DALLAS -- Amazon and Rackspace own today's cloud computing market, but telecom operators aren't going down without a fight—even if they haven't quite figured out how to make telecom cloud services profitable. Service providers at the TIA 2011: Inside the Network trade show this week acknowledged that enterprise adoption of their cloud services remains relatively low despite the billions of dollars carriers are investing in it, but say they also cannot afford to be left behind.
"We're in that early adopter phase where you're almost not sure if you're going to make money in the end or not," said John Breen, assistant vice president of equipment solutions engineering at AT&T, speaking on a panel at the show. "But if you don't stay in [the market], you'll never know."
The path to building out telecom cloud services is reminiscent of the early and uncertain days of mobility, Breen said during Wednesday's panel discussion, “Agility, Response and Cost: Cloud Services for Carriers.”
"Mobile phones were developed back in the ‘50s, but the technology probably didn't sell, because who would want a lousy voice connection?" Breen said. "Well, mobility turned out to be a huge thing and now mobile ... revenues [have gone] up and paid the cost of your mobile [infrastructure]. So, [we've] found ways to make money."
We're in that early adopter phase where you're almost not sure if you're going to make money in the end or not.
Assistant Vice President, Equipment Solutions Engineering, AT&T
A Verizon engineer in the audience, who said he was working on Verizon's cloud strategy and architecture, expressed his unease with the hazy prospects for a return on investment (ROI) in telecom cloud services. Unlike traditional business services—which supply carriers with relatively consistent, recurring revenue streams under strict, long-term contracts—cloud computing services are billed in a pay-per-use model and enable dynamic provisioning. A customer could spin up and pay for dozens of virtual servers one month, only to take most or all of them down by the next billing cycle.
That's especially troubling to carriers that have invested heavily in telecom cloud services to compete with the likes of Amazon. Verizon completed its $1.4 billion acquisition of cloud provider Terremark Worldwide Inc. last month. Verizon Business announced late last year that it will build cloud services in more data centers this year and add 5,500 server cabinets to cloud environments in Asia, Europe and North America; the expansion was part of a $17 billion capital expenditure plan for late 2010 and 2011.
Similarly, AT&T announced plans in 2010 and in 2011 to invest a combined $2 billion in business services, which include its cloud offerings, as part of larger multibillion dollar capital plans each year.
Neither carrier has publicly stated exactly how much of its business services cap-ex is being spent on building out telecom cloud services.
The rate at which pricing is being driven down by competition is also a concern, as it is "outpacing the technology value and efficiency you gain" from cloud computing, the Verizon engineer said.
"As a cloud industry, are we killing ourselves? Where [is] the profit in the future?" he asked.
AT&T CEO: Cloud plus LTE equals 'transformational'
Despite the hand-wringing over upfront capital investments, AT&T CEO Randall Stephenson remains bullish on telecom cloud services as a major revenue driver. The combination of telecom cloud services and Long-Term Evolution (LTE) will be "transformational" to the consumer and business markets, he said in a keynote address Wednesday.
But that transformation is not going to be pretty.
"The next five years are not going to be planned and deliberate. The next five years will be characterized by chaos. All of the development will come faster, and lots of things [are] coming [that] we haven’t imagined yet," Stephenson said. "Plan to build a network to handle secure and reliable chaos where the most creative ideas flourish, where the customer determines the winners and losers, [and] where new ideas are seamlessly brought to market."
Consumer, business telecom cloud services have pros and cons
Although most of the attention on cloud services has focused on the enterprise market, service providers aren't ruling out consumer cloud services as a viable market—especially as Amazon, Google and Apple deploy or plan to deploy consumer cloud services. Most recently, Amazon announced a Storage as a Service application, Cloud Player, for storing and playing music files in its cloud; Apple has long been expected to release a competing consumer cloud service for iTunes.
AT&T is currently focusing on the enterprise and small- to midsized business (SMB) markets for telecom cloud services, but consumer applications around mobility are "a huge opportunity," Breen said in an interview after the panel discussion. Smartphone and tablet users would likely pay a small monthly fee to back up data saved on their device to a cloud environment, and the data would be recoverable if the device is lost or stolen, he said.
"We think that's something that over time will find its niche," Breen said. "[Consumer] applications that are more tied to the cloud for storage ... is something that will monetize and pay dividends for us."
But profiting from the consumer market is not without its challenges. Service providers must ensure they have a high-quality product and pricing model from the start, a goal that doesn't always match carriers' track records, said John Trembley, director of product marketing at Netformx, a network design software vendor, and another panelist.
"The industry has a very bad habit of taking something that's quite not ready for primetime and making it free ... and somehow when it magically gets better, [providers say], 'We're going to charge for it,'" Trembley said in an interview after the session. "That's a dangerous path for consumers."
Hulu made that mistake when releasing its subscription-based Hulu Plus product in late 2010 after offering—and maintaining—a free service for the past two-and-a-half years, Trembley said. Although Hulu is a private company and not required to disclose its numbers, its CEO recently wrote in a blog post that Hulu Plus is expected to surpass 1 million subscribers this year; by comparison, about 27.5 million viewers watch its free content each month, according to research firm comScore.
Enterprise customers will be more willing to pay for telecom cloud services, but they also have their challenges, Trembley said. Some IT pros will resist buying cloud services, fearful that it will put them out of a job—such as an enterprise telecom pro who avoids cloud-based VoIP services, he said.
Enterprises are also often unaware of the hidden costs in private cloud services, such as the need to invest in Layer 3 switches or more wide area network (WAN) bandwidth to support a new service delivery model, Breen said. However, he didn't expect that to be a deal breaker.
"Companies who used to have a T1 in the building because they had all the brains in there now have to buy an OC3," Breen said. "[But] the business owner looks at it from the ROI perspective, and it's usually a favorable ROI."
Let us know what you think about the story; email: Jessica Scarpati, News Writer.