For many end-users of today’s communications technology, the cloud is a somewhat mystical concept, a digital equivalent of aether. Most think of it as a formless abstraction “up there” when, in fact, the cloud is rooted in the ground. Or the seabed.

Despite rapid advances in satellite connection, almost all intercontinental data transfer that takes place every second of the day occurs via hundreds of thousands of miles of underwater cables. Reading a map of these submarine cables is like viewing a tapestry of international telecommunication.

It is perhaps strange to think that the email you just sent to your colleague in Africa traveled below the Atlantic Ocean. It’s an oddly analogue image in an online world. Yet, the digital capability that those cables unleash is increasingly the stuff of science fiction.

Submarine cables have historically been laid by telecoms companies, mostly in the form of consortiums that share out the extreme costs, often running into the hundreds of millions of dollars. Perhaps frustratingly for these investors, the cables are famously attractive to sharks who, for reasons not entirely clear to scientists, can’t resist having a nibble.

Large fish, however, are not the only things eating into telcos’ profits. Over the past few years, many undersea cables have been laid by internet giants like Amazon, Google, Facebook and Microsoft, businesses that, in 2018, owned or leased more than half of the submarine cable bandwidth.

This expanding aquatic infrastructure grants these firms growing independence from telecommunications companies, allowing them to launch, even more aggressively, offerings that directly compete with telco products and services.

There is nothing new about this scenario.

A worrying habit

In stories that almost read like case studies for Kodak or Blackberry, telcos lost their core revenue streams to OTT providers in the early to mid-2010s, seemingly from nowhere. Between 2010 and 2014, telecom businesses saw revenue decline from 4.5 percent to 4 percent, EBITDA margins drop from 25 percent to 17 percent, and cash-flow margins decrease from 15.6 percent to 8 percent.

Then, when it became clear that cloud computing and networking was going to be the future of digital operations, telecoms companies again lost the advantage. On paper, telcos seemed like a solid bet to compete with the likes of Amazon, Google and Microsoft: network experts against booksellers, online advertising engines and packaged software suppliers.

But that hasn’t been the case. AWS, Microsoft, and Google have dominated the rapid evolution of cloud computing, leaving telcos to play catch up. Though their network infrastructure capabilities keep them relevant, it is possibly these very networks that account for telecoms companies’ sluggish response to accelerating change.

Some argue that “thinking digital” is deeply embedded in telcos’ business model because, in addition to offering their own digital products and services, they provide the infrastructure and connectivity that allow other players and sectors to operate in the digital economy.

However, it is not just technical capacity that counts. Thriving in the digital economy requires a different mindset. It’s the type of mindset that might have helped telcos see earlier on that the future of cloud wasn’t going to just be in networks, but rather the software and services that rested on those networks.

GSMA predicts that over the next five years telcos will spend USD$1.1 trillion on their networks, 80 percent of which will go on 5G. As we stand on the threshold of global 5G and perhaps the greatest leap into communicative novelty the world has seen, telcos are faced with another opportunity to take charge in the form of edge computing. How will they react this time? Will they capture the opportunity that relies on software, services and the security for the smart-everything world? Or will the cloud incumbents again capture larger returns on top of telecom infrastructure?

IoT in a post-COVID world

As we have learned, and continue to learn, through the COVID-19 pandemic, the world as we know it is fundamentally reliant on digital connection. The recent crisis has also made it abundantly clear that the nature of work is likely to evolve much faster than anyone previously expected.

After witnessing almost instantaneous shifts to remote working and the accelerated digitization of organizational operations, it is easy to see how the adoption of mass automation and AI-driven cyber-physical systems (CPS) might be sooner than many first thought.

Add to this the value that has been proved by utilizing national surveillance and monitoring systems to curb the spread of the coronavirus, and the case for a massive civil and industrial internet of things (IoT) becomes more visible and more compelling than ever before.

Such networks would incorporate billions of devices, sensors and machines in factories, cities and commercial environments managed by businesses and different tiers of government. The future prospects for consumer-facing IoT products and services are tremendous. In fact, the opportunities in all areas of IoT growth are abundant, but it is in the facilitation of enterprise and civic development that telcos could play a major role. The opportunities in developing the IoT ecosystem remain extensive. The question is, can they capture the possibilities?

McKinsey estimates that IoT’s potential economic impact on factories will rise to as much as $3.7 trillion a year by 2025. Though these figures were pre-COVID and don’t account for the huge downturn in the manufacturing sector, it is precisely this financial pressure that may force manufacturers to disinvest in human labor and prioritize the implementation of IIoT systems managed by AI.

However, with less capital available than before the coronavirus outbreak, companies – industrial and commercial – pursuing digital transformation are likely to be more risk-averse in their investments. Reliability and security will become more crucial than ever when choosing service providers, which should be to telcos’ advantage.

Finding the winning edge

The much-anticipated emergence of the massive internet of things (mIoT) is unlikely to be restrained by the economic impacts of the current pandemic. No-one knows for sure, of course, but more urgent development of new use cases in markets like healthcare, transportation, logistics, resource management or public surveillance will possibly stimulate the growth of the mIoT, not hamper it.

This expansion will continue to provide complex challenges in privacy, security, and even safety, an important concern when enterprises begin to incorporate more CPSs into their operations. With their vast experience in network management, telecom operators who are able to move beyond the mindset of selling connectivity or data have a number of advantages that can be leveraged to succeed in IoT.

The mIoT will be built on 5G, which is not just a physical network infrastructure. However, telcos pivoting into the development and management of virtual networks and multiple cloud-based applications should capitalize on their ownership of 5G network hardware to build an IoT ecosystem that delivers greater returns overall.

Security will be an important component of telcos’ proposition, not just as a market differentiator, but as a revenue stream. COVID-19 has highlighted the value of a humanity-serving IoT, but it has also laid bare the risks of sliding into a Big Brother society. Consumers and enterprises will demand greater IoT security, and telcos have a strong track record in keeping networks secure.

But success for operators will depend on their ability to capture a significant share of edge computing. This technology will facilitate most of the real-time cyber-physical use cases that often are used as adverts for 5G-founded IoT: autonomous vehicles and factories, remote surgery, massive drone networks, and so on.

These operations are extremely time-sensitive. There’s no tolerance for network lag when a driverless car traveling at 90 miles an hour suddenly needs to avoid a pedestrian. There’s no room for data delays at a critical stage of brain surgery.

5G’s near-zero latency is critical to the realization of these levels of operation, but even with 5G, we may not be able to rely exclusively on centralized cloud networking to deliver these use cases. IoT devices are also, by design and necessity, too small and too weak to take charge of the required data processing.

Edge computing, also known as fog computing, is a decentralized architectural pattern that moves computing resources and application services away from the cloud server, which is often hundreds of miles away, and closer to the point of data generation and action.

This improves speed as well as security and compliance. Edge computing removes the need for large packets of data to be transferred over great distances, and bypasses the potentially complex regulatory questions of data being generated in one jurisdiction but analyzed in another.

Telecom operators have a natural advantage in edge computing. Their physical networks with multiple data processing nodes mirror the distributed approach of fog processing. For edge computing to work, smaller data centers need to be located near the end device – telcos already have a lot of this hardware in place. This should give them the upper hand over AWS, Azure, and GCP.

These major cloud providers have largely relied on enormous data centers to deliver their services and will need to build out the components of an edge solution. Telcos, however, can reassign their existing assets in the service of computing at the edge.

Through their scale, infrastructure and networking experience, telecom companies should be able to leverage the move to the edge and reclaim a leading role in large scale and enterprise IT expansion.

The challenge, however, is not just technical, it is also mental. Can telecommunications companies make the mindset shift that will be required to re-imagine themselves as collaborative and forward-thinking players in a smart future?

Cloud 2.0

In politics, the principle of subsidiarity dictates that a central authority should only perform those functions that cannot be performed at a local level. This is a useful analogy for the future of cloud computing because, though almost all processes are currently run through centralized network hubs, what has been called “Cloud 2.0” will see more and more functions decentralized and moved to the edge.

Cisco predicts that the number of devices connected to IP networks will be more than three times the global population by 2023. Edge or fog computing will be critical to meeting the increased load of these devices, many of which will be built to run on the super low latency that we expect from 5G.

5G will also see network virtualization, which will allow telecom operators to redistribute the core network to be closer to the user or device. At the same time, Cloud RAN, which improves agility and flexibility by virtualizing non-realtime functions, effectively allows the edge to be brought closer to the core. These forms of optimized architecture will radically improve the user experience and are a major opportunity for telcos to take the lead in distributed cloud services.

The first obstacle telecoms firms face is a legacy of slow-moving, risk-averse operations. In a heavily-regulated industry, often with unnaturally low market competition, telcos never needed to be agile and responsive.

Of course, the landscape has changed quickly, but reputations and memory have not faded as fast. Numerous surveys show that telcos are less trusted than other types of technology providers in supporting enterprises with their digital transformation.

Businesses know that, in order to be as effective as the cloud giants, telcos need to alter their DNA. They need to shift from being a utility and a dumb pipe provider to acting as a business advisor and systems integrator. This is a major mindset and an organizational change that would affect every function within a telco. Not many have made that shift.

The inertia is understandable; there are some steep hills to climb. For one, telcos are geographically segmented and territorial. Yet, they are competing with worldwide cloud providers who are able to offer developers and software providers almost globally-consistent UI and capabilities.

Building the uniformity and reliability that enterprise clients need will require standardization and time. Time to build trust, and common standards to establish unity between telecoms operators. Such a collaborative approach may be difficult for telcos to implement but will be necessary if they are to claim the edge.

Another major obstacle is software itself. Virtualization and edge computing rely on software capabilities that telcos don’t traditionally have. By comparison, these skills are the lifeblood of cloud companies. Telecoms operators need to rethink their workforce and processes if they are to achieve the software efficiency and refinement that cloud competitors display.

One way telcos are dealing with this challenge is by working with cloud providers in potentially symbiotic arrangements. Recent announcements by Amazon Web Services and Microsoft see these behemoths using the networks and infrastructure of large telco carriers to deliver their cloud services to the edge. For many, this is a classic win-win, even if the telecoms operators do not get the ownership of the edge that they may have hoped for. Perhaps afraid of losing once again to cloud providers, telcos are willing to strike a deal that sees them capture at least some of the pie.

Were this the case, it would be another example of risk-averse thinking that will end with telecoms operators losing their play for the edge. Though cloud providers may be relying on carriers for now, they have already signaled their intention for the future.

Only last month, Microsoft acquired Affirmed Networks, specialists in fully virtualized, cloud-native networking solutions for telecom operators. This will release Microsoft from reliance on telecoms’ data centers as they build edge computing capability. In Microsoft’s recent quarterly conference call with analysts Microsoft’s CEO was boasting “We are the only cloud that extends to the edge, with consistency across operating models, development environments and infrastructure stack,” revealing more about Microsoft’s edge computing strategy.

Google Cloud has revealed similar aspirations with the launch of Anthos and Global Mobile Edge Cloud (GMEC). More than that, Alphabet also has Google Fi, a mobile virtual network operator (MVNO), as well as fiber and cloud offerings. Taken together, this represents a disruptive portfolio in telecommunications.

Similarly, Facebook is launching its Terragraph network in San Jose using 60Ghz spectrum, which could compete with 5G. Despite current agreements and collaborations, telcos’ competitors are making bold moves towards taking away more of telecoms’ business.

Conclusion

We have known for some time now that telecommunications firms are in need of new business models and approaches to market development. It is not novel to observe that telcos were too slow to react in the past, and as a result were beaten by OTT.

But reactive strategies, no matter how fast, are now altogether insufficient. Only proactive movement will do if telcos are to avoid losing the battle for edge computing. Cloud providers are already closing the gaps in their own capabilities, and telecom companies need to do the same, but faster.

This will require a new way of doing business, but also a new way of thinking about telecom business. It won’t be easy, but that doesn’t matter – right now, there’s no time to think about pain.

marin@5g.security | Website | Other articles

Marin Ivezic is a Cybersecurity & Privacy Partner in PwC Canada focused on risks of emerging technologies. He leads PwC’s global 5G cybersecurity efforts as well as industrial, IoT and critical infrastructure cybersecurity services in the region. All these focus areas are being transformed with the emergence of 5G, massive IoT (mIoT) and critical IoT (cIoT). Marin worked with critical infrastructure protection organizations in a dozen countries, 20+ of the top 100 telecom companies, and a number of technology companies on understanding the geopolitics of 5G; uncovering as-yet-unknown security and privacy risks of 5G, AI and IoT; and defining novel security and privacy approaches to address emerging technology risks.

Edge Computing Fog