Incumbent vendors cannot ignore the market-disrupting implications of AT&T’s and Swisscom’s outsourced 5G mobile cores

At the tail-end of June, both AT&T and Swisscom announced plans to outsource their 5G mobile core networks to cloud service providers. AT&T’s announcement was with Microsoft Azure. Swisscom’s was with AWS. With the AT&T deal, Azure will be acquiring IP and engineering expertise from AT&T that it can resell to other operators. It was reported that Azure will offer jobs to current AT&T employees, as well. This move suggests Microsoft understands how critical it will be to retain talent that has deep networking knowledge. Swisscom’s deal does not appear to include AWS acquiring any Swisscom assets or employees, but the operator did say it will be using AWS for its own IT applications.

Operators have already partnered with cloud service providers for hosting applications, customer data, and billing functions. What makes AT&T’s and Swisscom’s announcements notable is what is being hosted in the cloud: these global Tier one operators are trusting cloud providers with a critical network element that has an extremely high-level of real-time data traffic and stringent uptimes. If the hosted cloud core fails, the whole network goes down – the top barrier to operator adoption of SDN/NFV and other telco software initiatives. Obviously AT&T and Swisscom feel cloud services have matured to a level of performance that makes them comfortable outsourcing such a key network element. For this reason, today’s market-disrupting announcement should be concerning to incumbent equipment vendors.

Moving the mobile core from a network investment to an outsourced service will have a noticeable and negative impact on equipment vendors and the business models they have relied on for decades. The commercial value of their CSP relationship will be diminished. Equipment vendors will basically be software application providers with the cloud service company providing the traditional hardware component of the network element in the form of cloud services. Equipment vendors could see the value of their core network deals diminish by 20-30% with cloud services taking on the hardware role. Azure could eventually take an even bigger percent with its AT&T deal if it takes the IP it acquired to create its own core network software solution.  The core also is just the start.

With operators starting to embrace virtual RAN, cloud services will move into this space as well, taking another percent of the network build for themselves. Currently only the actual radios appear exempt from the reach of cloud service providers. Fortunately for RAN vendors radios remain the most expensive piece of equipment in the mobile network build. Mobile operators, unlike their equipment partners, however, should be happy with these announcements.

Mobile operators now have two high-profile operators willing to take on the risk and challenge of pushing out a crucial network element to the public cloud. The success of those two mobile operators will make it easier for other operators to do the same. At a minimum, it gives mobile operators more choices in how to architect their networks and create more vendor competition. It will also help mobile operators further transform themselves into digital service providers. Using cloud service providers should not only give them more service agility, it should also make their cultural transformation easier as cloud service providers will take on a part of that cultural transformation. Different research studies have pointed highlighted cultural transformation, including finding people who are used to working in a cloud environment, as a hinderance in making this transformation. 

As with any major market transformation, any impact this announcement will have will not happen overnight. Incumbent equipment vendors are sure to find ways to adapt either by increasing their value to CSPs in other areas (e.g., services, orchestration, PEOPLE/deep network expertise?) or by finding ways to lower their own costs (fewer employees, narrower product portfolios, etc). But it is getting difficult to deny that there is a transformation underway when it comes to how CSPs will build their networks and the relationship between them and their suppliers and which suppliers they might value more.