Faced with tighter margins over the past five years, telcos are relying more on software to deliver value in their networks, according to a report.
Last year, software investments accounted for close to 17% of telcos' capex, which was a marked increase from 11.7% five years ago, according to research by MTN Consulting. Telcos' total capex spend on software last year was $50 billion, and MTN Consulting expects it will continue to grow.
MTN Consulting also cited software-defined networking (SDN), network functions virtualization (NFV) and the build out of 5G networks and services as reasons for the increased reliance on software. MTN Consulting expects SDN, NFV and the ongoing 5G deployments will continue to drive up telco software spending over the coming years.
Software has also been vital in helping telcos compete, according to MTN Consulting. As a result, telcos are spending more on software from vendors related to SDN and NFV. A range of hardware devices—such as white boxes—are now engineered to provide functions, features, flexibility and capacity through software.
"That change has many benefits," said MTN Consulting CEO and Chief Analyst Matt Walker, in a summary of the report. "It allows a pay as you grow approach to investment, lowers maintenance and installation costs, simplifies customer management, and enables new service offerings."
While some large telcos have the internal wherewithal to build their own software, most of the smaller vendors rely on vendors whenever possible, which allows them to benefit from the vendors' scale and experience with larger operators.
Software network investments have also been pushed by tailwinds from the rise of webscale networks, according to MTN Consulting. Telcos are spending more capex on cloud-based software solutions, including software-as-a-service (SaaS) and similar offerings from the webscale providers. MTN Consulting said those types of transaction are evolving into large-multi-year arrangements that include a telco outsourcing key network functions to a cloud provider.
Telcos' move to mobile edge computing is also driving more partnerships with cloud providers. On the flip side, telcos have the last mile connections to customers that the cloud providers lack, which made them willing to partner with telcos.
MTN Consulting said telcos' growing interest in mobile edge computing (MEC) to complement 5G was also driving cloud partnership activity.
AT&T is a prime example of a telco working with cloud providers. AT&T announced cloud partnerships with Microsoft and IBM last year as well as another partnership earlier this year with Google Cloud. AT&T's partnership with Google Cloud blends AT&T's edge network, including 5G edge computing solutions for enterprises, with Google Cloud's expertise in Kubernetes, artificial intelligence, machine learning, and data analytics, among other technologies.
While some large telcos, such as Deutsche Telekom, are ramping up their internal software spend relative to software bought from third parties, MTN Consulting said that might not be sustainable in the current COVID-19 environment. Layoffs related to the coronavirus pandemic will create more opportunities for vendors to wedge a foot in the door of telcos.
"While in theory that may enable differentiation and faster time to market, it will be difficult to sustain in the current economic climate," according to MTN Consulting's research. "As telco layoffs begin to ramp in the face of the COVID-19 crisis, telcos will turn to vendors and webscale operators to fill the gaps. Potential beneficiaries of this change include webscale operators like Microsoft and a long list of vendors, including Accenture, Amdocs, Infosys, Oracle, TCS, Tech Mahindra, and Wipro."
While MTN Consulting didn't mention layoffs, software and automation have led to service providers, including AT&T, eliminating jobs from their workforces.