FANG – Facebook, Amazon, Netflix and Google – is taking a bite out of traditional service providers’ business. By competing with telecommunication service providers (telcos) to create and optimize the next generation of networks – including the highly anticipated 5G – these web-scale disruptors are outpacing their predecessors with highly scalable infrastructure.
In my colleague Rikard Kjellberg’s article, he referenced the pets vs. cattle analogy to describe the key advantages of running a telco ranch – and while FANG is well on its way to being ranchers, operators are still struggling to break out of their local wireless pet stores.
Telecommunications is Big Business. More than four cents out of every dollar of economic activity is related to telecommunications according to GSMA. With all of its apparent inefficiencies, the industry continues to grow at the relatively healthy pace of around 2.4 percent per year across the world.
Compared to service providers in the web-world, that growth is pretty slow. Just a quick look at FANG ?reveals what is going on. Google, the slowest among them, is still growing at a rate of over 15 percent year-over-year, or roughly six times the growth of telcos, according to NASDAQ.
Just what is the fundamental difference between so-called “web-scale” companies and the big players in the telecommunications world? That question generates many answers. Common reasons given include regulated markets, demanding service quality expectations, backwards compatibility requirements, size of the existing customer base, and more.
It is certainly true that these factors have a serious impact on the telcos’ ability to innovate. I submit, however, that there is one fundamental difference between the telcos and their web-scale challengers that is not so easily brushed off.
No need for drum-rolls. It’s pretty straightforward.
Since the gradual break-up of telecommunications monopolies across the world in 1980s and 1990s, the telecommunications industry has been split between network equipment manufacturers and network service providers. This split resulted in keeping both types of companies very dependent on the abilities of the other type.
A critical deficiency shared by network service providers is an inability to retain any technical edge over other service providers. Meanwhile, over on the web-scale side, Google’s PageRank, Amazon’s ShoppingCart, and Facebook’s subscriber database are just some examples of what Warren Buffett calls the insurmountable moats around their castles of business. These are technologies they have developed, nurtured, and continue to use to outrank, and ultimately dominate, the rest of the industry.
On the telecommunications side, network service providers have decided to outsource their most critical components of revenue generation to network equipment manufacturers. (I use this term in the most generic sense, to include hardware, software, firmware, and other manufacturers.)
Things have been this way for a long time. AT&T hired Lucent and Northern Telecom; British Telecom (BT) retained Marconi; Deutsche Telekom (DT) outsourced to Siemens, and there are many more examples. When times were good?—?in other words, when network service providers held market dominance (near-monopoly) in their respective markets?—?this model worked extremely well and helped both the service provider and the equipment manufacturer to thrive. Once the de facto monopolies began to disintegrate however, network service providers decided that open standards would be the solution to their problems. Open standards would allow them to substitute products from one network equipment manufacturer with those from another.
While open standards provided them with greater leverage over manufacturers, the decision also caused the now-fundamental weakness of the industry: everything is now expandable, and no company can dig a moat deep and wide enough to adequately protect their business.
Currently, the industry is trying to solve this problem through consolidation. This explains the multi-country alliances of service providers such as Vodafone, Orange, and DT. It also accounts for their desire to diversify business across various market segments, including wireless, enterprise, entertainment, and so on.
On the equipment manufacturer side, consolidation results in a decreasing number of large companies capable of providing solutions to service providers in multiple market segments across the globe. These attempts are certainly well-intentioned but they seem somehow limited in their success so far.
Just one of the unbreachable moats that web-scale companies construct around their businesses is building infrastructure capable of serving very large numbers of users and, more importantly, doing so with the smallest possible staff.
Let’s look at an extreme example. When WhatsApp was sold to Facebook in 2014, they proudly claimed to serve 40 million subscribers with just one engineer. This was comparable to AT&T and Verizon running their current networks with, give or take, four engineers each. The absurdity of this comparison nonetheless prompted Facebook to pay almost $20 billion for WhatsApp. Other success stories, though to a lesser extent, are told by FANG and other web-scale companies.
To put it as simply as possible, large web-scale companies overcome the challenge of massive scaling by distributing large problems over a very large number of identical components. In other words, they serve those billions of customers using a huge number of identical servers. This requires an amazing level of discipline when choosing the perfect server to do the work, using the right software to manage server lifecycles, and ultimately automating when, and how many, servers are deployed and deleted.
This is why Google invented container technology for their workloads over a decade ago, and very properly named the project “Borg.” This is also why, as of 2016, Google was deploying and deleting one billion containers every week. I doubt that many containers had been deployed in the entire history of the telecommunications industry up to that point.
The reason that Google and other web-scale companies can so easily perform so many deploy/delete functions is because they manage their (virtual) servers as immutable (or unchanging) components. They don’t service, repair or update their chosen servers while the servers are still running. If they find a problem with the server version, they quickly generate a newer version, deploy it on a limited scale for testing then deploy it massively.
In keeping with the “pet-cattle paradigm,” these are the best types of cattle: the kind that, based on a single blueprint, emerge from a breeding farm at any given time. Why aren’t telecommunications operators tending similar herds of cattle? The answer is found in the fact that the telecommunications industry is built on common interface standards.
While common interface standards provide great comfort and flexibility to the consumer, they tend to make service differentiation very difficult. Operators end up being forced to outshine each other in terms of their financial statements (drive for cost reduction), while also having to focus on implementation differentiators. As a result, telecommunications networks are full of purpose-built pets needing rigorous management.
The times, however, are changing. We are now seeing operators experimenting with open hardware platforms and open system software solutions growing more popular through organizations like The Linux Foundation. In recent months, leading vendors have begun promoting cloud-native network functions.
It is quite likely that, given another few years, telecommunications operator networks will begin using a large number of similar immutable network functions and ditching their pets altogether. Built as software running on a common hardware, they will provide specific network functions right up until they need to be replaced en-masse. It will be a world very different from the one in which we now live, but it will be essential to fulfilling the promise of 5G. By adopting some of the practices of web-scale companies, telcos might once again transform networks into differentiating infrastructures and with a bit of luck, enjoy some renewed days of glory.