Will 5G era make it third-time lucky for Microsoft in telecoms?

For years Microsoft tried and failed to crack the consumer telecoms market.

The group’s $8.5bn acquisition of Skype in 2011 was the highest-profile effort, bringing the then dominant internet-based phone and video-calling service under its wing. But Skype lost its spark as multiple redesigns, strategy shifts and product flaws allowed rivals such as Zoom, Google’s Hangouts and Teams, a different Microsoft platform, to come to the fore.

Two years later, an attempt to take on Apple and become a fully fledged smartphone company was even less successful. The 2013 purchase of Nokia’s mobile phone division for $7.2bn flopped, with Microsoft chief executive Satya Nadella shutting the unit down after he got the top job.

And its bid to muscle in on the mobile operating system market failed with Windows Mobile, pitched as an alternative to the Apple-Android duopoly, only ever being used on a small fraction of the world’s smartphones.

But the world’s largest software company has not hung up on telecoms. Instead it has turned its attention to the enterprise market and the carriers themselves.

Over the past year Microsoft has teamed up with operators including Verizon, Vodafone and Deutsche Telekom to help them roll out new dedicated 5G-based networks to business customers in markets such as manufacturing and logistics.

As more businesses look to 5G to potentially transform their operations, minimising delays in transmitting data over the network will be far more critical than it is for the consumer market where the latest wireless technology has started to capture the imagination with the launch of the new iPhone. 

For Yousef Khalidi, corporate vice-president of Microsoft Azure for Operators, pushing into the market was “natural Microsoft territory” given 5G required more computing power.

Microsoft is pitching itself as a partner for the network operators, vowing to cut down delays by having its data centres, which help underpin the 5G network, physically closer to the business customers. Last month, the company launched a version of its Azure public cloud service targeted at the telecoms industry as a signal of intent.

But Microsoft’s charm offensive is creating tensions. Mr Khalidi insisted that the company, whose market capitalisation has soared to $1.6tn, has had to be “humble” in its approach given its ownership of Skype and that some carriers may see it as a potential competitor in the potentially lucrative 5G enterprise market.

“We have learnt where our boundaries should be. We are not an operator and never will be an operator. We are a software company,” he said. “We provide all the points of control they desire. They [the carriers] own the customer totally.”

Nor is Microsoft the only company with such ambitions. Google, Microsoft, Amazon and IBM — dubbed “hyperscalers” in the industry — are all using their positions in the public cloud as a springboard to capitalise on the demand from business customers for 5G services.

Up for grabs is a market that, while worth only a slice of their current quarterly revenues, is still lucrative and fast-growing. Research group Analysys Mason predicts that what they call the “network cloud” market, comprising software functions and cloud infrastructure, will be worth $36bn by 2025 and enjoy a compound annual growth rate of 40 per cent.

The pressure on telecoms companies to sever ties with Huawei, a significant force in the European cloud computing market, has added impetus for the US technology giants in the 5G age.

“Huawei is being kicked out and there is a vacuum,” said Sylvain Fabre, analyst at Gartner. “There is an encroaching on this sector . . . a creep from the hyperscale vendors.”

Microsoft has gone a step further than rivals such as IBM and pushed into developing software to run telecoms networks themselves. This year it acquired two specialist companies — Metaswitch and Affirmed Networks — that put it at the centre of the growing convergence between telecoms and tech in the 5G era. Those deals also put it into closer competition with Nokia, Ericsson and Huawei.

Mr Khalidi, a Microsoft veteran who helped to develop the company’s original cloud product Azure under the code name “red dog”, said the deals had helped build a “house brand” in the sector, bringing with them hundreds of specialist engineers and existing network relationships.

Caroline Chappell, an analyst at Analysys Mason, argued that the opportunity for the likes of Microsoft goes beyond tie-ups such as the one it signed last month with Verizon, the largest US telecoms company, to combine 5G and cloud computing.

With more telecoms groups building 5G as a software-based system separated from the hardware elements — a process called virtualisation — some networks may opt to base their networks in the public cloud rather than their own data centres. “The big prize all the public cloud providers are after is the telecoms network itself,” she said.

Telefónica CEO José María Alvarez-Pallete has backed moves by European lawmakers for greater regulation of Big Tech © Bloomberg

But for the network operators, the interest from Big Tech is a double-edged sword. For almost two decades, they have sought to resist the world’s biggest tech groups who, through offering free voice calls and messaging products, have threatened to eat the operators’ lunch. And some remain wary.

José María Alvarez-Pallete, chairman and chief executive of Spanish group Telefónica, launched a broadside against the power of tech companies in the data world at a joint Financial Times and European Telecommunications Network Operators’ Association conference last month.

Pointing to the disparity in valuations between the shrinking telecoms sector and the booming technology industry, he called on the European Commission to “end the expropriation of new generation networks” while backing the move by Brussels for greater regulation of Big Tech. “That is the right way,” he said.

Microsoft’s ownership of Skype means the US company is a “borderline competitor”, according to one telecoms executive. The fact that the company could look to directly target parts of the telecoms market, such as providing private networks for enterprises, only adds to their nervousness concerning Microsoft’s ultimate intentions.

“The jury is out on what they’re really going to do,” the executive added.

Indeed, some reckon Microsoft has the potential to drive even further into the telecoms sector. CCS Insight, the research company, suggested last month that it could make a move for Finnish group Nokia, becoming a fully fledged telecoms equipment company offering cloud, software and radio equipment.

In February the US attorney-general William Barr said that the US, either directly or through American companies, should consider taking stakes in Nokia or Ericsson to help build a stronger international competitor to Huawei. Any such a move would represent a third attempt by Microsoft to use Nokia as a conduit to a greater foothold in telecoms after its operating system and handset forays.

But Mr Khalidi downplayed the notion that the group could take a stake in Nokia, saying Microsoft was more likely to continue to partner hardware companies in the chip and radio side of the industry. “We know where our limits are,” he said.

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