As the telecom industry migrates toward cloudification, what does it mean for Communication Service Providers (CSPs)? Moreover, what does the telecom software market look like in terms of solution offerings? In this reading, learn about the drivers, challenges, and hyperscalers surrounding telecom cloud and software space.
5G Will Be a Software-Defined Generation
The emergence of 5G has reigned in a new age for CSP operability. Whereas telecom has traditionally focused on selling tangible products, software and services will be the new dominant forces. Cloud, software, and 5G edge computing present new revenue opportunities in the evolving telecom industry and ignite the need for CSPs to look beyond equipment.
As mentioned in our 2023 technology trends whitepaper, telco cloudification means Network Equipment Vendors (NEVs) will shift focus from a finite supply of integrated equipment that optimizes network performance, to business models built around cloud software.
What the Numbers Say about Telecom Network Preferences
There’s no better way to exemplify the cloud and software preference of the telecom industry than to look at the market forecasts. As reported by ABI Research, revenue for Virtual Networks Functions (VNFs) will grow at a Compound Annual Growth Rate (CAGR) of 29% between 2021 and 2026, bringing total revenue in 2026 to US$2.4 billion.
During that same period, Cloud-Native Functions (CNFs) revenue will sustain a 99% CAGR and reach US$2.9 billion in 2026. While virtual and cloud-native networks will surge in popularity, revenue for Physical Network Functions (PNFs) will plummet from US$2.3 billion in 2021 to US$1.9 billion in 2026Chart 1: LTE Evolved Packer Core Revenue by Network Function Type (Source: ABI Research)
Example of Telecom Cloud in Action
A great example of the telecom cloud shift comes from Telefónica and Deutsche Telekom—which used MobiledgeX’s (since acquired by Google) orchestration platform that enables multiple clouds to be connected at the edge. In a showcase of how the technology can be applied to road safety, a cyclist and a car were put on a collision course at a blind junction. The cyclist’s smartphone and the smartphone in the car were connected via edge cloud, allowing Continental’s collision warning app to calculate the chances of a collision. Data such as the location direction of travel and the speed of the car and bike were factored in. In this example, the car automatically emitted a beep to warn the cyclist as he came near the junction.
This is just one brief example of how cloud-based telecom software can be applied. In this case, smart city planners would be very interested in these types of services.
How Can CSPs Respond to the Shift?
In the eyes of ABI Research, the telecom environment will eventually become software-only. It’s best to start making pivots now, rather than later when competitors will have already won over the hearts and minds of customers with a cloud-first mindset. Here are a few recommendations:
Step 1 to Success: Look Outside-In
Focus on providing solutions that are tailor-made for specific industries. Instead of relying on in-house strategic guidance, it’s best to look at what the market is hungry for and find ways to meet those demands in a “telecom plus software” integrated approach.
Step 2 to Success: Balance Risk
Don’t rush into choosing a public cloud platform, as the telecom software business model is in its infancy and there are many unknowns surrounding deployment. Although CSPs must take a careful approach when choosing cloud platforms, they must also have a dosage of risk appetite because it can take years before a Return on Investment (ROI) materializes.
Step 3 to Success: Maintain Brand Differentiation
Given the commoditization that often accompanies cloud and other software solutions, CSPs must do everything in their power to avoid this trap. Innovation will be key to sustaining differentiation in the telecom cloud space and standing out to potential customers. Expect a lot of acquisitions in the coming years, as CSPs try to add new features and gain tacit knowledge in underdeveloped areas of their software offering.
Next Steps for Telecom Software Integration
Fortunately for CSPs, there are plenty of cloud providers to choose from for software convergence. Cloud hyperscalers, such as Amazon, Google, and Microsoft, have a diverse set of competencies and enable CSPs to deliver next-generation customer experiences. To choose the right cloud provider(s), the selection process must account for market positioning, geographical location, and commercial growth strategy.
The cloudification of the telecom industry brings about entirely new use cases and business models that will force CSPs to rethink how customers view their brand. There are no guarantees on where software will lead the telecom industry and there will undoubtedly be some missing market gaps in the coming years as CSPs adapt. CSPs that can find an effective way to meet emerging customer demands, especially when it comes to the telecom cloud, will succeed and maintain unique niche competencies that win over customers.
Learn more by downloading ABI Research’s Cloudification of Telecom Technologies and Equipment application analysis report. This report is part of the company’s 5G Core & Edge Networks Research Service, which includes research, data, and analyst insights. Based on extensive primary interviews, Application Analysis reports present an in-depth analysis of key market trends and factors for a specific technology.