Telco dogs need to learn software tricks

36 Comments

Last year, after visiting British Telecom (BT) and meeting with their executives, I left London with one key take away: BT was one telco that completely understood that it was facing uncertain times, and had no choice but to reinvent itself to survive.

The senior BT management understood that while broadband was a start point for its reinvention, it had to boldly go where no telecom had gone before, if they wanted to survive. They had to behave and think like an Internet-based software company.

Ben Verwaayen, BT chief executive, when talking about BT’s transformation remarked :

“This is the second phase of BT’s transformation. The first phase saw BT shift its focus from narrowband to broadband. This next stage will see BT advance from a 20th century hardware-based company to a 21st century software-based services company.”

Though it may sound like a hookey statement by a telco chief, it is actually quite true. According to McKinsey nearly 60% of CIOs are currently considering software-as-a-service model. If you factor in the lag-factor typical of McKinsey reports (aka a year after the fact), the SAAS movement is well under way.

“There are more than 1,000 SaaS vendors in existence today, although 90% have less than $15 million in annual revenue, but are growing 4x faster than licensed software,” notes Colby Synesael, analyst with Merriman Curhan Ford.

The weak link, however, for SaaS, is the reliability of these services over an IP connection. Synesael, makes a good point when he argues that SaaS needs to overcome bandwidth constraints, packet loss, jitter and latency. These are issues that telcos can address with their network capabilities, and they can start to learn the ways of the software world, and work with SaaS vendors.

“In a software driven world, services will be available in real time and around the globe, harnessing the potential of BT’s 21st Century Network,” Verwaayen recently said.

That holds true for any telecom operator. The old AT&T CTO Hossein Eslambolchi used to talk about software-expertise-as-a-way out from telecom commoditization.

I wonder if this is a wiser, albeit less sexy way for telecoms to bolster their business. Instead of spending $6 billion on IPTV projects, AT&T could say buy a Salesforce.com (have some money left over for satellite-based triple play) and ensure a few hundred thousand folks paying $60-odd dollars a month for the CRM as a service. It be a nice way to fight off the cable companies who are now gearing up to go after the small and medium sized businesses.

36 Comments

five_whys

wow.. what a thread.. excellent debate here..

I have a different twist for the debate.

Lets take example of simple(!) portal by these Telcos as ISPs.

AT&T and BT partnered with Yahoo while Comcast and AOL (earlier) created their own portals. What is the perception of success / failures and lessons learned for portal by these companies and does that apply to SaaS?

Tom Coseven

I couldn’t find a link on their site, but this is the conclusion from my copy of the document:

Our conclusions regarding the economics of “dumb pipe” status are, we suspect, quite counter-intuitive (and starkly counter-consensus). In short, the economics of such a scenario, as measured by purely financial metrics, are actually better than those of the business today.

  • Revenues would fall significantly
  • Operating expenses would fall even more significantly
  • Operating cash flow would therefore fall more modestly, while operating cash flow margins would actually expand
  • Capital expenditures would fall sharply
    Free Cash Flow would actually increase
  • Capital employed in the business would also fall sharply, yielding much higher ROI and ROE

To be sure, our analysis ignores potentially painful milestones on the way to such a “raw connectivity” future, such as the stranding and subsequent write downs of a huge portion of Comcast’s current asset base. Growth prospects in this “end game” would likely also be lower than today’s (although not necessarily). Nevertheless, our analysis leads to the surprising conclusion that a disintermediated business would, on most financial metrics, at least, actually be a better business than the current one.

Behind these counter-intuitive findings is a simple, and perhaps more intuitive, truth. In a high fixed cost business, it’s not such a bad thing to be the low cost provider.

Om Malik

Vijay,

agreed this is an open market place, and there are no monopolies, but that doesn’t mean that the telco experience is invalid. if that was the case then why buy old AT&T. That is a part of buisness where telco being telco is a good thing.

Why not compete here with the smaller players who seem to have gotten the memo – and are retooling themselves.

I am not suggesting as many of you are perhaps reading that they start software development business.

Tom Coseven

Rajesh, I understood what you were going. I was trying to test the parallel argument for residential.

I just don’t buy the “dumb pipe can’t succeed” argument for either business or residential. Craig Moffett at Sanford C. Bernstein has been pitching the “Dumb Pipe Paradox” for the past year. His conclusion is that trying to be a “smart pipe” brings a lot more associated cost than revenue for all of the carriers and MSO’s. He makes a pretty strong case for the residential dumb pipe, especially for cable MSO’s getting out of the video business (this is from one of Comcasts leading analysts and a huge bull).

Having watched the telcos struggle unsuccessfully to move up the value chain for the last 30 years from AIN to IMS, I am convinced they should focus on what they know how to do best.

Rajesh

Tom, I hear BT is using many global software services firms to develop these common capabilities and embed them as objects for third party innovation. When I meant software firms, I most definitely did not mean Google or Yahoo…hope that clarifies.

Telcos stand to monetize their network and applications only through an ecosystem of software services and Web 2.0 partners.

Tom Coseven

Rajesh, wouldn’t partnering with a software company like Google violate net neutrality! Yahoo and Microsoft would be disadvantaged.

I don’t see a win-win telco-software partnership that the public (or Congress and the FCC) will allow for residential broadband. Business private network services is probably a different story.

vijay gill

Om, you said
beginquote
i mean to say delivery of SaaS, not developing software – but actually insuring that the services work. they can basically provide the quality to large corporate customers who might be thinking twice about SaaS because of network issues.

endquote

This theme of latency and jitter and packetloss seems to be a common driver among people saying the telco can deliver SaaS better because they can ensure none of these issues crop up. My question is: since these aren’t monopolies in the last mile like home service, why would anyone put up with horrible service that has significant jitter, packet loss etc. They can switch their circuit to someone who doesn’t quote suck as much unquote

Dennis Howlett

BT – OK – so BT Workspace was a good idea but BT Tradespace is a total disaster. They’ve made the classic Siebel mistake of not tying the applications together such that they ‘know’ which service you already have. Or for that matter that you’re already a user. Doh.

Swami

Om, totally agree. But one correction to your statement and all others…why just think of Salesforce.com when someone says SaaS. There are tons of other SaaS models. You can deliver pretty much any application, in a secure, VPN only-access, on a SaaS basis.

I think as Om says, the Telcos shound brace and be prepared to deliver such a platform that would help them deliver these services.

Ans finally please do not bring Web 2.0 here. It makes little relevance to this topic in my honest opinion.

Rajesh

Thanks Om, for this interesting topic.

In my opinion, Telcos must transform out of bit transport into becoming a digital distributor of digital goods. Else companies like Google, Yahoo and eBay will rise their backs like Zorro and pay nothing.

While Exxon-Mobil is distributing a resource in finite supply, Bandwidth is now as freely available as Tap water, thanks to the fiber invested in the boom days and margins from that bit transport will fall. Future margins are in innovative SaaS applications (like Billpay or m-wallet)

Telcos can transform themselves to Telco 2.0 by partnering with software services companies and building common capabilities that can be reused by third party innovators. It’s a win-win!!

Kate

Simon, I left Cisco 4 years ago, so I can’t comment first-hand on how they have progressed with BT and DT, but I can say if they are doing “large-scale” IP services it was a LONG HARD ROAD! Still it’s a streach to say because they are finally delivering Netflow that they now could deliver Salesforce.com.

Om Malik

Bruce,

of course, i am glad you disagree – otherwise we would be discussing some lame rumor about bebo and yahoo. appreciate the vociferous debate from our readers – and of course i am wrong, most of the time.

Om Malik

Bruce, here is what i have tried to say in this post.

SaaS needs to overcome bandwidth constraints, packet loss, jitter and latency. These are issues that telcos can address with their network capabilities, and they can start to learn the ways of the software world, and work with SaaS vendors.

This is a business they should consider expanding into, because it is a natural progression for them, and as the headline suggests, they need to learn these new tricks. if they don’t they are missing an opportunity. whether they will, I don’t know.

At least BT is trying.

Simon Leyland

Kate – I’d go further than just CPE management. Most corporate/government customers in the UK will either be on or about to move to a QoS enabled IP VPN infrastructure, many with managed CPE from the carrier. Plenty of these customers will have some added IOS or Junos feature – Netflow/NBAR or call manager SRTS as examples.

I’d say only BT and DT provide software applications in the cloud. The trend has been to give system integrators the lead role in application deployment and management – but I think even this may be changing.

Bruce

Om,

I don’t usually disagree with what you say, but you’re way off base in this case.

Don’t put too much stock in a bunch of consultant reports on SaaS. Yes, there are a lot of people chasing this concept, and it is growing rapidly in percentage terms, but that doesn’t make it the future. (The more important question is which is growing faster in absolute dollar terms — my guess is that 5% growth in software licensing far exceeds 20% growth in SaaS).

Some applications (Salesforce.com’s CRM)are good candidates for this type of model, while others (Microsoft Office) are not. (Note: that doesn’t mean the pricing for Office won’t continue to migrate to monthly/ annual fees, just that it is still a license being sold, not a service.)

However, that is beside the point. Raindeer has it correct — the telcos can go after the network-oriented applications (in which I’d include everything from Salesforce.com to Skype to eBay to Google), but it is a market wholly separate and independent of their core connectivity business. And a market they have little or no experience in.

Every attempt to improve the network business by adding applications only results in applications that are constrained by the telco’s network. To tie the network to a specific application simply limits the network’s use for competing applications. Either move is a mistake.

BT has done some smart things by creating an effective wholesale business an by focusing on building a competitive global network. If they wish to benefit from SaaS, they should not buy salesforce.com, but create the capability to enable/ support it and its 1,000-plus competitors. That would leverage its assets and capabilities — and just might succeed.

Om Malik

Vijay

good points, but it is also the same group that promises to deliver television. I think given their previous experience (ATT enterprise) they have a much better chance of getting software right.

i mean to say delivery of SaaS, not developing software – but actually insuring that the services work. they can basically provide the quality to large corporate customers who might be thinking twice about SaaS because of network issues.

vijay gill

Om, do you seriously believe that telcos will be able to deliver anything like SAAS and not completely make a hash of it? I have a hard time believing that a telco could run something like salesforce.com and not have customers migrate off of it very fast based on things like customer support issues. The incremental cost switching to someone faster and nimbler is small in todays world. The best way I can put this is to think about all these companies and notice that none of them actually came from a telco. So why do you think they can sustain this model if they couldn’t create it in the first place?

Kate

Simon, agreed… European businesses have been much more willing to rely on the carriers. This because deregulation in Europe occured much later. The early Carterfone/Part 68/Inquiry II legacy has made US businesses much more independent. Still I think your point is that the telco is managing CPE (on-premise VPN concentrators, firewalls, routers, etc…) rather than selling carrier-based IP services.

Simon Leyland

Kate – I agree the US telcos have trouble providing value added services. European Telcos do have more experience in delivering value. Companies in Europe have historically relied on large incumbent providers to manage the CPE. As a result they maintain very small (or non at all) in house networking skills where as the Telco has the skills and experience.

Kate

Vinnie, what WAN IT outsourcing do you think the telcos (even MCI) have been good at. Certainly not IP VPN’s and security. Just ask Cisco and Juniper (and the long list of now-dead edge router companies). They feed the telcos customers for IP services to try to get them to turn on the advanced functions on their edge platforms only to watch them screw it up.

Om Malik

Vinnie, (and raindeer) you make good points. THat is precisely why i am writing the post. they need to figure out a way to learn to play in this new market – software – which is where they can leverage their network skills more effectively.

Its not about if they can build their own SaaS services (I don’t think they can), but more about where to press their advantages instead. learn new tricks and benefit from this big shift.

if they don’t someone else will. like the global crossings of the world. or the cable companies. who are happy to try anything new.

Om Malik

Peter

good point – it is just different kind of packets we are talking about. they have been good a WAN services, and using that expertise that can extend that reach into the SaaS side of things. Remember, it is like selling five different types of petrol/gasoline –

vinnie mirchandani

they understand scalability, reliability and they have early outsourcing successes (particularly at MCI)…but if you look at where they have done well in IT outsourcing, it has been primarily in WAN services. End user services, data center ops, managed server/storage they are still bit players, and when it comes to apps outsourcing they are babes in the wood. SaaS would require many of these disciplines and additionally more of a software culture. Would need a huge transformation at BT or Verizon or Deutsche …

Peter Brockmann

Ask Exxon-Mobile what is wrong with being a commodity?

Telco’s have no business doing value added services. They will (and have tried) it within their walled gardens of the past (and in mobile). Just deliver me the packets on time, please.

Raindeer

OM, how do you see BT’s strategy of only rolling out ADSL2+ and no VDSL/FTTH in this strategy? Though Ben Verwaayen said at an Ofcom conference (see youtube) that it will deliver 24Mbit/s we all know that that is not what most people will receive. It is not stimulating the roll out of new networks. They are even doing a 5.5billion buy back of shares instead of investing it in better networks.

Furthermore, I wonder why you are so happy about services. If you compare the income generated from services with the income generated from infrastructure, you will see that per household spending on infrastructure is more. On a company level it is different, but even there infrastructure is a sizable chunk of the budget. But services are incredibly more difficult to get right. Just count the amount of competitors Vonage, Youtube, Ebay, Google, Salesforce have, there are plenty. But all these upstarts beat the incumbents and work on a global scale, something most telco’s don’t know how to do. So for Telco’s to get into the services game and be good, they will have to do the following

  • Design a brilliant service that they can sell on a national or global scale. (Just build the next Youtube. If kids right of puberty can do it, a big Telco should be able to do it too)
  • Make/buy a very good IT-services company that works very well on its own, without needing to resell the telco’s infrastructure. (but where are the synergies??)
  • Leverage their network knowledge to build low latency/jitter services. (Oh wait, QoS mechanisms don’t work in real life, but increasing capacity does and systems management is hard in itself)

Well you get the point, in my opinion East is East and West is West and success at one network layer doesn’t translate into success at another layor in the stack.

Simon Leyland

I agree Om, your point becomes especially interesting when it comes to behind the firewall applications. Many large businesses will not trust their applications to ride the internet, which currently excludes them from using most of the current web2.0 software.

Will there be a telco with enough vision to provide hosted web2.0 technology within their IP VPN infrastucture.

The fit almost seems perfect: web2.0 companies are often lacking customers but their software is unique. Telcos are exactly the opposite, rich in customers but starved of differentiation.

Tom Coseven

A want my telco to provide me a big fast reliable pipe — not try to sell me a suite of revenue generating services. In BT’s case this is not new thinking. It is a jump back to the 80’s mindset before the Internet, when the telco thought they had a captive subscriber.

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