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The Telco Cloud Dilemma

Can the large telcos ever compete with Amazon Web Services?

One of the notable presenters at this week’s Cloud World Forum in Brazil was from telco giant Telefónica. This Spain-based powerhouse has extensive interests across Latin America as well as North America and Europe, and owns everything from undersea cables up to managed services. And as with every other telco on this planet, they’re heavily into Cloud Computing.

Nothing unusual so far. But toward the end of this fellow’s talk, someone asked whether Telefónica was going to either partner with Amazon Web Services (AWS) or compete with them. Seeing as the larger company was all-in with their Cloud bet, I expected the answer would be to compete with the IaaS leader. After all, telcos from Verizon to Alcatel are in the trenches battling Bezos and Company. But to my surprise, he answered that they would prefer to run their SaaS apps on Amazon, while at the same time selling them connectivity. Competing with the Wal-Mart of Cloud was a losing bet, so if you can’t beat ‘em, join ‘em.

What’s going on here? Why would a large telco who is heavily invested in their own Cloud offerings feel that the spunky dot.com from Seattle was too powerful to beat? And more importantly, is Telefónica alone in this perspective, or are other telcos in the same boat? Then there are the biggest questions of all: can the large telcos ever compete with AWS, and what will it take for them to carve out a defensible niche in the exploding IaaS marketplace?

Understanding the Big Telco
Those of us whose careers have centered on moving bits around can easily forget that telephone companies have been in existence since Alexander Graham Bell and his partners founded the Bell Telephone Company in 1877. For most of this century and a half of history, telecommunications has delivered plain old switched voice networks. The rise of mobile telephony, the Internet, and now the Cloud have each in turn shaken the telco world to its core. And yet, its history, and hence its culture, rest in the world of the Public Switched Telephone Network. In other words, once a phone company, always a phone company.

As each wave of innovation hit this industry, cultural battles ensued between the old guard and the newcomers. The 1970s brought the rise of cell phones, shaking up the landline culture. The 1990s brought TCP/IP, shaking up the analog voice culture. And now, the 2010s bring the Cloud. In spite of these successive waves of innovation, however, telcos still see themselves as carriers – as providers of the underlying telecommunications infrastructure.

This perspective came through loud and clear in the Telefónica presentation. The presenter touted his company’s ownership of undersea cables, connecting Latin America with Europe and other points around the globe. Sure, this telco has moved up the food chain to a wide variety of managed services, serving hundreds of thousands of customers with far more than a simple dial tone. But what was Telefónica’s key differentiator he wanted the audience to take away from his talk? The plumbing.

Everyone Needs Plumbing
Not that there’s anything wrong with plumbing, mind you. Whether it be undersea cables, the Internet backbone, or the copper or fiber line to your home our business, we’d be hard pressed to leverage Cloud computing or any other information technology without quality plumbing. And as anybody who’s ever experienced a clogged toilet can attest, it’s easy to take plumbing for granted until such time as it stops working properly.

But no telco is content simply to remain in the plumbing business. In today’s largely unregulated global telco marketplace, simply providing connectivity is a low margin business. The real money lies in services that they can layer on top of the underlying pipes. Where is the big money in telco these days? Value-added services like SMS messaging, voice and data roaming, professional services, and, yes, Cloud Computing – both IaaS as well as the potentially more lucrative SaaS.

The bottom line for the telcos, therefore, is that Cloud-based offerings are value-added services, where the value they add is added to the plumbing. In other words, their fundamental cultural perspective is to make more money with the telecommunications infrastructure. The problem with this perspective, however, is that it’s not the best way for a Cloud Service Provider (CSP) to think.

How to Think Like a Cloud Service Provider
The origins of a company often indicate the essential culture of that company, even years after it has moved on to broader markets. Amazon, of course, began its storied career as an online bookseller. Rackspace was originally in the Web hosting business – but only because its founders couldn’t find enough work coding applications. Many other Cloud providers came out of the telco world (like Savvis and Terremark) or from multifaceted IT products and services companies (namely, IBM and HP). And yet, of all of these examples, Amazon is the one company who both defined IaaS and continues to drive the IaaS market from a solid leadership position.

There’s an important lesson here. Companies who think of Cloud Computing as telco managed services, or alternately think of it as next-generation managed hosting, are doomed to market follower positions, scrambling for the scraps of business Amazon leaves behind. It is precisely because Amazon thinks of itself more like a Wal-Mart than like a Telefónica that enabled it to disrupt the IT industry with AWS.

So, if the telcos and the hosting providers have too much cultural baggage to compete with AWS, is there any company that has a chance? Only one: Google. Google, of course, began its life as a search engine. Today, they’re paving their own way to the Cloud, focusing on a broad set of SaaS and PaaS offerings, with a much smaller emphasis on IaaS. But even though they’ve steered clear of Amazon’s core business by generally avoiding IaaS, they could make a run at this lucrative market whenever they felt the time was right.

What, then, do Amazon and Google have in common that positions them as the king and queen of the Cloud marketplace? On the technology side, both firms understand massive scale, perhaps better than anybody else on the planet. But if you believe that simply knowing how to scale is the key to succeeding as a CSP, you’re missing the point. It is the absence of cultural baggage that positions these two companies as Cloud leaders for many years to come.

The ZapThink Take
What, then, can the telcos do to succeed in the IaaS marketplace? As I’ve discussed before, they’re not going to be able to take down AWS. Amazon is too far ahead and moving too quickly for anyone to catch up to them any time soon. As a result, there are two basic strategies remaining: first, excel at something that isn’t AWS’s core strength, like enterprise-centric Cloud Computing. There’s definitely money to be made in this niche, but Amazon has its sights set on the enterprise market as well. Can a plumbing company who thinks of Cloud as a value-added services offering compete with Amazon in the enterprise space for long? Probably not.

The other strategy? The fellow from Telefónica nailed this one: run your stuff on AWS. AWS doesn’t want to dominate the SaaS space because they’d rather SaaS vendors run on their Cloud. If you’re a telco, your best Cloud bet is to offer SaaS-based services, and if it’s more cost-effective to run them in the AWS Cloud, then have no shame. Go for it. And remember, you’re still selling connectivity, and Amazon will never have enough of that.

More Stories By Jason Bloomberg

Jason Bloomberg is a leading IT industry analyst, Forbes contributor, keynote speaker, and globally recognized expert on multiple disruptive trends in enterprise technology and digital transformation. He is ranked #5 on Onalytica’s list of top Digital Transformation influencers for 2018 and #15 on Jax’s list of top DevOps influencers for 2017, the only person to appear on both lists.

As founder and president of Agile Digital Transformation analyst firm Intellyx, he advises, writes, and speaks on a diverse set of topics, including digital transformation, artificial intelligence, cloud computing, devops, big data/analytics, cybersecurity, blockchain/bitcoin/cryptocurrency, no-code/low-code platforms and tools, organizational transformation, internet of things, enterprise architecture, SD-WAN/SDX, mainframes, hybrid IT, and legacy transformation, among other topics.

Mr. Bloomberg’s articles in Forbes are often viewed by more than 100,000 readers. During his career, he has published over 1,200 articles (over 200 for Forbes alone), spoken at over 400 conferences and webinars, and he has been quoted in the press and blogosphere over 2,000 times.

Mr. Bloomberg is the author or coauthor of four books: The Agile Architecture Revolution (Wiley, 2013), Service Orient or Be Doomed! How Service Orientation Will Change Your Business (Wiley, 2006), XML and Web Services Unleashed (SAMS Publishing, 2002), and Web Page Scripting Techniques (Hayden Books, 1996). His next book, Agile Digital Transformation, is due within the next year.

At SOA-focused industry analyst firm ZapThink from 2001 to 2013, Mr. Bloomberg created and delivered the Licensed ZapThink Architect (LZA) Service-Oriented Architecture (SOA) course and associated credential, certifying over 1,700 professionals worldwide. He is one of the original Managing Partners of ZapThink LLC, which was acquired by Dovel Technologies in 2011.

Prior to ZapThink, Mr. Bloomberg built a diverse background in eBusiness technology management and industry analysis, including serving as a senior analyst in IDC’s eBusiness Advisory group, as well as holding eBusiness management positions at USWeb/CKS (later marchFIRST) and WaveBend Solutions (now Hitachi Consulting), and several software and web development positions.

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