Extending the Wholesale Economy Into the Cloud Ecosystem

THE DELTA PERSPECTIVE into thecloudecosystem Extending thewholesaleeconomy Tamer Ovutmen-SeniorEngagementManager Sam Evans-AssociatePartner April 2018 The report has been comissioned by the ITW Global Leaders’ Forum and developed by Delta Partners. Delta Partners is a leading advisory and investment integrated platform globally. We are a unique hub for people, capital and knowledge to address challenges and opportunities in a transforming TMD industry. Our unique business model enables us to serve our TMD clients through our three business lines, Management Consulting, Corporate Finance and Private Equity. For more information please contact Sam Evans at: [email protected] THE DELTA PERSPECTIVE

Extending the wholesale economy into the cloud ecosystem

Authors: Sam Evans - Associate Partner Tamer Ovutmen - Senior Engagement Manager

3 THE DELTA PERSPECTIVE

CONTENTS

Executive Summary 5 List of Exhibits 6 Part 1: Changing Internet Dynamics 7 1. Emergence of a new economy? 9 2. The Growth of Intra-Regional Traffic 13 3. Global Cloud Providers and MNCs – A Source of Growth? 14

Part 2: The Internet Extension: How Internet Players Have Become Global 17 Network Infra Providers, And Its Impact on Global Network Infrastructure Provision 1. IP Traffic concentration motivates network infrastructure focus 19 2. Global cloud providers Infrastructure as a Service 24 3. Specialist service providers enabling expansion of ‘Cloud Providers’ 26

Part 3: Expanding the Wholesale Economy and Creating Interfaces with Cloud 28 Providers 1. Extending international carriers’ wholesale economy 30 2. Key Questions for International Wholesale Carriers to consider 34

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EXECUTIVE SUMMARY

1. International wholesale carrier business is undergoing a period of transformation driven by global cloud provider traffic growth, core product monetisation challenges and shift in Enterprise purchasing behaviour.

2. Internet traffic growth is increasingly greater for intra-regional than inter-regional – as traffic patterns shift, so does potentially the opportunities to capture value

3. Future carrier growth will require accessing a share of value from the Cloud economy resulting from which they can strengthen their MNC proposition. The demand in both industry segments will increase but international carriers’ ability to monetise under the status quo is not guaranteed.

4. As the leading global cloud providers scale there is an increasing rationale for self-provision to manage the definition and costs of their networks – several providers are creating scale within sub-sea cable, long-distance fiber and data assets, which are not being included in the wholesale economy.

5. Having developed this scale global cloud providers are extending their network infrastructure to offer IaaS to customers, increasing competition in the Global Services market.

6. Whilst they may be developing international network infrastructure outside of the traditional wholesale economy Global cloud providers are working with specialist partners to build their capabilities. This suggests an opportunity for engagement continues to exist.

7. To increase international carriers’ proposition to Cloud providers to develop an inclusive wholesale economy they can consider developing a “Cloud and Connectivity Enablement” business model that leverages data centers and international fixed infrastructure to enable digital services

8. To build cloud and connectivity enablement capabilities required to incentivise Cloud providers to enter the wholesale economy, carriers need to strengthen capabilities in data center, managed networks and cyber security, hybrid cloud and IaaS, build the commercial frameworks to enable settlement for an expanded set of products and services, and organize themselves to most effectively interface with Cloud providers.

5 PART 1 CHANGING INTERNET DYNAMICS

This section of the report explores the conditions in which a new Cloud-driven economy is emerging, the drivers of this change most relevant to the carrier services business model and the implications on the sources of potential future growth

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International wholesale carrier business is undergoing a period of transformation driven by global cloud provider traffic growth, core product monetisation challenges and shift in Enterprise purchasing 1 behaviour.

Internet traffic growth is increasingly greater for intra- regional than inter-regional – as traffic patterns shift, 2 so does potentially the opportunities to capture value

Future carrier growth will require accessing a share of value from the Cloud economy resulting from which they can strengthen their MNC proposition. The demand in both industry segments will increase but international carriers’ ability to monetise under the 3 status quo is not guaranteed.

PART 1: CHANGING INTERNET DYNAMICS 7 THE DELTA PERSPECTIVE

1. Emergence of a new economy?

The traditional wholesale economy

Through their expansive network coverage and role enabling Whilst there are several drivers of the emergence of this the ubiquity and interoperability of the global telecoms Cloud-driven economy, there are three of particular market international wholesale carriers have developed a relevance impacting how international carriers should mature business model built upon the trading of capacity. assess this evolution: This trading of capacity has created an economy between carriers built on technical interoperability and common 1. Data traffic growth is being concentrated within settlement mechanisms where there are shared incentives global cloud providers: whilst global IP traffic to trade. continues to increase rapidly (c.27% annual growth between 2011 and 2016), most of this growth in traffic However, the international telecoms market has entered is driven by cloud traffic; the cloud traffic grew 54% a period of sustained transformation where the share annually between 2011 and 20161 of value is increasingly migrating to a separate economy driven by global cloud providers. Relying solely on the 2. Demand for network capacity is decoupling from traditional international carrier wholesale economy may monetisation: despite both transit and peering not be sufficient to capture of a fair share of growth going volume continue to grow, IP transit-related revenues forward, and carriers need to understand how they can are forecasted to fall from $3.6 billion in 2016 to $3.2 create a wider reaching economy that covers all types of billion in 2017 and $1.8 billion in 20222. New engines telecoms network wholesale providers regardless of their will be required to ensure and sustain carrier growth. business origins. 3. International Enterprise buying behaviour is evolving – the purchasing behaviour of large

1 Cisco - Visual Networking Index 2 TeleGeography - IP Transit Forecast 2017

EXHIBIT 1: Global IP traffic and global cloud traffic (2011-2021)

Global IP traffic (Access) by Network type Global cloud traffic (EB/month) (EB/month)

Fixed internet CAGR Managed IP Mobile data 281 +33% 1,600 48 +62%

46 +26%

96 499 7 187 +31% 23 29 7 1 66 57 21 2011 2016 2021 2011 2016 2021

Non-Data Center 6 18 55 Share of global traffic cloud traffic in 39% 88% 95% Data Center to data center User traffic (B) 23 78 226 traffic Source: TeleGeography - IP Transit Forecast 2017

8 PART 1: CHANGING INTERNET DYNAMICS THE DELTA PERSPECTIVE

EXHIBIT 2: IP transit prices for 10GE by region and median 10GBPS wavelength lease prices

Weighted median global IP transit prices per Mbps, 10 Gigabit ethernet, Q2 2014-Q2 2017 ($/Mbps)

2014 2015 2016 2017 2016-17 CAGR 14-17 London 1.28 1.00 1.00 0.61 -39% -22% Madrid 1.37 0.99 0.75 0.54 -28% -27% Europe Moscow 2.05 1.19 1.00 0.67 -33% -31% Stockholm 1.25 1.01 0.82 0.57 -30% -23% Chicago 1.61 1.13 0.97 0.60 -38% -28% Los Angeles 1.56 1.18 1.00 0.88 -12% -17% North America Miami 1.75 1.17 1.13 0.80 -29% -23% New York 1.63 1.11 1.00 0.78 -22% -22% Toronto 1.26 1.11 0.88 0.67 -24% -19% Hong Kong 6.00 4.13 3.10 1.83 -41% -33% Mumbai 14.16 9.97 9.32 7.69 -17% -18% Asia Singapore 5.84 4.00 3.11 1.79 -43% -33% Sydney 17.93 14.25 9.97 7.51 -25% -25% Tokyo 6.00 5.00 3.00 2.24 -25% -28% Buenos Aires 14.17 15.49 12.09 7.80 -36% -18% Mexico City 1.40 0.95 1.79 1.63 -9% 5% Latin America Santiago 17.70 12.80 11.09 9.62 -3% -18% Sao Paulo 17.81 14.13 5.19 4.62 -11% -36% Notes: Prices represent the weighted median monthlyprice per Mbps for a full-port commit in the listed city. Data derived from Q2 of each year. Prices are in USD and exclude local access and installation fees. 10 Gigabit Ethernet (10 GigE) = 10,000 Mbps Source: TeleGeography

international enterprises is transitioning away from global cloud traffic in data centre traffic increased from ‘one-stop-shop’ models to disaggregated purchasing 39% in 2011 to 88% in 2016 and will become 95% of from multiple specialist providers. The volume of major total data. deals (+$1m) in global services declined by 11% in 2016 vs 2015 for leading international carriers AT&T, BT, Orange, T-Systems, and Verizon3. Implications for carriers Data traffic growth is being concentrated As global internet traffic is increasingly data center to user traffic driven by cloud providers, international within global cloud providers carriers need to consider how they can develop a In the last five years, there has been a significant increase in proposition to capture sustainable value from this data traffic globally and the trend is expected to continue in market the next five years. The global IP traffic had been growing c.27% annually between 2011 and 2016 where the total volume increased from 29 Exabytes(EB) per month in 2011 to 121EB in 2017. Going forward similar annual growth Demand for network capacity is rate is expected in IP traffic and it is forecasted to increase to 281EB by 20214 (Exhibit 1). decoupling from monetisation

In parallel, the growth in global cloud traffic is one of the The increasing data traffic is not necessarily reflected in main drivers of internet traffic growth. Between 2011 and pricing of carrier services as, whilst the data traffic increases 2016, the cloud traffic grew c.54% annually (compared significantly, the prices in carrier services are declining. For to c.33% internet traffic growth) from 57EB per month to example, In Europe, the IP transit prices for 10GE decreased 499EB, and it is forecasted to continue to increase by 27% from $13.1/Mbps in 2013 to $5.7/Mbps in 2016. During annually till 2021 and reach 1.6 Zettabytes5. The share of the same period, these prices decreased from $13.7/Mbps

3 Ovum - Global services outlook 2018 4 Cisco - Visual Networking Index 5 Cisco - Visual Networking Index

PART 1: CHANGING INTERNET DYNAMICS 9 THE DELTA PERSPECTIVE

to $8.4/Mbps in North America. In parallel, the median high prices as they have greater potential to fall due to 10Gbps wavelength lease price in London-New York increases in volume and local traffic exchange that improve connection declined from $140k per month in 2010 to economy of scale. The price variance adds complexity to $35k per month in 20156. the provisioning of international network solutions and that reducing this variance will support the industry’s ability While the prices have declined globally converging across to move more quickly / dynamically. regions, significant geographic differences persist as pricing reflects the complexity of the connection. To illustrate, the In addition to declining data prices, international fixed and Singapore 10 GigE price is three times more expensive than mobile termination rates have declined at ~6% historically. a port in London, while São Paulo is six times the price in Only difference the termination rates are expected to flatten New York. IP transit in Sydney is eight times more expensive out/slowly increase in the upcoming years. Going forward in the United States, largely due to the underlying cost to ensure and sustain carrier growth new monetisation of transport across the Pacific to access global internet engines will be needed e.g. new products and services hubs. IP transit service can be expensive outside of primary enabling cloud services. transit hubs, particularly in remote locations with limited bandwidth supply and competition, such as sub-Saharan Africa and remote island nations. Implications for carriers

IP transit prices continued to decline and, the prices of With a sustained decoupling of the demand and high-growth, high-price markets are getting closer to more monetisation of some traditional wholesale carrier established hubs. If the relative decline of transit continues, products, beyond reducing the cost to serve and drive IP transit-related revenues would fall from $3.6 billion in technical efficiencies, international wholesale carriers 2016 to $3.2 billion in 2017 and $1.8 billion in 20227, even may need to diversify their service offerings to create as both transit and peering volume continue to grow. The new growth engines rate of decline would be greatest in emerging markets with

6 TeleGeography - IP Transit Prices 7 TeleGeography - IP Transit Forecast 2017

EXHIBIT 3: Overview of fragmentation in global services product portfolios

Unified Software as a Bespoke apps IT consulting Applications communications Service

Software Added value MI Cloud broker IT support integration and customisation tools Managed connectivity

Video calling and Fixed-mobile conferencing convergence Software and services Software Ethernet Messaging Call routing

Voice security Conference calling Platform as a Website Private cloud Service hosting Mobile Multi-site Wholesaled from (PaaS) enterprise MNOs VoIP Hosted PBX

Call recording Disaster recovery Disaster Infrastructure as a Colocation Data security Data centres recovery Service (IaaS)

Infrastructure Fixed line Traditional PBX

Enterprise Telecoms System integrator Layer specialists ICT infrastructure

Traditional providers Specialists Emerging providers

Source: Delta Partners analysis

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International Enterprise purchasing Resulting from this market evolution is a shift in value behaviour is evolving within the industry. For example, five leading operators (AT&T, BT, Orange, T-Systems, and Verizon) reported major International enterprises are undergoing a transformation deal volumes in global services down 11% in aggregate8, in both their requirements for, and how they purchase, however there is growth in volume of smaller mid-market connectivity and IT services, provisioned traditionally contract values representing the increase in agreements. through carriers’ Global Services propositions. Where historically purchasing behaviour favoured a ‘one-stop shop’ managed via an enterprise telecoms provider and / Implications for carriers or systems integrator to provision the full suite of required Whilst market dynamics may be evolving challenging services, purchasing increasingly disaggregate with large the ability of telecoms providers to be the de-facto multi-national enterprises dealing with multiple specialist ‘one stop shop’ for Global Services, multi-national providers. This is being driven by several factors including: enterprise demand is increasing and will likely favour 1. Expansion of connectivity / IT purchasing remits specialist providers regardless of their background. with increasingly strategic considerations focussing customer-facing units

2. Increasing complexity of requirements heightens need for multiple specialist providers

3. Ability to offer asset-light software enterprise services reduces barrier to entry into the enterprise ICT ecosystem

4. Emergence of layer specialists creates competition at each layer of the stack – scale is no longer a determinant of success

5. Asset-light propositions reduce cost of switching for enterprises incentivising a continual assessment of market players

6. On-going technology innovation and the on-going emergence of new players reduces enterprise appetite for ‘lock in’

8 Ovum - Global services outlook 2018

PART 1: CHANGING INTERNET DYNAMICS 11 THE DELTA PERSPECTIVE

2. The growth of intra-regional traffic

As global cloud providers expand their reach, services Across most regions, intra-regional bandwidth is growing and bandwidth requirements network infrastructure is faster than inter-regional bandwidth and as a result share of increasingly becoming a strategic point of competitive intra-regional bandwidth in total bandwidth is increasing in advantage as well as an increased cost of doing business. all regions. From 2012 to 2016, the share of intra-regional For example, the impact of one minute of network bandwidth in total bandwidth increased from 36% to 44% downtime for Google or Amazon can equate to the in Asia, 3% to 12% in Africa, 13% to 14% in LATAM, and lost revenues from one minute of provisioning targeted 5% to 6% in Middle East. advertising or eCommerce sales and as such, is much more business critical than a minute of downtime than would In this context, it is critical that international wholesale have been the case to their traditional communications carriers develop and maintain strong propositions as part of network. A combination of these dynamics increase focus the Cloud wholesale economy to be the partner-of-choice on how network infrastructure can support user experience for intra-regional traffic originating from global cloud and and the underlying business model and as a result content content providers. is being moved closer to the network edge and the point of consumption. This is especially the case with video streaming services. Regional data centre presence and Implications for carriers CDNs have become key parts of the network infrastructure On-going growth in online content demand likely to ensure quality of distribution to the network end points. to sustain trend of greater growth in intra-regional Globally, 77% of all Internet video traffic will cross CDNs over inter-regional traffic due to cloud expansion and by 2021, up from 67% in 2016. When looked at overall operator caching content. International wholesale internet traffic, CDNs will carry 71% of traffic by 2021, up carriers could create value through focus on cloud from 52% in 20169. This leads to traffic being moved closer bandwidth enabling and supporting content players to the network edge with inter-regional volume being on reaching local operators. replaced by intra-regional.

9 Cisco – Virtual Networking Index

EXHIBIT 4: Intra-regional and international bandwidth evolution by region 2012-2016

Intra-regional and international Internet bandwidth (Gbps) 2012 2013 2014 2015 2016 % 2012-2016 CAGR

250,000

200,000

45% 150,000

100,000 46% 47%

50,000 45% 42% 58% 41% 25% 114% 45% 41% 56% 89% 38% 0 Inter - Africa - Inter - Asia - Int'l Inter - Europe - Inter - LATAM - Inter - ME ME - Int'l Inter - Oceania - Inter - US&CA - Africa Int'l Asia Europe Int'l LATAM Int'l Oceania Int'l US&CA Int'l

Africa Asia Europe LATAM ME Oceania US&CA Intraregional BW % total (change from 3% to 12% 37% to 45% 76% to 75% 13% to 13% 4% to 7% 5% to 14% 11% to 6% 2012 to 2016)

Source: TeleGeography, Delta Partners analysis

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3. Global cloud providers and MNCs – A source of growth?

Within this context of sustained industry transformation, • Physical security of data center location; services international carriers could look at global cloud providers available through a public cloud, or private clouds and multi-national corporation to underpin the next wave hosted externally with the cloud provider of growth. Whilst value in the industry may be shifting and new models emerging, international carriers continue to • No single point of failure: the multitude of hardware offer a compelling value proposition. The requirement for resources means that should one aspect of the international carriers is to ensure that these are traded in service fail the service will be unaffected an expanded wholesale economy rather than be subject to a dictated hierarchical structure playing the role of capacity vendor only. ii. Provide a proposition to incentivize partnership rather than self-provision

Whilst the scale of global cloud providers network Global Cloud Providers infrastructure requirements can create a rationale for self-provisioning there will still be opportunities for To ensure relevance with cloud players there are two carriers to offer compelling propositions. Traditionally, primary requirements for international carriers: internet players have favoured low-CAPEX models and i. Invest in local / regional infrastructure relevant to global continue to have lower CAPEX intensities than several cloud providers other categories of player in the telecoms value chain. International carriers can seek to position themselves ii. Provide a proposition to incentivise partnership rather as partners to these providers offering more flexible than self-provision business models, such as revenue sharing, pay-as-you- grow, and value based pricing. Depending on capacity requirements carriers can incentivize the cloud players i. Invest in local / regional infrastructure relevant to to use carrier’s infrastructure instead of self-provisioning global cloud providers with high-quality of service, managed-security services, on ground resources, local expertise and local access International carriers can deploy and manage regional networks. infrastructure including sub-sea cables, fibre networks and data centres, all assets required at a regional level For the second tier of smaller providers, such as by global cloud providers. In locations where the regional cloud providers, content, social media or cost, operational feasibility and regulatory barriers to commerce platforms, international carriers continue deploy might be high for global providers and in which to have a strong value proposition. Smaller providers there is a current under-penetration of non-carrier do not necessarily have the scale supporting the infrastructure, providing such assets in partnership economics for self-provisioned network infrastructure, under and Infrastructure-as-a-Service (IaaS) model or a business model where the network is a clear could provide a compelling proposition where the point of differentiation. It is international carriers complexities and expenses of managing the underlying who have the capability to aggregate. The amount of network infrastructure are outsourced. Such benefits to self-provisioning required to carry services like cloud, cloud providers of a model include but not necessarily gaming and IT security is extensive and they do not limited to: gain a clear competitive advantage by owning their network. To these second-tier providers, international • Scalability: resource is available as and when you carriers can provide a wide suite of Global Services need, no delays in expanding capacity or any where they have expertise, relationships and developed wastage of unused capability network infrastructure. Some of these services could include, but not be limited to: • Location independence: the service can be accessed from anywhere, so long as the security protocol lets it

PART 1: CHANGING INTERNET DYNAMICS 13 THE DELTA PERSPECTIVE

• Interconnection and hubbing (e.g., IPX and cloud interconnection services) Implications for carriers • Fraud prevention and security (e.g., protection against bypass fraud) There are opportunities to develop propositions for international cloud providers: i) offering more flexible • Cloud services and hosting (e.g., cloud-based business models for connectivity and provide special- unified communications) ist services with focus on tier-2 providers, ii) ensuring network interoperability and financial settlement • Internet of Things and machine-to-machine services (e.g., connected car services)

• Mobility (e.g., hosted mobile VoIP, support for roaming, and mobile payments) Extending cloud enablement capabilities • Putting more control in customers’ hands (e.g., to Multi-National Corporations customer APIs and portals) International Carriers’ infrastructure developed to serve Supporting these propositions, and supporting the cloud providers and internet players can be leveraged to opportunity for international carriers to be the point strengthen Global Services propositions to MNCs. For of aggregation are two critical wholesale components example, services developed relevant to cloud providers of enablement – network interoperability and financial such as data center, cloud Virtual Private Network (VPN) settlement. These enabling components ensure that and Security-as-a-Service can be extended to service other international carriers can aggregate at an industry level to verticals of Global Services business. This can help enterprise provide technical solutions across borders supported by a can construct their required international networks to common commercial framework.

EXHIBIT 5: Enterprise digital transformation model

Channel & Supply service chain provider

Digital Fully ecosystem connected network

R&D & manu- Fully connected Customer facturing network

Agile IT IoT

Transaction Industry service

Source: Huawei

14 PART 1: CHANGING INTERNET DYNAMICS THE DELTA PERSPECTIVE

connect customers, suppliers, distributors, and partners in Seeking a roadmap to expand the a single business ecosystem. international carrier wholesale economy

These services will also support MNCs on-going digital The challenge facing international carriers is that whilst they transformation efforts. Digital transformation is a top have, or can develop, relevant capabilities to play a part in priority for many MNCs to better serve customers and the emerging Cloud-driven global network infrastructure realise increased operational efficiency and international ecosystem, and have the potential to create further value carriers are well placed to support them in this process. By through using these capabilities to enrich Enterprise offerings 2018, digital transformation will be the key strategy for there is no wholesale economy in which a sustainable 67% of the top 2,000 global enterprises. By end of 2017, ecosystem encompassing both carriers and cloud providers over 50% of the enterprise IT budget will be spent on has been created. Sustaining a primarily customer-supplier new technologies . This represents a significant emerging relationship is likely to preclude international carriers from addressable market for Global Services, and one which capturing their fair share of value and lead to a market carriers should address. In doing so, international carriers where relationships with Cloud providers are consolidated will need to consider the enablers of international ‘digital by a small subset of providers. enterprise’ which will be consistent across verticals.

To become a digital enterprise, a company needs to build connections covering its people and things and, link its employees, customers, partners, and suppliers In the next two chapters of this report together. The company’s operations should be based on two main questions will be answered: Big Data and Artificial Intelligence (AI). On top of that, it needs to automate its business processes with built- 1. How are global cloud providers evolving in, real-time decision making to realize simple, efficient, and intelligent operations. As these requirements cross their business models to reshape interna- international networks, all provide potential opportunities tional network infrastructure? for international carrier service expansion. 2. How can international carriers extend Through digital transformation, international carriers could their wholesale economy to engage glob- go up the stack beyond connectivity and offer solutions al cloud providers in a sustainable ecosys- such as hybrid cloud, managed network, and security to become the solution provider for MNCs. Unlike already tem? digitized enterprises the long-established industries that are not digitised demand one-stop and local services, cloud- and-network synergy, and security. Carriers can leverage their strengths to help vertical segments integrate their fragmented networks and processes. By restructuring their business processes and network operations, carriers can enable the digital transformation of industries.

Implications for carriers

In developing capabilities to enable cloud providers, international carriers should consider how these could form the basis of an expanded Global Services service portfolio to MNC vertical enterprises

PART 1: CHANGING INTERNET DYNAMICS 15 PART 2 THE INTERNET EXTENSION: HOW INTERNET PLAYERS HAVE BECOME GLOBAL NETWORK INFRA PROVIDERS, AND ITS IMPACT ON GLOBAL NETWORK INFRASTRUCTURE PROVISION

This section of the report explores how and why global cloud providers become international infrastructure providers, and how this change impacts international infrastructure provisioning.

16 THE DELTA PERSPECTIVE

As the leading global cloud providers scale there is an increasing rationale for self-provision to manage the definition and costs of their networks – several providers are creating scale within sub-sea cable, long-distance fiber and data assets, which are not 1 being included in the wholesale economy

Having developed this scale global cloud providers are extending their network infrastructure to offer IaaS to customers, increasing competition in the Global 2 Services market

Whilst they may be developing international network infrastructure outside of the traditional wholesale economy Global cloud providers are working with specialist partners to build their capabilities. This suggests an opportunity for engagement continues to 3 exist.

PART 2: THE INTERNET EXTENSION 17 THE DELTA PERSPECTIVE

1. IP Traffic concentration motivates network infrastructure focus

Concentration of internet traffic The rationale for self-provisioned network infrastructure Internet traffic is increasingly concentrating within a small number of global cloud and content providers. Of the top Traditionally global cloud providers have been over-the- ten backbone providers, which account for approximately top players who used international carriers’ infrastructure 50% of international bandwidth only three (Telia, Level 3 rather than funding their own. These global cloud providers and Tata) are traditional international carriers, whilst the rest can be divided into two categories: (Google, YouTube, Netflix, Amazon, Facebook, Microsoft and Apple) are internet providers. Furthermore, fixed and • Tier 1 ‘hyperscale’ providers: these provider’s mobile internet traffic generated by Google (incl. YouTube, architectures is designed to provide a single, massively GooglePlay), Facebook (incl. Instagram), Microsoft, Netflix, scalable computing architecture. The architecture Amazon and Apple (incl. Appstore, iTunes) reached 63% of is typically made up of small, individual servers, network traffic in 2016, increasing from 47% traffic share called nodes, that provide computing, storage and in 2012. networking. They are often supported by their global market leadership in consumer digital service provision. These operators are the market leaders in the global Implications for carriers online market place for their service verticals e.g. Amazon for e-commerce, Netflix for video streaming, As the leading global internet / cloud providers Google for search and short form video (YouTube), and continue to expand their service offerings and Facebook. increase their focus on content, the trend of traffic concentration is likely to increase • Tier 2 providers: competitors in each vertical or platform type to the Tier 1 providers but offering smaller scale either in product suite, geographic reach or customers reach.

EXHIBIT 6: Share of fixed-mobile traffic generated by top 6 providers, globally and APAC

Share of fixed traffic generated Share of mobile traffic generated by top six provider1 by top six provider1

100% 100% 100% 100%

37% Global 53% 57% 51%

63% 47% 43% 49%

2012 2016 2012 2016

Notes: 1 Fixed + mobile traffic generated by Google (incl. YouTube, GooglePlay), Facebook (incl. Instagram), Microsoft, Netflix, Amazon and Apple (incl. Appstore, iTunes); Source: Sandvine, Delta Partners analysis

18 PART 2: THE INTERNET EXTENSION THE DELTA PERSPECTIVE

EXHIBIT 7: CAPEX investment of internet players

Evolution of capital expenditure for internet/cloud players ($m) Google Amazon Microsoft Facebook CAGR 2011-16 10,959 10,199 9,915 24%

32% 9,114 7,358 6,736 30%

5,294 6,552 4,589 5,687 49% 3,785 4,892 3,444 4,491 3,438 3,273 2,234 2,904 1,811 2,523 1,831 606 1,235 1,362

2011 2012 2013 2014 2015 2016

. Source: Ovum

Global content providers rely on connectivity to underpin 2. Faster time to market: ownership enables faster their business models and operations, which is critical to deployment and upgrades deliver seamless experience to users. As such, content is hosted on strategically located servers to provision each 3. Technological advancements: they are developing connected geography, and transit channels to connect all their own technology to reduce cost, carriers focus on points of presence in a seamless network. Given the extent traditional providers for technology of volume of traffic generated by these globally market- While global cloud providers have diversified their leading services, access to connectivity, from the content propositions across varied areas (e.g. Facebook’s Aquila provider perspective, is a cost of doing business that is drones, Internet.org, Free Basics, Amazon’s smart home and increasingly being brought in-house. This trend is evident IoT efforts), a common strategy for all has been investing in Tier 1 global content providers CAPEX investments. in expanding their data centers’ reach and international Between 2011 and 2016, Google, Amazon, Microsoft, and connectivity through submarine cables, satellites and finally Facebook’s annual CAPEX grew by 24%, 30%, 32% and with local networks 49% CAGR respectively.

Pure-play digital service players have traditionally favoured OPEX to CAPEX, however the increasing relative importance Implications for carriers of proprietary network infrastructure is leading to on-going Sources of network infrastructure investment are increases in investment. There are three main reasons for becoming increasingly varied. Global cloud providers this trend: are continuing to invest at scale across cloud enablement infrastructure 1. Reducing total cost of ownership: by getting access to infrastructure at the cost of infrastructure and reducing costs of technology upgrades. When they buy the bandwidth the total cost increases because of providers’ margin

PART 2: THE INTERNET EXTENSION 19 THE DELTA PERSPECTIVE

EXHIBIT 8: Overview of connectivity infrastructure investments from major internet players

Subsea cables: Subsea cables: Data Centers Subsea cables: Data Centers Subsea cables: • MAREA • Transpacific Unity Cable • Aliyun JUPITER • Partnership • MAREA • APG • APAC subsea cable • Data centers with Equinix • New Cross-Pacific • Pacific Light Cable • FASTER • Partnership Data Centers and Limelight • Deals with Hibernia and Networks Network • Monet with Equinix • AWS service AcquaComms • Cloud • HAVFRUE • Tannat • Alibaba • Data centers • Data centers • Asia Pacific Gateway • Junior Cloud's City Data Centers Brain solution • JUPITER • PLCN • Data centers • INDIGO-West • Azure Data Centers • INDIGO-Central Cloud • Investment in CDN • HAVFRUE • Curie Long distance fibre • HongKong-Guam • Fibre to connect Data Centers own data centers • Investment in CDN • Fibre network in • Google Cloud Uganda (with Airtel Long distance fibre and BCS) • Fibre infrastructure • Google Fiber (Uganda/Ghana)

Satellite / • Aquila • Project Loon • O3b Drones • SpaceX

• Express WiFi • Google Station (Wi-Fi) • Investment in - • Rural connectivity • Affordable Access Initiative • Internet.org/Free Basics • Project Loon rural connectivity • Partnership with MBC Local • ARIES • Project Wing infrastructure • White-Fi Connectivity networks • Terragraph • O3b project

Subsea cables Singtel, China Telecom, and China Mobile are co-investors, similarly Jupiter has NTT, Softbank and PCCW in the Subsea cables form the backbone of the internet by carrying consortium. Going forward carriers need to continue being more than 90%10 of the world’s data traffic. Google, as an part of these investment consortiums working closely with example of internet player rationale, highlights the benefit global cloud providers to ensure efficient investment and of building subsea cables as two-fold control11: avoidance of overbuild.

1. Control in definition - controlling the design and construction process, to fully define the cable’s technical specifications, streamline deployment and Data Centres deliver service to users and customers faster In parallel to connectivity investments, cloud players are 2. Control in operation decision - make routing investing on data centres to enable their cloud servicing decisions that optimize for latency and availability offers. The caveat for carriers is, whilst cloud players are co- investing with carriers in sub-sea cables, they are building Google invested over $30bn in the last three years on their their own data centres – thus building their own proprietary infrastructure and Facebook, Microsoft and Amazon are ecosystem external to the global telecoms ecosystem. also heavily investing. For example: SoftBank, Facebook and Amazon are building a new 8,700 mile transpacific subsea Google, Amazon, and Microsoft are all investing building cable connecting Asia with North America, and Microsoft in data centre globally as the backbone of their cloud and Facebook’s recently completed 4,000-mile transatlantic platforms. They have established presence in their core internet cable. locations and the new wave of investments is focussing on expanding their footprint to new regions and setting up When it comes to submarine cable investments, the carriers local data centres. are often a part of the consortium. For example: in FASTER

10 Ovum 11 https://www.blog.google/topics/google-cloud/expanding-our-global-infrastructure-new-regions-and-subsea-cables/

20 PART 2: THE INTERNET EXTENSION THE DELTA PERSPECTIVE

EXHIBIT 9: Recent and planned submarine cable deployments by content providers

Content providers’ recent and planned submarine cable deployments

Capacity Distance Completion Cable Telco Partners (Tbps) Route (km) Ownership yr Singtel, China Mob, FASTER 60 Trans-Pacific 11,629 Consortium Jun 2016 China Tel. Monet Algar Telecom 64 US-LATAM 10,556 Consortium Dec 2017 Tannat Antel Uruguay 90 LATAM 2,000 Consortium 2018 Junior - - LATAM 390 Owner - Pacific Light / Pacific Light Data Coms 144 Trans-Pacific 12,817 Consortium 2019 Cable Network

INDIGO-West Yelstra, Singtel, Indosat 36 Asia-Australia 4,600 Consortium 2019

INDIGO-Central Telstra, Singtel, Indosat 36 Australia 4,850 Consortium 2019

/ HAVFRUE - 108 Trans-Atlantic - Consortium Q4 2019 Curie - - US-LATAM - Owner 2019 Hong Kong- Telin, RTI, Hawaiian Tel. 48 Pacific 3,900 Consortium 2019 Guam Asia Pacific NTT, China Tel,KT 54.8 Intra-Asia 10,400 Consortium Nov 2016 Gateway Chungwa, Vietnam Tel / MAREA Telxius 160 Trans-Atlantic 6,605 Consortium Feb 2018 / JUPITER NTT, Softbank, PCCW 60 Trans-Pacific 14,000 Consortium 2020 New Cross China Tel, China Mob, KT 81.9 Trans-Pacific 13,618 Consortium 2018 Pacific

CASE STUDY 1: Infrastructure strategy of Amazon

Strategy/ • Amazon has built its strong cloud offering to target Global 2,000 and public sector organizations • It works on building very close ties with System Integrators to penetrate its target accounts. On the other hand, system Focus integrators benefit from AWS’s leadership in the public cloud domain

Value • AWS manages customers’ infrastructure with embedded security and enables customers to maintain ownership and sovereignty of their data, a key concern that is arising nowadays proposition/ • AWS bets on its strong sales force and service support. The teams are not only composed of sales personnel but also USP technical account managers, solution architects and professional services providers

CAPEX (2012-2016) More expenses on data centres’ Infrastructure assets / Initiatives ($ Billions) expansion to grow AWS service

6.7 • In 2017, AWS announced around 1,400 new CAGR: 15% features, functions, and services • AWS had 17 regional locations and 44 4.9 availability zones around the world in 4Q17 4.6 3.8 3.4

• Consortium – JUPITER cable (ready in 2020) • Major capacity owner in Hawaiki cable (ready in 2018)

2012 2013 2014 2015 2016

Source: Telegeography, Ovum, Press clippings

PART 2: THE INTERNET EXTENSION 21 THE DELTA PERSPECTIVE

• Google, publicly owns and operates data centres in 57+ locations and it is speculated they are present in Implications for carriers 100+data centres globally in 6 regions and 18 zones. They are planning to further expand their footprint by Global cloud players are seeking to use their reach to opening data centres in India by 2018. provide the global coverage similar to international carriers. Increasing investments from cloud players • Amazon owns and operates 71+ data centres across will results in market for traditional connectivity and the globe, and they are planning to extend their data centre offerings of carriers footprint to 4 new regions

• Microsoft Owns 65 data centres and is present in +100 data centres around the world in 38 regions. They invested above $15bn in global data centres. They are planning to open 10 data centres in UK for distributed ledgers (to reach total 20 DCs)

EXHIBIT 10: Global data centre footprint by provider

Data Centres per owner (Number of data centres)

Amazon 71 Microsoft 65 Google 58 IBM 46 Alibaba 29 Citigroup 20 Apple 18 Facebook 14 Oracle 12 Salesforce 12 Rackspace 7 Allianz 6 Axa Group 2

Note: Data Centers per owner based on public available sources as of Nov 1st 2017. Source: TeleGeography, Factiva, Operator websites, Delta Partners analysis

22 PART 2: THE INTERNET EXTENSION THE DELTA PERSPECTIVE

2. Global cloud providers extending their infrastructure as a service

Global cloud providers are leveraging their network Microsoft’s Azure Platform is the second largest IaaS infrastructure assets to offer “Infrastructure as a Service” – Cloud provider. The company had $1.6bn in revenues in they are effectively seeking to offer Global Services outside 2016 with a market share of 6% . Microsoft offers Azure of the traditional wholesale economy. The services include within its Commercial Cloud segment, where it is marketed basic computing, data storage, and networking services alongside 365 Commercial and Dynamics CRM Online. that companies can rent as needed and exclude cloud- based business software, like Salesforce Alibaba is the number three IaaS public cloud vendor with a 3% market share in 2016. However, its 127% growth In 2016 AWS’s business generated $9.8 billion in revenue between 2015 and 2016 outpaces its top two competitors. from IaaS, representing a growth of 46% year-on-year . Its Further growth for Alibaba can happen through expanding 40% market share makes it the largest IaaS Cloud provider its footprint to the West. It currently runs 14 data centres in a fragmented market. worldwide with just two in the US, one in Silicon Valley and one in Virginia.

EXHIBIT 11: IaaS public cloud service market

2015-16 IaaS public cloud services market share x% Market share ($ Millions, 2015-2016) Growth 31% 22,160

16,861 9,147 Others 13% 41.2% 484 5% 2.2% 8,074 461 500 48.4% 1,579 100% 2.7% 2.3% 7.1% 675 127% 250 980 5.8% 3.0% 1.5% 61% 298 9,775 1.8% 6,698 44.2% 46% 39.8%

2015 2016

Note: 2015-2016 revenue for Alibaba has been adjusted from estimates previously published in "Market Share: IT Services, 2016" Source: Gartner (September 2017)

PART 2: THE INTERNET EXTENSION 23 THE DELTA PERSPECTIVE

Google is the fourth player in infrastructure-as-a-service cloud since mid-2017 because they believe Google provides (IaaS) public cloud market with $500m revenues and the fastest connection for consumer transactions while still 2.3% market share. Google grew faster than Amazon and using Amazon in their subsidiaries like Venmo and Braintree Microsoft in 2016, with 100% revenue increase between where traditionally these services have been provided by 2015 and 2016. Google cloud platform focuses on wholesale carriers. providing innovative solutions for enterprises. For example: Snap IPO in February 2017, shows Snap Inc., a high growth social video OTT service, chosen Google’s cloud services, Implications for carriers accounting for 10% of Google’s revenues. As part of the agreement Snap Inc is required to “use [Google’s] cloud Global cloud providers will increasingly compete services for substantially all of [their] hosting requirements”, with carriers for Global Services and international reducing contestability of this high growth markets to other enterprise business. International carriers will need to infrastructure investors understand where they can partner and where they should compete with these players. Many global enterprises do not have exclusive deals with one provider, and they use multiple cloud providers simultaneously. For example: PayPal decided to use Google

CASE STUDY 2: Infrastructure strategy of Google

• Aims to match the global cloud data center footprint of major players (AWS, Azure, and IBM SoftLayer) Strategy/ • Expand submarine cable network to expand to new regions with up to six cables expected to be launched in 2019 Focus • Special focus to establish local data centers to serve enterprises and meet increasingly strict data residency requirements • Aiming to target very large enterprises in a few key sectors

Value • Google Cloud Compute (GCP) positioned as enterprise-ready public cloud proposition/ • Key differentiating factor for GCP is the use of analytics and machine learning USP • GCP also offers use discounts, per-second billing, and custom machine types

CAPEX (2012-2017) Ongoing investments in data centres, Infrastructure assets / Initiatives ($ Billions) Hyderabad campus, SpaceX investment • Project Loon • Project Wing

• Owns data centres in 15 locations CAGR: 31% 12.6 • 100+ data centres speculated globally • 7 cloud regions added in 2017 to reach 13 regions 11.0 9.9 10.2 and 39 availability zones

7.4 • Consortium in 10 cables: 4 launched between 2010 and 2017 and 6 planned between 2018 and 2019 • Sole owner of 2 cables (Junior - 2018 and Curie - 3.3 2019)

• Google Fiber 2012 2013 2014 2015 2016 2017 • Fiber deployment in Uganda/Ghana

Source: Telegeography, Ovum, Press clippings

24 PART 2: THE INTERNET EXTENSION THE DELTA PERSPECTIVE

3. Specialist service providers enabling expansion of ‘cloud providers’

As the largest global cloud providers have focused on • Amazon’s acquisition of 2lemetry and Microsoft’s strengthening their own network infrastructure, categories acquisition of Solari Srl for IoT platforms of providers have emerged with specialist services to enable such efforts. Global cloud providers are working with • Facebook’s acquisition of Privatecore and Amazon’s these specialist providers to deliver components of their acquisition of ClusterK, in the cloud computing infrastructure. Such services include, but are not limited platforms domain to cloud computing platforms, data center infrastructure • Veenam and Microsoft’s partnership on data protection, management tools providers, and disaster recover- as-a- infrastructure management and capacity planning for service providers virtual environments Some global cloud providers have established partnerships These partnerships and acquisitions demonstrate global or acquired such specialist services providers to gain cloud providers challenge in complete self-provisioning, expertise in new domains and speed up deliver of their even for the largest players with value being generated infrastructure. Some examples of these partnerships and through working with specialists in specific areas. acquisitions include:

• Amazon and Twilio’s partnership on SNS, virtual meeting, notification tool, cloud based contact centre on AWS platform

EXHIBIT 12: Specialist businesses enabling cloud providers (non-exhaustive)

Data centre Data centre back-up Disaster recovery as a Cloud computing infrastructure IoT platforms and recovery service platform management tools

Source: Delta Partner Analysis,

PART 2: THE INTERNET EXTENSION 25 THE DELTA PERSPECTIVE

CASE STUDY 3: Infrastructure strategy of Facebook

Strategy/ • Work on a range of new technologies to connect the unconnected and ensure consistent speeds and quality of internet experience Focus • Invest in technologies other than GPON to deliver connectivity (drones, Terragraph, ARIES, Free Basics, etc.)

Value • Facebook has worked on establishing partnerships and having discussions with governments and local operators in order to bridge the coverage gap and offer Internet connectivity to rural and underserved areas proposition/ • Express Wi-Fi project aims to provide fibre-like speeds to underserved communities via partnerships with ISPs and mobile USP operators. The service is currently live in India, Nigeria, Kenya, Tanzania, and Indonesia.

Total CAPEX (2012-2016) Infrastructure assets / Initiatives ($ Billions)

• Aquila: solar-powered drone to bring connectivity to 6.7 CAGR: 64% underserved areas Heavy spending to boost mobile for future growth • Consortium in six submarine cables (APG launched 4.5 in 2016) with other cables ready for service in 2018- 2020 • Major capacity customer in AEConnect cable CAGR: 23% launched in January 2016 2.5 1.8 • Terragraph: Using 60 GHz band, multi-node wireless 1.4 1.2 system, COTS components and cloud data processing • ARIES: base station with 96 antennas designed to support 24 streams simultaneously over the same 2012 2013 2014 2015 2016 2017 spectrum

Source: Telegeography, Ovum, Press clippings

26 PART 2: THE INTERNET EXTENSION PART 3

EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS

This section of the report explores what approaches international carriers could take in seeking to extend the wholesale economy to incorporate Global Cloud providers

27 THE DELTA PERSPECTIVE

To increase international carriers’ proposition to Cloud providers to develop an inclusive wholesale economy they can consider developing a “Cloud and Connectivity Enablement” business model that leverages data centers and international fixed 1 infrastructure to enable digital services

To build cloud and connectivity enablement capabilities required to incentivise Cloud providers to enter the wholesale economy, carriers need to strengthen capabilities in data center, managed networks and cyber security, hybrid cloud and IaaS, build the commercial frameworks to enable settlement for an expanded set of products and 2 services, and organize themselves to most effectively interface with Cloud providers

28 PART 3: EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS THE DELTA PERSPECTIVE

1. Extending international carriers’ wholesale economy

Developing wholesale interfaces with 3. Organising for success – ensuring that both at an Cloud providers to extend the wholesale individual carrier and overall industry level international economy wholesale carriers are operating an effective model of distribution and presenting a clear proposition to cloud In the context of the changing market dynamics and the providers. evolving network infrastructure strategies of global cloud providers, the key question for international wholesale carriers is how to become meaningful to enable a Building the capabilities: the ‘fifth sustainable ecosystem with clear wholesale interfaces rather than be pushed towards lower value parts of the carrier business model’ value chain in a hierarchical relationship. There are three Traditionally, international wholesale carriers have built primary components to this: their businesses on four models: carrier services, fixed infrastructure resellers, global services and OIP transit 1. Building the capabilities – expanding international carrier’s wholesale capabilities to provide an enriched The emergence at scale of global cloud providers, and offering to Global Cloud providers the impact they are having on international network infrastructure in both demand and supply is opening a fifth 2. Ensuring industry enablers – ensure seamless technical interoperability and commercial settlement to model for carriers – Cloud and Connectivity Enablement. serve as the underlying enablers of the telecoms-cloud This new model leverages data centers and international ecosystem networking capabilities to serve global cloud providers through offering colocation, network capacity, managed networking, network security, IaaS and PaaS solutions.

EXHIBIT 13: A new business model for international carriers

Traditional Wholesale Business Models New Model I II III IV V Cloud & Fixed infrastructure Global Services Carrier Services IP Transit connectivity resellers (B-end) (A-end) enablement

• Develop agreements • Leveraging nat’l and • Serving the ICT needs • Serving operators in • Leverage Data for traffic originating int’l assets to offer of international accessing all/remote Centers and or terminating connectivity to/in a companies (MNCs, foreign networks and international fixed internationally country for B-end financial institutions, providing worldwide infrastructure to Description • Private network media companies) IP connectivity enable digital services services (nat’l level)

• Int’l voice incoming & • Capacity services • Private network • IP Transit • Data Center services outgoing (DWDM, STM-1) of services • International capacity • Capacity services terrestrial and • Voice Hubbing • International • Managed network Products & submarine cable bandwidth • SMS A2P infrastructure and security services Services • Managed bandwidth • IaaS/PaaS solutions • Int’l gateway services • Cloud services

Revenues Revenues Revenues Revenues Revenues Market trend Profitability Profitability Profitability Profitability Profitability

Source: Delta Partners analysis New business model

PART 3: EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS 29 THE DELTA PERSPECTIVE

EXHIBIT 14: Service offerings from international carriers

Global providers Solutions Digital Players B2B / B2G Communication Hybrid Cloud IoT Platforms AI / Machine Distr. ledgers Content Security ops Managed NW & Security consul cyber security Managed NW DC connectivity Data Center IaaS Colocation IP Transit Connectivity Private NW Capacity / Carrier Source: 'International carrier websites' February 2018, Delta Partners Analysis

To enable development at scale of the fifth business data center connectivity. Through carriers extending model, carriers will need to ensure they can provide a their wholesale economy to trade capacity between comprehensive product portfolio in connectivity and up data centers they can build industry scale through the stack. Key services within the ‘Cloud and Connectivity aggregation. Such a proposition could be particularly Enablement’ model likely include: relevant to smaller cloud providers who do not have the scale to self-provision but need to provision 1. Connectivity – connectivity will continue to be the services across markets. Furthermore, establishing core business for carriers covering IP transit as well as a strong data center network and integrating it into capacity services and private networks. Despite the the wholesale economy could provide the platform for largest global cloud providers having a rationale to self- further services. provision, international carriers can continue to offer a compelling proposition through global network reach. 3. Managed networks and cyber security – as service It will be critical that international carriers continue to provider connectivity requirements become more both innovate within their networks including areas complex, international carriers can manage these such as private multi-network services as well as NFV requirements across network footprints and ensure and SDN interoperability, and also explore economic security. Whilst global cloud providers can deliver models and commercial frameworks to accelerate and this on their own networks, there is increasing value simplify the ability to provision connectivity. In doing from delivering consistent quality, reporting, risk so, carriers should continue to be the de-facto providers management and security operations across networks. for multi-national, local enterprise and platform players Providing the point of aggregation between carriers while they strengthen their proposition to the Tier 1 and a common commercial mechanism to charge for global cloud providers beyond local access and in-fill these services will allow carriers to ensure industry scale services. and a compelling proposition for international service providers. 2. Data centers – in specific markets carriers will be able to secure a strong position within the data center 4. Platforms and Solutions – building on fixed market providing services around colocation, IaaS and connectivity and data center infrastructure, carriers

30 PART 3: EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS THE DELTA PERSPECTIVE

can develop solutions across areas including content, that they can support NFV/SDN services across network data management, IoT and hybrid cloud. Within the infrastructure. Failure to do so could create incentives for cloud ecosystem vertical-specific service providers will service providers to seek to keep traffic on-net and invest in seek to compete with global cloud providers to offer scaling their own network infrastructure. international offerings but without the economic scale to self-provision infrastructure or a willingness At a commercial level, the cloud driven ecosystem will to leverage the global cloud providers. Carriers can drive increasingly dynamic requirements on network offer the point of aggregation for this ecosystem of infrastructure. As such, international carriers will need digital applications using its commercial settlement to evolve their settlement frameworks to ensure that frameworks as a means to enable international connectivity or network services can be provisioned and provisioning of services. charged for accordingly and extended to a wider range of services than currently covered. Ensuring these capabilities can be delivered at industry scale important for international carriers so they can be Beyond network capacity and network-linked service, this global partners for cloud providers and MNCs. One carrier settlement framework can be extended into the Cloud alone might not have the required scale to have relevant environment to support the delivery of complex application propositions, whilst acting as an aggregated Industry with based services traded on a wholesale level. As such, the appropriate commercial frameworks can ensure that development of the Cloud-inclusive wholesale economy is the concept of global ubiquity of reach that has been a not solely to ensure international carriers can provision their cornerstone of telecoms can be extended into cloud services to Cloud providers but also the mechanisms for services. trading developed by international carriers are extended to serve carriers. Many of the leading international carriers offer a broad portfolio of relevant services – however, it will be important In doing so, there is the potential for international carriers that this approach is taken across the industry to enable the to both enable their retail divisions to take a broader enabling of these services at scale. service portfolio to market, as well as support additional monetization of cloud applications. This would extend the concept of service scale and interoperability beyond its Implications for carriers current conception.

Scaling of the fifth business model to offer compelling propositions to Cloud providers will likely require Implications for carriers international carriers to further diversify their portfolios with value delivered through aggregation at Ensuring the evolution of settlement frameworks to industry level. In doing so, the capabilities developed meet the dynamic requirements of Cloud providers is to incentive Cloud providers to trade with wholesale a necessary enabler to extend the wholesale economy. carriers can be extended to strengthen MNC Beyond enabling the provision of international carrier propositions. services to Cloud providers it will enable global industry settlement frameworks to be extended to Cloud services and applications.

Ensuring industry enablers Capabilities alone will not ensure that international Organizing for success carriers can build a proposition of significant relevance to incentivize global cloud providers to enter the wholesale In the Cloud-driven ecosystem, the boundaries between economy. This is evident in the status of development of retail and wholesale are likely to become less clear, especially leading wholesale carrier portfolios as shown in Exhibit 15 in an enterprise environment. At any given time, global above. cloud providers are likely to be customers, competitors and suppliers with an opportunity to serve both their domestic At a technical and commercial level carriers need to be and international requirements. To ensure efficiency in able to facilitate the real-time provision and settlement of these interfaces it is critical that international carriers take services to meet Cloud providers dynamic requirements. a holistic view of how they manage these relationships. Wholesale and Retail teams will need to be coordinated At a technical level, NFV/SDN interoperability will increasingly and work closely together, and Wholesale units will need become a key networking requirement in the cloud driven to educate Retail units on the value of this collaboration. ecosystem. International carriers will need to ensure

PART 3: EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS 31 THE DELTA PERSPECTIVE

There is no single model of organization for international wholesale carriers. Whilst variance in models will persist Implications for carriers there is a common requirement to drive alignment so there is a consistent approach and interface with the Cloud At an individual carrier level, it is critical that Wholesale providers. and Retail units work closely to address opportunities with global cloud providers; at an industry level, the At an industry level, international carriers will require GLF can provide leadership to ensure development of a consistent industry position both in communicating the technical and commercial enablers the value of an inclusive wholesale economy but also development and implementation of the enablers. GLF has a key role to play on both these levels. If the industry cannot organize itself with a clear proposition supported by the appropriate levels of technical interoperability and financial settlement mechanisms it will be challenging to create the scale of aggregation required to incentivize the global cloud providers to develop wholesale interfaces as opposed to a hierarchical relationship.

32 PART 3: EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS THE DELTA PERSPECTIVE

2. Key questions for international wholesale carriers to consider

In the context of the transformation of international network infrastructure supply and demand, as well as commercial model, driven by the expansion of global cloud providers, it 3. What investments are needed at an is important that carriers consider the following questions: individual carrier and overall industry level to best position international carriers develop a meaningful wholesale economy with global 1. How can international carriers ensure that cloud providers? at an industry level the key enablers, both technical and commercial, are in place to meet evolving customer demands at global scale?

4. How should carriers organize themselves to best serve global cloud providers?

2. How can international carriers position themselves to ensure they offer compelling propositions to global cloud providers to enter a meaningful / inclusive wholesale economy?

PART 3: EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS 33 THE DELTA PERSPECTIVE

LIST OF EXHIBITS

EMERGE OF A NEW ECONOMY? EXHIBIT 1: Global IP traffic and global cloud traffic (2011-2021) 9 EXHIBIT 2: IP transit prices for 10GE by region and median 10GBPS wavelength lease prices 10 EXHIBIT 3: Overview of fragmentation in global services product portfolios 11 EXHIBIT 4: Intra-regional and international bandwidth evolution by region 2012-2016 13 EXHIBIT 5: Enterprise digital transformation model 15

THE INTERNET EXTENSION EXHIBIT 6: Share of fixed-mobile traffic generated by top 6 providers, globally and APAC 19 EXHIBIT 7: CAPEX investments of internet players 20 EXHIBIT 8: Overview of connectivity infrastructure investments from major internet players 21 EXHIBIT 9: Recent and planned submarine cable deployments by content providers 22 CASE STUDY 1: Infrastructure strategy of Amazon 22 EXHIBIT 10: Global data centre footprint by provider 23 EXHIBIT 11: IaaS public cloud service market 24 CASE STUDY 2: Infrastructure strategy of Google 25 EXHIBIT 12: Specialist businesses enabling cloud providers (non-exhaustive) 26 CASE STUDY 3: Infrastructure strategy of Facebook 27

EXPANDING THE WHOLESALE ECONOMY AND CREATING INTERFACES WITH CLOUD PROVIDERS EXHIBIT 13: A new business model for international carriers 30 EXHIBIT 14: Service offerings from international carriers 31

Sam is an Associate Partner at Delta Partners, a leading specialist global TMD Advisory, Corporate Finance and Investment firm. Sam has advised mobile operators, content distributors, network infrastructure providers, device vendors and payments networks across North America, Europe, Africa, Middle East and Asia. He has a degree in Philosophy, Politics and Economics from Oxford University. Tamer is a Senior Engagement Manager at Delta Partners. Tamer worked in Vodafone Group Strategy team on commercial strategy, acquisitions and digital transformation; previously advised mobile operators in strategy planning and new product launches across Europe, South Africa and Turkey. He has a PhD in Operations Management from University of Nottingham and MSc in Industrial Engineering from Sabanci University (Istanbul) If you would like to contact the author to further discuss this topic, you can email to: [email protected]

Delta Partners is the leading Advisory and Investment firm specialised in Telecoms, Media and Digital with offices in the Middle East, Africa, Europe, Asia, Latin America and the United States of America. We partner with global and regional telecom providers, digital players, other TMD clients and our investors to help them address their most challenging strategic issues. Our unique combination of Management Consulting, Corporate Finance1 and Investments2 creates unparalleled value for our clients, investors and business partners. For more information, please visit www.deltapartnersgroup.com and follow us on Twitter @Delta_Partners 1 Delta Partners Corporate Finance Limited and 2 Delta Partners Capital Limited are members of the Delta Partners Group of companies and are authorised and regulated by the DFSA.