At home in the cloud: The emerging opportunity for telecom operators

Residential consumers are demanding more and more cloud computing services and storage, and the volume of data they want to store in the cloud is substantial. Given how much multimedia data the typical family maintains, the dormant demand for cloud storage is already between 2 and 5 terabytes of data, and it will likely increase by a factor of 10 within the next five years. This situation offers telecom operators one of the most significant opportunities for additional revenue to come along in years, if they can use their inherent advantages to play successfully in the cloud infrastructure game — if not in cloud services.

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At home in the cloud The emerging opportunity for telecom operators

Contacts

Beirut Bahjat El Darwiche Partner +961-1-985-655 bahjat.eldarwiche @strategyand.pwc.com Dany Sammour Principal +961-1-985-655 dany.sammour @strategyand.pwc.com Hani Zein Senior Associate +961-1-985-655 hani.zein @strategyand.pwc.com

Delhi Ashish Sharma Principal +91-124-499-8705 ashish.sharma2 @strategyand.pwc.com Dubai David Tusa Partner +971-4-390-0583 david.tusa @strategyand.pwc.com Bassam Hajhamad Principal +971-4-390-0260 bassam.hajhamad @strategyand.pwc.com

Düsseldorf Jens Niebuhr Partner +49-211-3890-195 jens.niebuhr @strategyand.pwc.com Düsseldorf/Stockholm Roman Friedrich Partner +49-211-3890-165 roman.friedrich @strategyand.pwc.com

Frankfurt Germar Schroeder Principal +49-69-97167-426 germar.schroeder @strategyand.pwc.com Kuala Lumpur David Hovenden Partner +60-3-2095-3188 david.hovenden @strategyand.pwc.com

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About the authors

Peter Weichsel was formerly a partner with Strategy&. Jens Niebuhr is a partner with Strategy& based in Düsseldorf. He focuses on IT strategy and transformation for large enterprises and leads the firm’s European IT activities in the communications and utilities sectors. Dr. Germar Schroeder is a principal in Strategy&’s Frankfurt office. He focuses on communications clients and ICT service providers, and has led several initiatives for product development, go-to-market, and operating model design, specifically for the cloud. Dany Sammour is a principal with Strategy& based in Beirut. A member of the firm’s communications and technology practice, he specializes in strategy development for telecom operators.

This report was originally published by Booz & Company in 2012.

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Executive summary

Residential consumers are demanding more and more cloud computing services and storage, and the volume of data they want to store in the cloud is substantial. Given how much multimedia data the typical family maintains, the dormant demand for cloud storage is already between 2 and 5 terabytes of data, and it will likely increase by a factor of 10 within the next five years. Various service providers such as Apple, Google, and Microsoft, and small but agile niche players such as Dropbox, are driving the consumer cloud market, currently offering 100 gigabytes of storage for about US$20 a month. Clearly, however, the price is still unacceptably high for most families, and the amount of storage offered is not nearly enough. This situation offers telecom operators one of the most significant opportunities for additional revenue to come along in years, if they can use their inherent advantages to play successfully in the cloud infrastructure game — if not in cloud services. Telecom operators know how to manage large-scale infrastructure in a reliable, secure manner; they understand their customers’ needs; they can manage their networks to optimize the user experience on different devices in different settings; and they can make use of their unique customer-facing capabilities, including billing and customer relationship management practices, to tailor their offerings to particular segments of their customers as needed. However, operators must move fast and be decisive if they are to seize this opportunity. Each company must define for itself its distinctive, optimal way to play in the cloud, tailoring its way to play to its unique footprint, geography, network infrastructure, and customer base. Timing will be particularly critical in scaling up the telecom infrastructure to the degree that will be required, and in putting in place the capabilities needed — in particular,

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deep customer understanding, infrastructure scale-up and management, and ultimately the end-to-end integration of cloud infrastructure, network, and cloud devices in a secure and reliable way — to gain the clear right to win.

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Emerging demand

Business and consumer interest in cloud IT services has clearly increased over the past year. Despite the occasional security and continuity setbacks, cloud IT offerings — whether through publicly accessible services, privately gated services, or hybrids — are on the rise, particularly for corporate customers. On the consumer side, this development has just begun. Companies are creating more and more services — some as simple as basic file storage — to satisfy the rising demand from residential customers for cloud services. Most prominently, Apple recently launched its iCloud offering with a huge burst of marketing. These efforts are geared toward meeting consumers’ rising demand for space to store and share their growing amounts of data and to be able to access that data across an ever wider variety of devices. Consumers around the world are buying up huge quantities of all kinds of smart devices — smartphones, MP3 players, tablets, and smart TVs, as well as more traditional PCs and notebooks (see Exhibit 1, next page). Almost 1.5 billion mobile phones will be sold worldwide in 2012, and up to 40 percent of them will likely be smartphones. In developed markets like the U.S. and Europe, more than threequarters of the population is expected to have smartphones. Most smartphones currently provide 16 to 64 gigabytes of data storage, enough to hold the great majority of most consumers’ music, pictures, and application data, along with a reasonable number of video clips. That will suffice for today. As the amount of content owned by consumers continues to multiply, however, their storage demands will also grow, as will the storage capacity of their devices. By 2020, individual smartphones will most likely offer as much as several hundred gigabytes of storage. Unsurprisingly, consumers are already demanding the right to consume all of their media across all of their devices, as seamlessly as possible, at home, in public, and at work. But the sheer amount

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Exhibit 1 Sales of devices will continue to grow steadily over the next several years
Global device sales forecast, 2008–15

Units/ year in millions

3,500

3,413

3,030
3,000

2,785 2,508
2,500 1,570 Standard phones

2,252

1,540

2,000

1,865
1,494

1,535

1,500

1,463

1,493
1,220

1,429 776 Smartphones

677 1,000 921 895 561 458 362 500 252 140 150 0 285 175 138 271 18 210 146 65 245 151 120 265 190 390 465 Notebooks 445 Tablets

280 156

340 159

158

157

PCs

2008

2009

2010

2011

2012

2013

2014

2015

Source: IDC; Gartner; iSupply; Strategy& analysis

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of data they hope to store and share will make it increasingly difficult to maintain identical sets of data across all devices. Thus, as the amount of data belonging to the typical household explodes, merely synchronizing the many devices each household owns will become hopelessly impractical. Already, the dormant demand for cloud storage is 2 to 5 terabytes, and it will likely increase 10-fold over the next 10 years (see Exhibit 2, next page). If that exponential growth continues, consumers will seek one of two solutions: keeping files on devices at home (with all the cost and complexity of maintaining the necessary hardware), or moving them to outside, cloud-based servers (which would be easier to maintain, and probably more cost-effective). In the long run, the only viable alternative will be the cloud — both for storing all this data and for making it available on the many devices on which people expect to be able to access it, from anywhere, at any time. To be sure, the cloud solution requires that a broadband network is available and that the data can be stored on a reasonably reliable and secure cloud service. But that’s exactly where the opportunity for telecom operators lies. Given the level of demand, and the sheer volume of data that will need to be stored and sent around, the market for low-cost consumer cloud storage will explode in the next several years. We expect that managing this data volume across multiple devices and networks will substantially affect the entire structure of the whole communications industry — not just the storage infrastructure but the broadband data networks as well. What will this new market look like, and who is most likely to benefit?

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Exhibit 2 The amount of media content owned by households is exploding
Accumulated digital content per household
40 35 30 25 Terabytes/ household 20 15 10 5 0 2006 2010 2015 2020
Home entertainment Retail home video Gaming Home backup Personal data

Source: Strategy& analysis

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A range of service providers

Until recently, the primary market for cloud computing was the corporate world, where data centers and cloud services have already become relatively common. In 2010 and 2011, cloud services began to proliferate for consumers, starting with sites for posting and sharing videos and photographs, and then moving to documents and projects (including places for children to post and collaborate on schoolwork). These services are evolving rapidly now, as a variety of companies — large players like Apple, Microsoft, and Google, and smaller, niche firms such as Dropbox — begin to offer consumers a range of online services. These services are being marketed largely through so-called premium plans: Initial membership is free, while full-service licenses have a monthly or yearly charge, typically ranging from a few dollars per month for a minimal amount of storage space to $20 or more monthly for a larger amount, such as 100 gigabytes. Companies are taking different approaches to the consumer cloud. In some cases, the actual cloud infrastructure is not exposed to the customer; rather, it becomes an invisible but integral part of the offering. Apple’s newly rebranded iCloud is perhaps the most prominent example of a cloud service that does not focus on the actual infrastructure. Instead, it provides a “walled garden” solution that allows owners of Apple devices access to their Apple applications (iTunes, iPhoto, Keynote, Numbers, Pages), content sharing among these applications, and simple cloud storage. Of course, other big players such as Facebook also offer de facto cloud storage space as an integral part of their service. Providers such as Dropbox, on the other hand, focus specifically on the bare-bones cloud infrastructure, selling primarily storage space in the cloud combined with some limited services and a convenient user interface. As such, they provide the basic infrastructure for services, which then make use of that infrastructure in various ways. Certain apps in the iOS App Store, for example, rely on the use of a Dropbox account. The service is easy to install and provides a highly transparent cloud-based “hard drive” visible across all of the user’s various devices,
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Companies are taking different approaches to the consumer cloud, selling it as storage space or as an integral part of a service.

no matter which operating system or platform is being used. Dropbox typically charges $20 a month for 100 gigabytes of storage, although an initial 5 gigabytes is free. Microsoft’s consumer cloud offering to date is heavily tied into its cloud-based work environment, particularly through its omnipresent Microsoft Exchange service. It provides customers with a cloud environment of their own, with access from various connected devices such as iPads and home PCs. It also provides an effective, seamless way for corporations and their employees to integrate their files while maintaining a high level of security. Consumers looking just for storage solutions can also create their own private cloud at home, through one of several possible hardware options. Previously reserved for high-end markets, network-attached storage (NAS) systems have become increasingly common, particularly as consumers migrate from desktop PCs to notebooks and tablets, since without a desktop computer, there is no natural place for large amounts of storage at home. The simplest options involve hard drives attached directly to the router that distributes broadband throughout the home. Installing and provisioning a full-fledged stand-alone NAS system, however, is likely not an option for most customers. Such systems require additional backup in case of failure, and accessing the data when not at home requires a robust household broadband connection and relatively complex setup procedures. Some consumer-oriented companies provide solutions; for example, Apple’s Time Capsule and video-sharing programs, built into its operating system, automatically maintain a hard-drive backup and device-to-device synchronization, keeping track of terabytes of data with minimal attention. But Time Capsule, too, requires some knowledge to set up. Moreover, as computers, tablets, and smartphones proliferate, many consumers will lack the skill and time required to maintain, in effect, a complex home-based data server system for their families. And just the power needed by a NAS system may cost as much as $200 a year.

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Local versus global delivery

The market dynamics of cloud infrastructure, the network of hardware and connections that gives people access to storage, are quite different from those of cloud services — the range of services and software that people use when online. Thus, the race to provide consumer-oriented cloud infrastructure and services will lead to a separation of the two and a restructuring of the entire cloud computing industry. This separation can be traced to the essentially different means by which services and infrastructure will need to be scaled up. Cloud service providers primarily offer the software that is visible to consumers as they manage their use of the cloud, with the underlying infrastructure typically hidden. Because software by nature can scale up quickly and globally, these providers can operate in very specific niche environments, offering specialized services to relatively narrow groups of consumers living around the world — and maintain quite profitable businesses as a result. Cloud infrastructure providers face a very different challenge. As the demand for cloud storage rises, and the business becomes increasingly commoditized, prices will drop quickly. In five years, consumers might be able to buy 2 terabytes of storage for less than $20 a month, the same price they currently pay for 100 gigabytes. This underlying drop in cost — a factor of 20 — will not be met through the operation of Moore’s Law alone, but rather through the raw power of operational scale effects and the resulting operational excellence in local data centers, as well as by bundling storage offerings with telecommunication network services. Therefore, companies hoping to compete in the cloud storage market will need to massively and rapidly scale up their data centers to maintain a competitive cost structure (see Exhibit 3, next page). Among the requirements will be optimized data centers greater than 10,000 square meters each, dedicated solely to low-cost storage, and colocated with the broadband network infrastructure for maximum performance. Providers must be able to continually expand and optimize every aspect of their operations, from manpower and
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Exhibit 3 The cost of cloud storage will decline rapidly over the next several years
Provider cost structure per terabyte of cloud storage, 2012–20
$10,000

$1,000

Cost/ terabyte (US$)

$100

$10

$1 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Strategy& analysis

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maintenance to the sourcing of equipment, space, and power. As storage increases, capital expenditure will continue to grow, totaling several hundreds of millions of dollars for a typical midsized operator. In this environment, a critical question arises: Which players will be able to scale up their infrastructure offerings to the size required, and will it be a local or global scale game?

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Operators’ right to win

As the number and sophistication of cloud services for consumers continue to grow, traditional telecom network operators face the distinct possibility of being pushed aside, with their networks being used as mere bit pipes for the massive amounts of data traveling between consumers and their clouds, reducing them to mere commodity providers. Yet the underlying infrastructure needed to support the consumer cloud — both the robust broadband networks and the necessary storage — will have to grow just as rapidly to keep up with demand. For operators, this offers the single most important growth opportunity in a long time — potentially reversing years of increased competition, market consolidation, and declining revenues. Building and maintaining the infrastructure, however, will be a considerable challenge. In a midsized European country such as the Netherlands, between 1 million and 2 million families will likely be using substantial cloud services by 2015. The total cumulative investment to support the necessary cloud services at this level, including the truly scalable infrastructure, will likely be about $300 million over the next three to five years, making the scale-up of cloud infrastructure the largest ongoing industry investment other than the current fiber and LTE broadband build-out. Cloud infrastructure could contribute as much as 20 percent of future revenue from key customer segments. And it could be broadly selffunded, even during scale-up, if the timing is managed right. Should operators enter the cloud infrastructure space? The answer is largely dependent on whether they can define for themselves a clearly articulated way to play and defend their right to win by developing a strongly differentiated set of key capabilities in this domain. Already, some operators have demonstrated that they can combine their network transport capabilities with cloud service provisioning to differentiate themselves from cloud infrastructure and service providers that operate independently of the networks.

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The delivery of high-definition video is a case in point. Here, network operators can clearly establish an advantage on quality as well as on cost. Because their network technology allows them to optimize the content, depending on the customer’s particular broadband network, the cost of delivery can be contained. Similarly, their network quality of service (QoS) technology can ensure that the content is best suited to the device it is being consumed on — whether it is an HDTV set, an iPad, or a smartphone. Data backup operations, too, could be optimized for improved delivery depending on the user’s device and type of broadband network. It could also be tailored to varying customer needs through specific QoS packages with guaranteed upload and download speeds. Standard backup processes could be replaced by synchronizing content on various devices and then allowing the cloud to become the final backup. Thus, uploading and downloading new data to be backed up could be managed as a function of the broadband network context, timing it to take place only when the customer is connected to his or her home wireless network, for instance. In addition to their technological advantages in combining their networks and cloud infrastructures to offer higher quality at a lower cost, operators could also bring to bear their deep understanding of the local market and customer base. They have an established billing relationship with their customers, allowing them to adapt their offerings to different segments to secure customer satisfaction and retention. Indeed, operators typically know how to segment and address their customers, they have a good reputation for managing large-scale secure infrastructure, and they can flexibly adapt to local legislation and regulation. Overall, the combination of cloud and network infrastructure management with a good understanding of the customer and the local market situation gives operators a clear right to win in offering consumer-centric cloud infrastructure.

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Executing the way to play

The stakes are high in the race to capture value in the consumer cloud space. Therefore, network operators need to move fast and be decisive in defining their optimal way to play in the cloud. How they do so will ultimately depend on their market footprint, geography, network infrastructure, and customer base. However, they must also be specific in defining a way to play that gives them a clearly articulated right to win. The way to play for an incumbent national operator will differ from that of a mobile low-cost challenger. The value lies in building a coherent, differentiated set of capabilities and getting the timing of the scale-up right, a choice that will depend greatly on how well a player understands its local markets. • Operators should begin by assuming that very few cloud service providers will be willing or able to take the risk to scale up their own cloud infrastructures to the degree required. Thus, operators will need to take a three- to five-year perspective in building their scalable cloud infrastructure. Then they have to be ready to open this cloud infrastructure and operating model to third parties based on well-defined open interfaces. • Operators must also clearly differentiate their consumer cloud offerings from any corporate public cloud services. In doing so, they need to offer retail customers a simple user interface, easy-touse consumer-oriented processes, and personally tailored service levels, all integrated with some social network services. For many operators, this will mean investing in (or acquiring) interface and design capabilities that they have not needed in the past. • Operators must invest in up-selling capabilities for their cloud infrastructure that will enable them to add as much as $10 to $20 in revenue per month to their existing revenue base for some 10 to 20 percent of their key customers, while selling more incremental services to the remaining customer base.

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• Operators need to be ready to scale up their offerings to terabytes of storage for millions of users, if required, while maintaining an attractive cost structure throughout the scale-up. This will require investing in substantial operational capabilities in scaling up cloud infrastructure. • Operators need to get the timing of the scale-up right. Then they must make sure they have the strategic suppliers in place to ensure access to additional hardware, space, power, and the like. And finally, they must be able to design their data centers to achieve the lowest possible operating cost.

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Conclusion

The burgeoning market for consumer cloud services presents operators with a significant growth opportunity. To gain a clear right to win in the residential cloud space, however, they must combine their cloud and network infrastructures in a differentiating way and with a focus on their specific geography, markets, and related customer segments. And they will have to carefully define their specific way to play in this game. In doing so, they must develop clear answers to the following questions: • When should I invest in cloud infrastructure, and to what extent? • How can I best leverage network infrastructure together with the cloud? • On which segments should I focus initially, and in the long run? • Which services should I provide on my own, and with whom should I partner? • Which capabilities do I need to invest in and develop? • How can I best interact with a wide range of third parties?

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This report was originally published by Booz & Company in 2012.

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