ABI Research note says investment in 5G business paves the way for Communications Service Providers (CSPs) to operate in the software layer and opt for a new business model.
Investment in software represents a departure from transactional model characteristic of telecom equipment manufacturing. Software points toward a recurring revenue model that is more consistent and predictable.
“With a growing importance of software, the commercial imperative from a tech vendor’s perspective is stark: depart from a finite supply of (3G and 4G) equipment, characterized by scarcity, to monetization models based on 5G software where the supply is essentially infinite,” said Don Alusha, Senior Analyst 5G Core & Edge Networks at ABI Research.
Telecoms Capex will grow at about 8 percent to $317 billion in 2021, and will hover around $330 billion for the next three years until falling to $320 billion by 2026, according to MTN Consulting.
With 3G and 4G networks, commercial arrangements revolve around a Capex purchase model. SPs pay a price to own a mobile network – being paid in cash, financed, or leased. It could be hardware (cellular antennas) or software predicated on perpetual licensing, ABI Research said.
Network Equipment Vendors (NEVs) like Ericsson, Huawei, Nokia, Samsung, and ZTE receive an upfront payment at the point of signing a contract. In a Capex model, NEVs have one stress point: winning the deal. SPs need to take care the risk of implementing the purchased technology.
In a 5G ecosystem, there may not be a product sale. Technology suppliers need to channel the required Research and Development (R&D) to build the technology and win a deal. They need to invest in marketing, execute the sales cycle in the hope they win the deal.
There is not much difference from the Capex model. The difference lies in the fact that Opex models are associated with recurring (micro-) transactions — extra compute, more storage, more modules, etc.
“Further, businesses built on Opex models invest a significant amount of capital upfront and then try to make up with volume because of a superior cost structure that is associated with software; the marginal cost of producing an extra copy is very small. That underpins hyperscalers such as Amazon, Google, and Microsoft business model and strategy,” Alusha explains.
There is an increasing consumerization of telecom technologies because of a growing adoption of cloud and software. The software business is a scale economic business. A considerable investment is made upfront to develop a software product and then the marginal cost of producing each one is very small.
There are advantages from a balance sheet perspective, as SPs pay for software in a rough approximation for their usage over time — an operational expense — as opposed to a fixed-cost basis in a Capex-centric world. This improves their Return-on-Invested Capital (ROIC) measurements.
In the new world of cloud and software, in addition to selling a transaction, NEVs must make a material and positive impact on the recipient of the service to create value.
Cloudification of telecom equipment offers unprecedented opportunities. But it inherently constitutes new technologies for the industry and there is a risk attached. There will be challenges, given the lack of maturity and many unknowns around performance, best practices, and control of technology assets.