5G is the first ‘G’ in cellular technology allowing CSPs to operate at the software layer. Software is a deviation from the transactional paradigm typical in telecom equipment production. Software points to a more stable and predictable recurring income model, similar to that of hyperscalers. According to ABI Research, a worldwide technology intelligence group, this has consequences for the industry’s business structures.
“With a growing importance of software, the commercial imperative from a 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.
Commercial agreements for 3G and 4G networks are based on a CAPEX procurement model. To own an asset, CSPs pay a predetermined price. It might be hardware (cellular antennae) or perpetually licensed software. Cash, financing, or leasing can all be used to pay for the value. The fact that there is a defined price is, nevertheless, the most important factor.
Network Equipment Vendors (NEVs) such as Ericsson, Huawei, Nokia, and ZTE are assured an upfront payment at the time of contract signing whenever an agreement is reached. NEVs have one stress point in a CAPEX model: getting the deal. CSPs bear the risk of adopting the bought technology. One thing to keep in mind is that by the time a product is adopted and used, the majority of the cash has already been spent on installation, integration, and other expert services required to get the product up and running.
OPEX vs. CAPEX Models
In contrast, there may not be a ‘product’ sale in the 5G ecosystem, and by extension, the cloud and software world. Technology providers must still channel the necessary research and development (R&D) to construct the technology and secure a contract, stated Alusha. They must invest in marketing and follow the sales cycle in order to close the purchase. There isn’t much of a difference between this and the CAPEX model in this regard. The distinction is that OPEX models are linked to recurrent (micro-) transactions – additional computing, storage, modules, and so on.
“Further, businesses built on OPEX models typically 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,” added Don Alusha. “The marginal cost of producing an extra copy is very small. That underpins hyperscaler’s (AWS, Google, and Microsoft) business model and strategy.”
Because of the expanding usage of cloud and software, there is an increasing consumerization of telecom technology, but it is subtle. The software industry is a large-scale economic enterprise. The cost of developing a software product is high up front, but the marginal cost of creating each one is quite low. Building software differs from producing equipment in that the latter involves the production and transfer of ownership of a product, whilst the former is far more intangible. From a financial standpoint, there are benefits, added Alusha, since CSPs now pay for software based on an approximate estimate of their consumption over time – an operational expense – rather than a fixed-cost basis in a CAPEX-centric environment. Their Return-on-Invested Capital (ROIC) measures improve as a result of this.
To create value in the new world of cloud and software, NEVs must make a material and positive impact on the service recipient in addition to selling a transaction. This would allow the sector to experiment with new business models that go beyond where the money is in the value chain and into the future. The cloudification of telecom equipment provides unprecedented benefits (for example, innovation, improved economics, business agility, and so on), but it also introduces new technology into the sector, which carries a risk.
Given the lack of maturity and numerous unknowns surrounding performance, best practices, and management of digital assets, there will be issues. “However, operators that are the first to respond to these difficulties may acquire a competitive market edge,” concluded Alusha.
About ABI Research’s Study
These findings are from ABI Research’s Cloudification of Telecom Technologies and Equipment application analysis report. The company’s 5G Core & Edge Networks research service comprises research, data, and analyst insights, and this study is part of it. Application Research studies provide in-depth analysis of significant market trends and variables for a certain technology, based on extensive primary interviews.
Executive Summary
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Software points to a more stable and predictable recurring income model, similar to that of hyperscalers.
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With a growing importance of software, the commercial imperative from a 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.
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There may not be a ‘product’ sale in the 5G ecosystem, and by extension, the cloud and software world.
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Technology providers must still channel the necessary research and development (R&D) to construct the technology and secure a contract, and they must invest in marketing and follow the sales cycle in order to close the purchase
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Building software differs from producing equipment in that the latter involves the production and transfer of ownership of a product, whilst the former is far more intangible
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Cloudification of Telecom Technologies and Equipment application analysis report
