Academic journal article The McKinsey Quarterly

The Soft Side of Telecoms

Academic journal article The McKinsey Quarterly

The Soft Side of Telecoms

Article excerpt

If traditional telecom equipment vendors don't have a strategy for the software business, they may be in the wrong business altogether.

Deregulation may have prompted the restructuring of the telecommunications industry, but technological innovation is what keeps the process going. And for technological innovation, there is no business like the software business. In the 1980s, the computer industry was transformed when microprocessing technologies allowed new companies such as Microsoft to create a software industry that was largely independent of hardware. In the near future, a series of technological changes could likewise transform the structure of the telecommunications industry by shifting much of the value it creates from hardware to software.

For incumbents, the implications are far-reaching. Traditional providers of telecom equipment, already challenged by newcomers, will now have to struggle against more and tougher software-oriented competitors, though it is possible that the traditional providers will themselves seize emerging software opportunities. Changes in the software arena will have a more subtle impact on network operators, which may lose control over many of the services provided over their networks as the balance of power shifts toward software. Yet the impending transformation also offers network operators novel business opportunities--in network management, for example, and hosting software applications on their networks.

Advances in software will eventually blur the distinction between network operators and equipment providers. But in the immediate future, the advances are likely to turn the equipment providers' territory into a battleground.

Which software developments will matter most in telecommunications? How might equipment providers address them?

The increasing importance of software

Today's public switched telephone networks (PSTNs) already rely on millions of lines of software code to control their basic functions: switching traffic across networks, allocating capacity, identifying faults, and billing customers. In the coming generation of telecom applications and services, software will be even more important. New advanced telephony services--such as call forwarding, personalized numbering (calls rerouted to a person's office, home, mobile phone, or voice mail as appropriate), and interactive services--are created almost entirely in software. So are such recent innovations as capacity reservation and smart routing, which improve the reliability of networks based on Internet Protocol (IP). Moreover, on the Internet and other IP networks, it is software that provides the means of transporting pages of information and underpins enhanced services, such as streamed audio and video.

Software allows service providers to deploy new services quickly and cheaply, for once it has been developed, it can be downloaded to networks immediately, with no need to reengineer the underlying hardware. And because software can be repeatedly duplicated at almost no additional cost, it offers huge economies of scale. Software also makes it easier to manage ever more complex systems. Today, many corporations run wide-area networks (WANs) and intranets linking offices across the globe. Such WANs and intranets are in turn connected to the Internet and to the WANs and intranets of other corporations. Managing these agglomerations of networks would be impossible without new kinds of network management software.

In this general expansion of software's role in telecommunications, two trends are accelerating the transfer of power from traditional equipment vendors and network operators to new software-oriented companies. The first such trend is the migration of software from the core of the network to its periphery. In PSTNs, the software controlling the network is tied closely to the switches and related equipment at its center. Because the network operators manage this equipment themselves, they and their equipment providers determine who programs the network with software. …

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