Laying siege to the carrier pipe

Are carriers threatened by the investment from tech companies in telecoms infrastructure? Kavit Majithia investigates.

When the Wall Street Journal broke a story in December last year on the growing influence tech companies now have on the world’s internet infrastructure, the carriers’ “dumb pipe” status suddenly came under the spotlight.

The paper reported, in a front page exclusive, that tech giants – the biggest being Google and Facebook – had stepped up their efforts in attempting to control the world’s internet backbone. This was beginning to raise tensions with carriers around the world.

Google, according to WSJ sources, controls over 100,000 miles of internet routes around the world, more than doubling the size of the US network run by the country’s third largest player Sprint, which covers a 40,000-mile footprint.

Google has also given its financial backing to a new trans-Pacific cable linking the west coast of the US to two landing stations in Japan, strengthening further its position in the subsea cable market.

According to analysts, there has been a fundamental change in thinking. Tech companies have seen the value of investing in large-scale infrastructure, in order to serve their vast user base.

Cloud computing and video streaming are major factors for the change, as are the high rates that tech companies have to pay operators for access to the vast quantities of capacity they require.

Companies like Amazon and Microsoft have ceded control of the internet pipe to telecoms operators for decades in this space. Until now, there has really only ever been one set of companies that has invested in fibre and subsea cables. But for telecoms operators that have already been marginalised by Google, Facebook and Amazon in over-the-top value adds like instant messaging, video and cloud, this latest OTT strategy comes as a proverbial kick in the teeth.

Build it, and they will come

Google’s play into the infrastructure space started small, and grew rapidly. The tech giant opened its first data centre 15 years ago in Santa Clara, California. It spanned 2.6 sq m and operated as one of the first co-location facilities in Silicon Valley.

Today, nobody knows how many data centres Google has at its disposal, and no-one at the company is prepared to say. It did, however, reveal a mammoth $7.35 billion capital spend on its internet infrastructure during 2013, doubling the capex amount it spent in 2012.

In the same year, Google made its first foray into the Asian data centre market, launching two new units in Taiwan and Singapore in a bid to tap into the growth of the internet on the continent.

Other 2013 highlights include a $390 million investment on a facility in Belgium, a $600 million expansion of its complex in Oregon and a commitment to spend $1.5 billion to its infrastructure in Iowa. According to latest figures, it has spent a total of $2.65 billion on data centres alone in the first half of 2014.

On the residential side, it has Google Fiber. The company has steadily built up a high-speed fibre offering covering regional parts of the US, with evidence that it is now set to embark on rapid expansion. Google again started small, launching the fibre offering exclusively in Kansas City in 2012. It entered into the ISP market with bold claims that it would offer consumers broadband packages 100 times faster than speeds presently available.

While it did not confirm nor deny its intentions at the time to roll out the network in other parts of the US, it now has. In February 2014, Google finally revealed its battle plan, and after additional small-scale launches in Austin, Texas and Provo, Utah last year, the company said it has now selected another 34 cities as candidates for future network expansions.

Google Fiber, which was once promoted as an open-access fibre network, has quickly developed into a vast closed-fibre service that is designed to provide fibre to the home (FTTH) and battle incumbents for market share.

What started as an experiment has quickly gained traction. Mike Spieldenner, head of consulting at telecoms fibre service company NEF, says “Google is a unique example”, and that tech companies will struggle to follow its lead.

Many tech companies do indeed own fibre services, and in some cases have even built their own dark fibre networks (Facebook in Europe, for example). The delivery of these services has for now been left to the last-mile providers on the access side, and thus far it has only been Google that has stepped into the ISP space.

“Building networks in places across the US is part of Google’s overall strategy,” says Spieldenner.

Google will still require billions of dollars and a number of years to replicate the infrastructure that has been established by the ISPs across the US. But in markets where there is a Google network right now, “revenue is definitely being usurped by the incredibly fast Google Fiber system”, claims Spieldenner. And for now, Google’s strategy has left smaller and regional cable and telecoms companies at its mercy.

“It is very difficult for a service provider to compete against a network that is cheaper, incredibly fast and inevitably more customer-focussed than a local cable company,” he adds.

If Google maintains its project plans, analyst firm Bernstein Research predicts Google Fiber could be deployed in 25 million US homes by 2022.

How concerned is the carrier community?

Despite vast investment, there is no indication that Google is investing in subsea cables to sell 100Gbps wavelengths and light up capacity, nor that Facebook is investing in data centres to provide co-location and carrier-neutral services to the enterprise market, and therefore directly compete with the carrier business model.

Hunter Newby, CEO at Allied Fiber, claims that there is no real clash between the two segments, and technology companies will continue to look to traditional wholesale carriers when they require a service.

“If I’ve built something that they need, they will come to a company like Allied Fiber and buy it before they spend the money to build it themselves,” he says. “The fact is, we don’t go everywhere, so they need to build some sections to serve themselves and that’s fine with the carrier community.”

Newby says that technology companies are investing in this space as a means to aid their own operations. The fact that Google controls 100,000 route miles does not imply that it built the infrastructure itself, or that the company will have excess fibre to sell to carrier customers.

“They have picked up these networks from carriers in the nineties, they did not build it” he says. “Google has it, Facebook wants it and Microsoft wants it, and these companies will scour the earth for it. They, however, will not build it because they have intentions to establish a nationwide fibre network. They only want to build pieces where they need it.”

According to Staffan Göjeryd VP and head of data and infrastructure at TeliaSonera, the simple fact is that these companies will need infrastructure everywhere, considering increasing data demands. He claims that there is enough room and infinite opportunities for different types of players because of the underlying growth in data traffic.

“Five years ago, this space was run by the carriers,” he says. “Tech companies are now obviously seeing the benefits from their point of view, in terms of catering towards their own needs.”

Market watchers will argue that while Newby and Göjeryd’s claims hold up, the actual issue facing carriers is something else altogether. Technology companies are unlikely to rival the traditional wholesale carrier business model, but with their own infrastructure, they are unlikely to partner with them either.

“There is a more immediate loss of revenue due to the encroachment of the large content of digital-orientated service provider,” says Spieldenner. “The revenue loss is more attributed to the Amazons, Googles, Facebooks and Apples of the world for not requiring as much support from the telecoms world.”

Facebook likes Tata?

According to research data from the NEF, business class revenue for carriers has been in decline for the last five years, as OTT companies begin to invest in capabilities, including equipment and data centres. This includes buying, building and streamlining data centres and associated supporting networks.

Google’s investment in the FASTER subsea consortium was its third participation in a submarine cable project in the last six years, while rival Facebook is known to have invested in at least one cable to date, spending $450 million on the Asia-Pacific Gateway (APG).

While consolidation and investment is rife in both telecoms and the OTT markets, a high-profile merger between the two segments is yet to emerge. This could be set to change, however. Analysts predict that Facebook could take a different approach to building up its network infrastructure to Google, and an audacious tie-up with Tata Communications could be possible.

Vodafone has also been linked to the Indian operator, which is valued at $1.2 billion, and this price tag is unlikely to scare off a company that has just spent $19 billion on instant messaging application WhatsApp.

Tata’s vast submarine cable footprint will surely be an attractive pull for Facebook, as well as its presence in India, which is known to be an important growth engine for the social media giant. Industry analyst and telecoms entrepreneur Sunil Tagare believes a carrier tie-up could be Facebook’s only credible option to build up its capacity.

“Imagine if they have to build a global network from scratch, it’s virtually impossible,” he said in a blog post. “They will have to hire hundreds of people and pretty much copy Google, which will take ten years at least.”

Common ground

The carriers, for now, can sit tight. According to Juniper Research, the present state of the market suggests mobile operators stand to generate approximately $20 billion by 2018 through strategies involving “carrier OTT” services.

This includes investments, not only on the network side of their operations, but on new services and next-generation technologies.

Carriers across the market are attempting to leverage internet-based services to accommodate traditional offerings, with VoIP, VoLTE and M2M deployments becoming essential to the carrier service portfolio. The larger incumbents are also not lying down and letting the technology companies rule the roost when it comes to infrastructure.

José Gutiérrez, president, wholesale solutions at AT&T Business Solutions tells Capacity that “network infrastructure is crucial”.

The company claims it has invested over $119 billion in its network over the last six years, and will invest a further $21 billion in 2014 as part of the Project Velocity IP (VIP) initiative.

AT&T has veered away from the network neutrality debate across the US, unlike rival Verizon. It has instead steered its battle plan towards improving internet user experience and accommodating the growing demand for applications and cloud services. Gutiérrez claims that the company sees great opportunity in leveraging OTT services, and believes the solution behind the evolving business model is dependent on collaboration.

“As technology opens the door for conversations with other industry players that may not have been possible in the past, strategic collaborations are becoming more important and competitive lines are blurring as a result,” Gutiérrez says.

TeliaSonera was an early mover to instigate such a partnership, and announced in 2012 that it would operate and build Facebook’s pan-European managed optical network.

The deal is implemented over the carrier’s fibre-optic infrastructure and is designed to scale several terabits of capacity to connect into Facebook’s data centre on the edge of the Arctic Circle in Sweden. Göjeryd declined to comment on whether TeliaSonera had struck additional partnerships with Facebook since 2012. However, he does claim that carriers now have a new role in enabling technology companies in implementing their strategies.

“You have companies the size of Google and Facebook that need to connect their data centres and they may need to do that by acquiring capacity services from carriers,” he says. “It is all tailored around ensuring we have solutions in those areas. From data centre investment to infrastructure, given their vast traffic volumes, it was always going to be the next logical step for these companies to set up their own infrastructure bases. We are not too concerned by it.”

Google to reveal infrastructure masterplan soon

When approached to comment on this article, a Google spokesperson said that the company “may want to revisit the topic in the fall, when we will have broader updates on Google’s work in this area”.

Facebook declined to comment altogether, and it is clear that both companies are keeping their strategies firmly secret for now. On the whole, it appears that carriers continue to harbour hopes on more collaboration and partnerships in the technology space.

Conversely, companies like Google and Facebook are focussing their strategies away from being so reliant on the carrier “dumb pipe”. Instead, they are aggressively creating their own networks that are autonomous from the world at large.

“They have to do this, because the nature of their business is actually about content and its delivery,” says Spieldenner.

“It’s a great thing, because they constantly push the innovation curve.”

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