture. Nonetheless, operators that are able to

embrace Telco Cloud will be more-readily able to grow new revenues, due to increased service

agility and the ability to create new network-integrated services.

Telco Cloud potentially leads to sources of advantage for operators due to cloud-consumption

models for core services, programmable networks underpinning SLAs, and distributed compute

capabilities. These new capabilities have the potential to lead to the creation of new and

differentiated services.

Some of these new services will be easier to implement than others (e.g. vCPE); operators

beginning the journey towards Telco Cloud should aim to launch these services first, and over time,

add functionality and embrace new technologies, enabling the launch of more advanced services.

STL forecasts a Telco Cloud transformation could have a significant positive impact on operators’

businesses, leading to revenue growth of c.10% in 2021 compared to base case forecasts.

Whilst the accuracy of this forecast necessarily depends on the accuracy of our assumptions about

technological and market development over the next six years (and there will be many challenges

involved in a Telco Cloud transformation), our analysis helps to map the opportunity landscape for

operators and highlight the transformative potential of SDN and NFV.

As operators’ core business has come under significant pressure in the past 5-10 years, finding new

sources of growth is critical to their future. Telco Cloud has the potential to deliver this new growth.



Appendix

Modelling Assumptions & Mechanics

Market & Telco Profiles

Source: STL Partners



Modelling Mechanics

Base Case Scenario

Definition: the base case refers to the state in which Telco X has not adopting Telco Cloud; therefore

revenues solely represent existing services (i.e. no Telco Cloud services are modelled).

Market and telco characteristics are estimated and revenues are modelled accordingly:

By revenue source:

Voice

Data

By customer segment:

Enterprise Mobile (>250 employees)

Enterprise Fixed

SME Mobile (0-250 employees)

SME Fixed (0-250 employees)

Market figures for SMEs reflects the addressable market size; many SMEs would

not fall into this category as they would not require separate telco fixed services for

their business, for example very small business that do not have a separate site

Consumer Mobile

Consumer Fixed

Estimates/assumptions are made for: market size, market growth rate, ARPU*, market share, churn

rates and gross adds for each segment. Estimations/assumptions are based on telco annual reports

and reports from telecoms regulatory bodies. (See Figure 19 for full market and telco profile).

*ARPU for enterprise / SME fixed sites assumes an average ARPU per site, based on average

number of connections per site.

The revenues per segment (both Voice and Data) were calculated for the first month, using ARPU

and number of customers within the respective segment.

For the following months, the same revenue calculation applies (per segment), using ARPU and

number of customers, however other considerations apply:

ARPU in month n+1 takes ARPU of the previous month multiplied by the Compound Annual

Growth Rate (CAGR).

Number of customers in month n+1 accounts for the number of customers in the previous

month, adding the gross adds in that month (based on Telco X’s share of gross adds).

Share of gross adds is defined as the share the telco gains from new customers in the

market as well as the share of customers who are churning in the market minus the number

of telco customers churning (based on the churn rate).

Existing digital / managed services business lines were also modelled:



Managed services (for enterprises & SMEs): it is assumed that a percentage of enterprise

and SME fixed customers take up managed services from the telco. Revenues are

calculated from the number of customers of this service and the ARPU of the service.

Consumer digital (mobile & fixed): it is assumed that a percentage of consumers take up

mobile and/or fixed digital services (e.g. IPTV.) Revenues are calculated from the number of

customers of this service and the ARPU of the service.

Telco Cloud Scenario

Definition: this scenario refers to the state in which Telco X has embraced Telco Cloud and launched

Telco Cloud services; therefore, revenues reflect the new services, as well as existing services.

Telco Cloud revenues are modelled by taking base case revenues and adding the sum of the net

revenues from the new Telco Cloud services.

Direct service revenue for each service is calculated by modelling the number of customers who take

up the service (this is driven by an adoption rate over a set timeframe) and the value of the service*

from each end-user core impact.

*This is additional value and excludes any indirect revenue from the take-up of the service (i.e.

through existing core services).

Some services (e.g. consumer vCPE) also generate revenue due to pull through to core services

(i.e.: voice, data). Some new services could lead to:

A decrease in customer churn for a period of time.

An increase in gross adds for a period of time; these gross adds are also assumed to take

up core services.

An increase in core ARPU e.g. due to intensified data usage.

The revenue from this impact on core services is calculated by making an assumption on how a

particular service would impact the customer churn rate, (core service) ARPU, and share of gross

adds.

Some new services may substitute/replace existing services for consumers, for example:

Enterprise vCPE: cannibalising effect on managed services as customers migrate to the new

service.

Consumer fixed services: cannibalising effect on consumer fixed digital services segment

(e.g. IPTV) from migration to new service.

To calculate this effect, the model assumes a proportion of existing managed services / digital

services customers will migrate to new Telco Cloud services.

Taking cannibalisation effects into account, net service revenues are modelled to estimate the value

of Telco Cloud.

A graphical explanation of the modelling mechanics is shown below.



Figure 19: Modelling Mechanics




Service Descriptions: Index of Icons

The table below lists the icons and respective definitions that appear in the service descriptions (in the chapter titled ‘Telco Cloud Services’).

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