Business model

Telco business model threatened by Big Tech’s network push • The Register

Telcos risk missing out on the revenue needed to fund new networks, despite skyrocketing demand for their services — and Big Tech is to blame.

That’s the gist of the GSM Association’s 2022 Internet Value Chain Report, released yesterday.

The Association considers the Internet value chain to include revenue earned by all actors involved in the end-to-end service experienced by end users using the Internet for any purpose. The report suggests that the value of this channel has increased significantly from $3.3 trillion in 2015 to $6.7 trillion in 2020, helped by the growth of the online population from 3.2 billion to 4, 4 billion.

57 is another significant number in the report, as it is the percentage of global internet traffic represented by Alphabet, Meta, Netflix, Apple, Amazon and Microsoft combined. 57 is also the percentage of revenue generated by online service providers, compared to 48% in the 2015 edition of the Value Chain Report.

The document also measures global traffic in petabytes, finding growth from 41.3 petabytes of total global data movement in 2015 to 181.1 petabytes in 2020. Most of the growth came from video traffic.

While much of this traffic travels through Big Tech carrier-operated networks, most also travels through carrier-operated networks. But the GSMA cites figures that suggest social media and content players have lower costs and higher returns for shareholders than operators.

“The online services and user interface segments are benefiting the most from value chain growth and generating the most significant returns for shareholders, while the internet access connectivity segment has generated relatively low, even single-digit returns on capital,” the report said.

This low return on capital is problematic as network operators are tasked with operating, expanding and improving their networks even as their business model becomes less profitable.

“Enterprises are replacing high-margin MPLS and VPN services with more basic Internet access services, resulting in an overall loss of revenue and margin for carriers,” the report said.

Hyperscalers, on the other hand, have realized that their global scale allows them to perform the kind of network functions once provided by carriers – and generate revenue, some of which comes from carriers turning to clouds for offers network as a service instead of performing their own network functions. The report cites AWS’ 5G offering and Microsoft’s acquisition of core network function providers Metaswitch and Affirmed Networks as an example of this trend.

While this arrangement is attractive “From the telco’s perspective, they are selling the access portion but without the backbone network services they would previously have sold on top of it, reducing their returns while requiring the same asset base to provide,” the report says.

“If these trends fully materialize, telecom operators risk becoming primarily Internet service providers, fulfilling the sales and service function, but with significant investment needs to build and maintain the infrastructure of access,” the report said. And if network operators can’t get enough capital, it’s far from clear how the billions more who will be connected in the years to come will be connected.

The report calls on business leaders and policy makers to ensure that network operators benefit from a listing in which they can build both core and edge networks. The report does not detail how network operators could be made more sustainable, but calls for ecosystem-wide discussions to make this happen in the interest of another five years of value chain growth for all. ®