Extending the Wholesale Economy Into the Cloud Ecosystem
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Extending the wholesale economy into the cloud ecosystem Sam Evans - Associate Partner Tamer Ovutmen - Senior Engagement Manager April 2018 THE DELTA PERSPECTIVE THE DELTA 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 4 THE DELTA PERSPECTIVE 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 6 THE DELTA PERSPECTIVE 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).