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There are cynics who would argue that cloud is ‘merely an architecture’, just another name for Internet stuff. Oracle’s Larry Ellison once said “I can’t think of anything that isn’t cloud computing!” In one sense, you could see his point. Computing has certainly been distributed for some time now. Even in POTS, the architecture for voice service delivery doesn’t sit in your telephone. So you can argue that cloud is merely a language to describe a pre-existing, or already transforming architecture. But to do so would be to miss the point.
The clouds that are developing today are not merely about applications, but about open platforms. We are seeing more and more standards being adopted for core cloud operations and interoperability, applications development environments emerging, and resources being exposed through open interfaces what were previously intended for a single client. That exposure of physical, data and application resources to indeterminate and potentially unlimited clients facilitates the integration of commerce and industry. It also, of course, reallocates cost – and that is the driver for its adoption.
Cloud: It’s Cheaper, Right?
In the first instance, cloud is often about cost reduction. Most enterprises have been introduced to the cloud through software as a service, or hardware virtualization. Rather than having to size and cost a software implementation with five year adoption charts and predicted utilization, enterprises were being offered a pay as you grow model, that shifted the cost back onto the service provider, who could in turn achieve economies of scale through multi-tenancy and virtualisation technologies that were simply closed to individual enterprises. The overhead and exposure of the conventional data centre were minimised, and the cost of stranded assets eliminated. Similarly, hardware virtualization was simply a way to improve asset utilization in the data center.
The adoption of enterprise private clouds similarly abstracts – or virtualizes – the enterprise computing capability for consumption by unenumerated applications. This time the enterprise is internally reallocating cost, avoiding the siloing of cost into application stacks, departments, or business units. In particular, the cost of test and development environments for new applications or new capabilities is significantly offset by utilizing uncommitted capacity in production environments or other physical assets that can be isolated from the mission critical computing flow, and exposed for alternate use.
Now, software as a service, or cloud computing, while tending to be more efficient, doesn’t necessarily cost any less than ‘conventional’ adoption. A software stack for – for example human resources – may actually end up costing more than it would have done had the enterprise decided to do an upfront deal, buy some hardware for the data center and a perpetual license for the software. The economics of the transaction are such that the provider of the human resources system will have to charge more if the return is spread over a number of years with an indeterminate outcome. However, this increased cost to the enterprise only occurs when the implementation is considered as a standalone capability. When we consider the entirety of the enterprise systems domain, invariably there are savings made.
Cloud: It’s About Agility, Right?
Here, however, is where the story gets interesting. Whether or not cloud services save the organisation money, they offer an extraordinary transformational potential to the enterprise. The agility that attaches to cloud infrastructure provides great ability for the enterprise to make faster decisions, to repurpose resources, and exploit market opportunities. In telecommunications, it enables service providers to react quickly to competitive manoeuvres, and quickly scale up capability where required, while minimising the exposure to poor decisions should the market turn.
With this level of agility, the market minimizes imperfections, anomalies, and waste. The market – generally – becomes more efficient, and suppliers become more accurate. While the enterprise reallocates cost in a cloud environment, and more tightly allies cost to revenue, there is a further – perhaps unintended – effect. Value itself is redistributed, closer to the players in the ecosystem who invest most in the overall economy. For telcos, the commoditization effect of cloud architectures strips differentiation away from core services and exposes them to the ravages of the commodity market. From that exposed position, value becomes isolated to the brand, and drifts to the applications that run across the top. However, all is not lost in this apparent bit-pipe dystopia.
Cloud Wars IV: A New Hope
If the enterprise is providing a service – let’s say voice and data connectivity – then there is a certain amount of value that is being provided. The ecosystem within which this service is delivered, however, has latent value that either remains unexploited, or is exploited by opportunistic third parties, such as over the top service providers. Therefore, in opening up the platform, service providers are unleashing a latent value in the digital engagement ecosystem, while at the same time – in large part – remaining unable to capture it.
If a customer pays $10 for an amount of service – let’s say a month of connectivity – then the $10 goes to the service provider, and the service provider spends $8 on operational costs and maintaining the network and so on, and returns $2 to its shareholders in the form of appreciating share value, dividends, or some other mechanism. However, the platform upon which this connectivity is being served has also yielded a trove of information about the customer engagement, behaviour and preferences, and has facilitated the execution of commerce. The platform, provided by the telco, is essentially the shop floor of digital commerce.
Now – hold that thought
Increasingly, retailers are viewing themselves as platforms. They sell, or auction, shelf space, floor space, and advertising inventory. They facilitate their suppliers to sell directly to their customers. They are landlords, perhaps, and the real retailers are the merchants who are selling through the high street store to the consumer. The retail store – just like the digital commerce site, like Amazon Marketplace – becomes a platform. More and more, retailers are not carrying substantial inventory. Some retailers carry ‘own brand’ merchandise, with complex economic models behind them. But ultimately, by abstracting the service they provide in the ecosystem, they reduce their risk and exposure to excess inventory, fluctuating commodity prices, and even the weather. A retailer that never takes ownership of inventory could be referred to as a fully transformed retailer.
So, let’s go back to the telco. If digital commerce is being executed on the telco platform, and if all commerce is digitizing, then that space can be treated in a similar way to a fully transformed retailer. Just as the retailer will provide information to the manufacturer about the context for trade in terms of footfall, location, and behaviour, so too the fully transformed telco can offer the same environment within which it can facilitate commerce. In that environment, value begins to reorganise itself. The value of the digital service platform is not merely in its connectivity – the core utility that is being provided by the telco – but also in the metadata that the customer engagement yields.
The total value in the range of vision of the service provider is now significantly increased. There is value that accrues to the customer, but there is also value accruing to merchants who can execute more accurately on the digital platform because they have access to relevant and appropriate customers who are more likely to transact. In essence, the telco is facilitating merchants in selling to customers who want to buy. Now, we have two groups of value, the connectivity (utility) value to the consumer, and the metadata / commerce value to the merchants. This value gets socialised around the ecosystem; working both value groups allows the service provider much greater business agility.
How About A Formula?
Theoretically, this digital commerce ecosystem allows the service provider to deliver the core utility service for free, as long as its metadata monetization infrastructure is sufficiently mature and robust. While that might sound like a ludicrous proposition, consider this: most telecommunications service providers today are giving away the entire metadata monetization revenue for free. That is how Google, and Amazon, and Facebook, and all the rest of the so-called ‘over the top’ players are growing so fast – their raw material is free! Further than that, the model is maturing to the point that even with sunk costs – like Google Fiber – they can still offer the core service for free, while monetizing on the back end.
If the revenue from the consumer is A, and the revenue from the merchants is B, and the cost of operations is C, then all that is necessary for a viable business is that A + B > C. The profit in the business P = A + B – C. Now, presuming this to be true, and applying very simple algebra, not only can A = 0 (so long as B > C), but it is also possible for A < 0 (having B > (C – A))! What that means is that telcos could actually pay people to be their customers, if their metadata monetization function was sufficiently robust. However, when the revenue from the merchants (B) is persistently zero, that forces a requirement for A > C in order that P > 0.
Now, given the nature of the domain – the platform, after all, is open, whether that’s Windows, or Android, or iOS – that genie is out of the bottle. So it’s not like telcos can start charging Google or Apple for the third party revenue that they are securing. But it is certainly possible that service providers can begin to monetize the data that they currently capture in the first instance through advertising and targeting by sharing anonymized data through the ad-tech environment, and ultimately by exposing a comprehensive commerce architecture to merchants and (in particular local) businesses. Integrating that data capability with payments, coupons, and cloud services like machine to machine, eHealth and smart meters can ultimately provide a very rich commerce platform for merchants.
Telcos don’t need to be global in order to compete with the over the top players. They don’t need to be part of a consortium, or a payments platform, or anything like that. They just have to stop thinking like telcos, and start thinking like retailers, like merchants. The key question telcos should ask is “How can those guys – merchants – sell more stuff or reduce their cost of operations based on what we have?” The answer is actually more immediate, and more immediately monetizable than you’d think. It’s just about applying what you already have, in an intelligent, smart way. I gave some hints towards it in a recent blog on the subject. I’ll post some more on this later.