It is an open secret in the telco software business that software is often the smaller part of a software provider’s revenues. The rest is made up of long and expensive integrations, supplemented by a “long tail” of customization requests. But the end is nigh for this “customization economy” in telco software. Yet relatively few operators have connected the dots and seen the changes playing out.
So, what is happening? The answer is, of course, the cloud, or more specifically, the availability of telco-grade, cloud-native software. It is not much of a leap to infer that when a single instance of a software solution with standards-based APIs and flexible configuration options is available in the cloud, the old ways of years-long integrations and customizations hardly fit the paradigm.
Is this good news for the market?
For the software vendors involved, this is either good news or bad news depending upon their level of preparation or agility. For instance, very large software vendors may struggle with this change. For years, decades in some cases, theirs has been a services business with a dash of software. If a large vendor has ninety percent services revenues, this change in the model will look like a cliff edge. In this situation, neither denying that the cliff edge exists nor falling off the cliff edge seems like a good strategy.
Of course, the large vendors have a couple of factors in their favor. Firstly, they’ve got incumbency. They have critical software which works, not to mention established processes and relationships within the operator business. These factors will offer a degree of protection for a while, but inertia will not deliver permanent protection. Secondly, ironically, the fact that they do have services operations will also protect them.
To understand that paradox, we have to understand that historically, a barely customizable out-of-the-box telco software solution has never been an attractive prospect. It explains why telco software companies without a services function have remained in the little leagues, only being attractive to extremely price-sensitive Tier 2 or Tier 3 operators globally. When dealing with critical software like BSS systems that can make or break an operator’s business, not having the option of experts customizing that software is a fear-inducing scenario.
Looking more broadly at the telco software market, outside of a handful of giants, the shift towards a cloud paradigm should absolutely be taken as good news. It means that over time, realistically over a period of years, a software business can refocus itself on being a software business. It means a more level playing field for a wider number of players, who can get back to competing on the quality of their software.
Is this good news for the operator?
The quick answer is “yes, but …”
Clearly, understanding that eventually, the expensive services related to software deployment and maintenance in telco networks will go away or at least be drastically reduced will be taken as a positive by operators. The opportunity to cut costs will naturally be seized upon.
Here’s the “but.” It does necessitate a shift in operator behavior across a couple of vectors. Firstly, operators will have to end their addiction to never-ending customizations. With true cloud-based software, there will essentially be a single version of their software (with some customization options built-in), compared to the current reality of there being as many versions of the software as a vendor has customers.
We will get closer to an iOS experience where the most important options can quickly and cleanly be toggled on or off. Versus an Android experience, where the options are greater but come with increased complexity and risk, requiring increased technical skills to navigate.
The second vector is related to the changes in the cost structure. A true software-as-a-service model is more of an OpEx-based model compared to the usual CapEx model that still proliferates in this industry, where cycles of investment related to network build-outs still dominate operator balance sheets. Nonetheless, shifting from a CapEx model to an OpEx model does not seem to be a mountain to climb anymore, as it did several years ago. Largely, the industry has opened up to OpEx models and no longer requires awkward or confusing conversations with CFOs.
So, what comes next?
We must be clear that this change in the telco software market is not an overnight change, nor will it be a binary on-off situation. But the movement is happening, and it seems unlikely that anything will stop it.
What we think is next is a hybrid market where, over time, the market will “cross the chasm” and genuinely cloud-native software will dominate. In this crossover period, the role of the cloud-native software vendor has to change. Rather than being an “order-taker,” the better software companies will become guides. Most operators are still not yet mentally or technically prepared to embrace the move to the cloud fully. They will have to borrow the expertise and cloud engineering skills of their software vendor ecosystem to thrive.
The cloud is finally laying to rest the “customization economy” of the telco software market. Eventually, the fear of not being able to customize ad infinitum will subside, and both operators and vendors will breathe a sigh of relief that that era draws to a close and that something simpler and better will take its place.
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