Incumbent Vendors Reveal Early 5G Monetization Trends

Both Ericsson and Nokia showed continued growth in their top-line revenues during the 1Q 2022 although profits and margins were adversely affected by numerous factors. In particular, Ericsson reported a 12% growth in its mobile networks revenue while Nokia reported a 14% growth in its fixed networks business, but both were boosted by favourable currency conditions. Counterpoint Research expects that the vendors will face a continuation of the headwinds experienced in Q1 during the remainder of the year, which include supply chain issues, inflationary pressures plus the impact of developments in Russia and the Ukraine. In addition, both are increasing R&D investments which will hit their bottom lines.

However, there are encouraging signs that efforts to develop new 5G monetization technologies will start to come to fruition during 2022 with the commercial launch of a range of ARPU-boosting services leveraging CSPs’ recent 5G SA core deployments – plus accelerating enterprise wireless revenues.

AI-based Network Optimization

For the first time, both vendors reported commercial traction in the use of new AI-based network optimization services by their CSP customers. After many years of R&D investment this is a welcome development as it will result in a transition from low to high margin network support services. With their large installed base of CSPs, Counterpoint Research believes that both vendors are well placed to benefit from this opportunity. However, with several CSPs exploring alternative platforms with the hypercalers, it is becoming clear that this could turn out to be a very competitive market.

For example, Vodafone recently announced the roll-out of its alternative Unified Performance Management (UPM) platform, a pan-European network optimization platform in partnership with and Google Cloud. Other vendors with similar initiatives include BT, which earlier this year signed a AI/ML and data analytics deal with AWS.

ARPU Boost via Network Slicing

 With ARPU either static or falling, many CSPs are looking to vendors to help them monetise their 5G networks. As 5G SA core deployments accelerate during 2022, Counterpoint Research believes that vendors will start to introduce a range of ARPU-boosting services during 2022. During the first quarter, Ericsson announced two such services: Dynamic Network Slicing and Dynamic End-User Boost. The latter is particularly interesting as it is a data-boosting app controlled by smartphone users themselves.

Offered by Ericsson One Network Solutions – the vendor’s cloud-based intelligent platform – the app enables users to boost mobile data connectivity on-demand on 4G and 5G networks as well as improve security. For example, using the app could enable an user to download a file quickly or participate in a video conference when out of the office. The service is offered as a white label service, which means that CSPs can market the service as they wish and decide whether to target consumers, enterprise users or both.  Counterpoint Research understands that both services are now being offered on a commercial basis by Hong Kong CSP SmarTone. However, Ericsson claims that several CSPs in Europe will be launching similar services throughout 2022.

Targeting The Edge

While Nokia has been offering its MXIE edge-focused platform for some time, Ericsson made an effort to catch-up this quarter with its own edge-related product launches including an Edge Exposure Server and a Local Packet Gateway (LPG).

The LPG is a single unit/single-server full-stack appliance which integrates seamlessly with Ericsson’s dual-mode 5G Core and OSS systems. The key objective here is to reduce the cost and complexity of deploying 5G edge use cases and enable enterprises to launch new services quickly.  As a hybrid private network solution, Ericsson claims that the LPG can be a more cost-efficient alternative to a traditional, dedicated private network solution, while still maintaining strict 5G central core security and satisfying the highest data privacy requirements. The vendor claims that it has six customers working to deploy its LPG and expects commercial services to start in 3Q 2022.

Incumbents vs Hyperscalers

It is inevitable that all incumbent vendors will face stiff competition from a multitude of new entrants, but particularly from hyperscalers such as AWS, Google Cloud and Microsoft Azure, who are leveraging their core technical competences and huge enterprise customer base to target all the emerging opportunities described above, including private networks. As Exhibit 1 shows, the majority of CSPs have already developed edge partnerships with one or more of the hyperscalers. However, as no player can offer end-to-end solutions across all verticals, developing the best ecosystems through partnerships will be critical for all of them, including the hyperscalers.



Exhibit 1:  CSP Edge Partnerships with Hyperscalers

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Google Cloud: Customer centricity critical for future growth

Over the past year, we have seen an evolution in Google Cloud’s strategy.  Building on the company’s strong technology and product foundation, Google Cloud has taken the next step by becoming more customer-centric.  As CEO Thomas Kurian put it in a recent interview, their goal has been to pair their expertise with “empathy for what [their customers] are facing”.  This focus on the customer mirrors the state of the cloud market, which effectively began as a SaaS product back in the early 2000s, to an efficiency play circa 2006, to what is today very much a problem-solving story.  This means offering solutions versus capabilities, requiring the tech giant to rely more on partnerships and acquisitions to help it move up the software stack and navigate market shifts quickly.

There have been numerous acquisitions in the past year which have enhanced Google Cloud’s capabilities across big data, analytics, storage, hosting, and gaming, ultimately expanding the ecosystem of solutions available to their customers.  The acquisitions include:

Exhibit 1:  Recent Google Cloud acquisitions/integrations

Google Cloud Acquisitions 2019
Source: Google Cloud. *Typhoon Studios was acquired by Stadia, Google’s cloud gaming division.

Google Cloud’s customer-centric transformation is being touted as a key factor in recent big wins, and examples below highlight the strategic role the company is enjoying across much of its customer base.  Significant customer wins and partnerships over the past year include:

Exhibit 2:  Customer wins and partnerships

Google Cloud Customer Wins 2019
Source: Google Cloud, customer announcements. *Banking, Financial Services, and Insurance Sector.

The cloud infra and services market will remain hyper-competitive as AWS continues to dominate, and other tech giants ramp up efforts to gain share in a market that is expected to continue double-digit growth through the medium term.  Google Cloud’s strength comes from its artificial intelligence and machine learning capabilities, which allows the ad side of Google’s business to understand consumers like nobody else.  Google Cloud’s ability to translate this strength to the enterprise will be a major factor in gaining market share, requiring not only an expanded team (the company is looking to triple its sales force over the next two years) but maintenance of the core ‘expertise plus empathy’ culture set forth by CEO Kurian during the company’s transformation last year.  In the end, like all transformation stories, success will depend as much on Google Cloud’s people as it does on their products and processes.

Azure Arc: A Paradigm Shift in Hybrid Cloud Management

Microsoft announced Azure Arc on 4th November 2019 at the Ignite 2019 conference. Azure Arc enables enterprises to deploy Azure cloud services, on any type of on-premises infrastructure as well as in a multi-cloud environment. As hybrid cloud strategies for enterprises gain more popularity, app and cloud management will be a more sought-out service that public Infrastructure as a Service (IaaS) can provide. In this regard, Microsoft’s biggest competitors, AWS and Google Cloud have also recently launched their hybrid cloud management services, AWS Outposts, and Google Anthos, respectively.

A hybrid cloud strategy is an enterprise cloud strategy that involves managing and operating workloads across different infrastructure environments, namely, on-premises, private cloud or public IaaS cloud. Enterprises often need to keep confidential data on-premises or in a private cloud. However, other less sensitive data and applications can be maintained in public cloud environments because it can be more cost-effective and offer additional features. Azure Arc has added a further dimension to this hybrid strategy with managing resources across multiple public cloud platforms.

According to Microsoft, Azure services can be enabled on any computing platform, including Windows and Linux servers, located on-premises, in the cloud or at the edge. Any Windows or Linux server, even those running behind a firewall and proxy, can be registered with Azure Resource Manager. VMs running on top of VMware vSphere, Amazon EC2, and Google Compute Engine can also be registered with the Azure Resource Manager.

In addition to this, Microsoft said that Azure Arc can also register Kubernetes clusters. Once registered, any Kubernetes cluster can be managed like Azure’s Kubernetes Service (AKS). Customers have the flexibility to deploy Azure SQL Database and Azure Database for PostgreSQL Hyperscale, where they need it, on any Kubernetes cluster.

From the Azure portal, customers get a unified and consistent view of all their Azure data services running across on-premises and clouds and can apply consistent policies for security and governance across the different environments. Microsoft has a good hold in the enterprise cloud market; however, it has limited visibility among start-ups due to better offerings from AWS and Google Cloud in terms of pricing and services.

AWS’ hybrid cloud solution, Outposts, combines pre-configured hardware and software to the customers’ on-premise data center or co-location space to run applications in a cloud-native manner, without having to operate from AWS data centers. Currently, users can utilize EC2 instances and EBS volumes for storage. At a later stage, Outposts will locally support Amazon ECS and Amazon EKS clusters for container-based applications, Amazon EMR clusters for data analytics, and Amazon RDS instances for relational database services. However, until now, there has not been a multi-cloud solution being provided by AWS.

Google hybrid cloud solution, Anthos, is a combination of Google’s Kubernetes Engine (GKE), GKE on-premises and the Anthos Config Management console for unified administration and security policies across hybrid Kubernetes deployments. It can be run on customers’ existing servers. Anthos will also let users manage workloads running on third-party clouds like AWS and Azure, giving freedom to deploy, run and manage applications on any cloud. However, Google is yet to bring managed database services such as Cloud SQL and Bigtable to Anthos.

Azure Arc has shifted the paradigm of hybrid cloud management, by providing resource management on different types of servers as well as different cloud platforms. This feature will help its customers undertake cloud migration. This will also increase the cloud adoption for enterprises that are yet to migrate. Until now, Google Anthos is the closest competitor to Azure Arc, for example in the way it provides Kubernetes clusters across multiple cloud platforms. However, the absence of managed databases in Anthos gives Azure Arc an edge. AWS must boost its hybrid cloud management services to compete with Microsoft and Google. However, Microsoft will need to capitalize on this opportunity by targeting small and medium businesses as well as start-ups, as its competitors are chasing hard with their own multi-cloud management solutions.

Cloud Server CAPEX Soars as Datacenter Companies Look to Increase Share in Cloud Services Market

The cloud services market has been experiencing high double-digit growth in the past few years. Yet, there is more room to grow. Demand will continue to increase as more geographies, and companies adopt cloud services. Conventional corporate organizations are shifting towards public and hybrid cloud due to better offerings and low-cost maintenance. This demand has compelled datacenter and IaaS (Infrastructure-as-a-Service) providers to invest heavily and continually increase their infrastructure to support clients.

Among the Cloud Services providers who spend for servers and related hardware, Google dominated followed closely by AWS in 2018 (Exhibit 1). According to Counterpoint’s Cloud Services Tracker, Google spent 10% of the overall global spend, followed by Amazon Web Services (AWS) and Alibaba, with 9% and 7% share, respectively, in 2018. Facebook and Microsoft are also spending heavily to increase their datacenter capacities and capabilities. Other notable players are Apple, Intel, IBM, China Telecom, and Equinix.

Cloud Infrastructure CapEx Spend – 2018

Exhibit 1: Cloud Infrastructure CapEx Spend – 2018

Further, Counterpoint’s Cloud Services Tracker shows that the combined capital expenditure (CAPEX) of FAMGA (Facebook, Apple, Microsoft, Google, Amazon) increased by 45% year-on-year (YoY) in 2018. Intel’s CAPEX rose by 29% YoY in 2018. Chinese counterparts, BAT (Baidu, Alibaba, Tencent) and China Telecom saw a 24% YoY increase in CAPEX. Combined, FAMGA, Intel, BAT, and China Telecom contributed to 56% of global CAPEX by datacenter and IaaS providers. Among the REITs (Real Estate Investment Trusts), Equinix and Digital Realty are the biggest contributors. However, going forward, we expect the CAPEX of cloud services providers to increase as companies like Google and Microsoft venture into cloud gaming by launching their platforms, Stadia and Project xCloud, respectively.

AWS has the most number (66) of cloud infrastructure locations worldwide with 12 more locations in the pipeline, followed by Google Cloud with 61 such locations. Alibaba has 58 locations worldwide while Microsoft Azure has 20. These cloud giants are expanding globally as they look to increase their market share in the cloud services market. Further, these companies are working to ramp up their product portfolio with innovations and acquisitions and increase their market share by engaging in strategic partnerships.

Google has been quite aggressive in expanding its cloud services through acquisitions. Recently, it has acquired Looker, a big data and analytics platform, for a massive US$2.6 billion. Google’s list of acquisitions includes Qwiklabs, Kaggle, Bitium, Apigee, and Orbitera, among others. AWS is also active in this regard and has acquired companies like 2lemetry, Elemental, ClusterK, Cloud9 IDE, Graphiq and Sqrrl, among others. AWS even acquired Annapurna Labs to boost its internal production of custom chips for cloud infrastructure.

Further, cloud services providers are partnering with Taiwanese/Chinese ODMs to source servers and other components for increasing their capacities. The biggest ODM contributors are Foxconn, Wistron, Wiwynn, Inventec, Quanta providing servers to Google, Facebook, Microsoft, Amazon, and OEMs such as Hewlett Packard Enterprise (HPE) and Dell. Inventec and Quanta have the highest number of partnerships with leading cloud providers. Exhibit 2 shows the customer-ODM relationships.

Cloud Provider/OEM – ODM Partnerships

Exhibit 2: Cloud Provider/OEM – ODM Partnerships

The future looks bright for the ODMs, server OEMs, as well as component makers as cloud providers, continue to expand their consumer base as well as services. Multiple new services such as cloud gaming, service mesh, IoT expansion as well as entry into new geographies will drive the cloud adoption and hence, will increase the infrastructure spend by cloud service providers.

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