Will telcos seize the edge computing opportunity?

By Frank Rayal, Xona Partners

Frank Rayal is Partner at Xona Partners. He advises technology companies and investors on technology trends and strategy, M&A planning and positioning, and strategic partnerships.

We live today in the age of the mobile cloud, a relatively centralised model that proved efficient and extremely successful. We progressively arrived at this model over a decade of development that’s driven by large public-cloud players. Under this model, these same cloud players, such as Amazon, Google and Microsoft dominate the ecosystem, offering applications as a service on a global scale. The current market capitalisation of these three players alone is $1.9 trillion. Telecom players who primarily own the wireline and wireless access to end users are relegated to providing commodity services. For comparison, the market capitalisation of the top 3 US telecom companies is a quarter of these 3 cloud players. But new market dynamics are emerging which could provide an advantage to the telecom service providers. The question is whether they will be able to seize the opportunity.

From Cloud to Edge Computing

Looking at how technology evolves, we see parallels to trends that caused major market change. In the early days of computing, mainframes benefited a few millions of users before personal computer based on client-server architecture dominated the market by benefiting hundreds of millions of people. Today, the mobile cloud services over two billion people through smartphones. The evolution to connect several billions of IoT devices requires edge computing to meet the necessary application requirements. This shifts the balance in favor of a hybrid centralized/decentralized cloud model, where the location of data processing and storage is a function of an application’s requirement for bandwidth, latency and cost economics.

Edge Compute in Mobile Networks

The wireless telecom ecosystem experimented with different edge computing applications for at least 10 years with little success. Most applications focused on backhaul optimization initiatives to reduce bandwidth requirements, save transport costs and improve user experience. One of the reason for failing is that the architecture of the wireless network is not designed to accommodate edge computing. Placing applications at the edge meant breaking the centralized topology for critical functions such as billing and legal intercept. These functions run in the core of the network. Placing applications at the edge meant custom workarounds that the service providers did not have much appetite for due to unclear monetization prospects. Moreover, a fairly rigid mobile core architecture with custom-designed hardware forces centralized economics.

Changing the Game Through Virtualisation

Virtualization of the mobile infrastructure is a catalyst for change. Through virtualization, service providers have the flexibility to instantiate as many instances of network functions as required. These functions could be placed where appropriate, including close to the user at the network edge. Virtualization provides service providers the flexibility to cost effectively scale on demand where and when it is required. As such, network function virtualization has a direct effect on the economic equation that drives distribution of the mobile core network.

Closing the Distance Between the Core and the Edge

While virtualization of the core network is ongoing service providers could pursue a parallel process to centralize and eventually virtualize appropriate functions of the radio access network. This already happened with some leading mobile operators primarily in Asia and a number of other operators around the world are contemplating a similar approach. Pulling the edge closer to the core complements pushing the core closer to edge. The large number of distributed central offices in the possession of service providers, coupled with the trend towards distributed data centers hosting, could be used to run edge applications.

The Role of Blockchains

While the rise of blockchains is associated with bitcoin and payment, the impact of blockchains could be far reaching. By nature, blockchains is a decentralized technology that obviates the need for a central authority for trust. It allows a network of peers to exchange value securely and reliably. As an open ledger, blockchains become a storehouse of transactions whose utility transcends payment. To make an analogy, the central authority is equivalent to a central cloud while the edge cloud is equivalent to a peer-to-peer network. The thought that we could communicate, transact, and exchange value without a central entity is ground-breaking. The fact that the cloud players have been silent on blockchains is only indicative of the threat it presents to their business model. The blockchains technology provides a new venue for telecom operators, acting as edge cloud providers, to develop new business models around content and application hosting and distribution, that could give them an edge over the public cloud providers.

The Opportunity to Telcos

Telecom service providers have an advantage over the OTTs in being closest to the subscriber. However, the telcos have lost the battle to the OTTs and are at risk of being relegated to providers of commodity connectivity services. The advent of edge computing, edge cloud and blockchains could change the competitive dynamics between telcos and OTT in unimaginable ways. The path to enable this change is admittedly long and arduous. To capitalize on opportunities enabled by new technology and market dynamics, the telcos have to be proficient at software development. This is a critical challenge for companies that are steeped in the physical infrastructure business, building towers and trenching the ground. But should the telcos be able to pivot into software companies, they will bring to bear incredible assets to enable edge applications and win new business opportunities that would otherwise go to the cloud players. We foresee an opportunity for telcos in the fast-growing public cloud service business to provide a new generation of applications and services that leverage network functions virtualization and emerging blockchains-based technologies and business models. But will the telcos seize the opportunity?