AI, Virtualization, Automation Essential for Telcos "Moving Up the Stack?"

With the caveat that it is always in the interest of a firm or industry segment to tout the business value, revenue growth and impact of the products those companies sell, a new white paper by Empirix essentially makes the argument that mobile business models will shift in the direction of revenue models based on artificial intelligence assisted insights, automated networks and virtualized infrastructure.

The near-term problems are revenue and cost pressures. The strategic problem is that every legacy telecom product category already has become mature, or is reaching maturity.

Revenue and cash flows of telecom companies have dropped by an average of six percent a year since 2010, according to McKinsey consultants.

source: McKinsey

And the same time, capital investment requirements are rising as higher data consumption requires investment in additional capacity. On average, the ratio of capital spending to revenues is about 15 percent for the major operators, a higher percentage than typically has been required in the the past.

In a now saturated market, that puts pressure on profit margins.

To be sure, operating cost reductions will help. But, longer term, nothing firms do in terms of operating cost reduction can overcome a loss of half of current revenue every 10 years. When that happens, one cannot “cut your way to profitability,” as the old adage suggests.

Applying virtualization, automated network operations and AI to network and other operations will help reduce costs, but will not automatically produce additional new revenue streams. That is the harder task, as it almost certainly involves moving up the stack.

The simple fact is that strategies based on “access” or pipe services will prove insufficient to sustain service providers, as the scale of new access revenues from internet of things, for example, will fail to replace the lost revenues from legacy services.

Though many criticize AT&T for its big moves into video entertainment, both on the “pipe” and “content” segments of that business, Comcast pioneered the strategy.

As a practical matter, the moves by Comcast and AT&T into the content and associated parts of the video entertainment ecosystem illustrate the broader moves tier-one access providers will have to make in other areas such as internet of things to sustain themselves.