At Home in the Cloud – The Emerging Opportunity for Telecom Operators

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Booz & Company

Bahjat El-Darwiche

Dany Sammour

Booz & Company examines the impact of residential consumers on cloud storage expansion and how telecom operators can keep up

Dubai, UAE, 27 March 2012: Residential consumers are demanding more and more cloud computing services and storage, and the volume of data they want to store in the cloud is substantial. Given how much multimedia data the typical family maintains, the dormant demand for cloud storage is already between 2-5 terabytes of data, and it will likely increase by a factor of 10 within the next five years. Booz & Company’s thought leaders outline ways in which telecom operators can make the most of this expected boom.

Emerging Demand

Business and consumer interest in cloud IT services has increased over the past year. Despite the occasional security and continuity setbacks, cloud IT offerings—whether through publicly accessible services, privately gated services, or hybrids—are on the rise, particularly for corporate customers.

On the consumer side, this development has just begun. Companies are creating more and more services—some as simple as basic file storage—to satisfy the rising demand from residential customers for cloud services. Most prominently, Apple recently launched its iCloud offering with a huge burst of marketing.

These efforts are geared toward meeting consumers’ rising demand for space to store and share their growing amounts of data and to be able to access that data across an ever wider variety of devices.

Most smartphones currently provide 16 to 64 gigabytes of data storage, enough to hold the great majority of most consumers’ music, pictures, and application data, along with a reasonable number of video clips. As the amount of content owned by consumers continues to multiply, their storage demands will also grow, as will the storage capacity of their devices. By 2020, individual smartphones will most likely offer as much as several hundred gigabytes of storage.

Unsurprisingly, consumers are already demanding the right to consume all of their media across all of their devices, from anywhere and as seamlessly as possible. But the sheer amount of data they hope to store and share will make it increasingly difficult to maintain identical sets of data across all devices.

“Merely synchronizing the many devices each household owns will become hopelessly impractical. Already, the dormant demand for cloud storage is 2 to 5 terabytes, and it will likely increase 10-fold over the next 10 years,” said Bahjat El-Darwiche, Partner with Booz & Company. “If that exponential growth continues, consumers will seek one of two solutions: keeping files on devices at home, with all the cost and complexity of maintaining the necessary hardware, or moving them to outside, cloud-based servers, which would be easier to maintain, and probably more cost-effective.”

In the long run, the only viable alternative will be the cloud—both for storing all this data and for making it available on the many devices on which people expect to be able to access it, from anywhere, at any time. To be sure, the cloud solution requires that a broadband network is available and that the data can be stored on a reasonably reliable and secure cloud service. But that’s exactly where the opportunity for telecom operators lies.

Given the level of demand, and the sheer volume of data that will need to be stored and sent around, the market for low-cost consumer cloud storage will explode in the next several years. We expect that managing this data volume across multiple devices and networks will substantially affect the entire structure of the whole communications industry—not just the storage infrastructure but the broadband data networks as well. What will this new market look like, and who is most likely to benefit?

A Range of Service Providers

Until recently, the primary market for cloud computing was the corporate world, where data centers and cloud services have already become rela­tively common.

In 2010 and 2011, cloud services began to proliferate for consumers, starting with sites for posting and sharing videos and photographs, and then moving to documents and proj­ects (including places for children to post and collaborate on schoolwork). These services are evolving rapidly now, as a variety of companies—large players like Apple, Microsoft, and Google, and smaller, niche firms such as Dropbox—begin to offer consum­ers a range of online services.

Consumers looking just for storage solutions can create their own private cloud at home, through one of several possible hardware options. Previously reserved for high-end mar­kets, network-attached storage (NAS) systems have become increasingly common, particularly as consumers migrate from desktop PCs to note­books and tablets, since without a desktop computer, there is no natural place for large amounts of storage at home. The simplest options involve hard drives attached directly to the router that distributes broadband throughout the home.

Installing and provisioning a full-fledged stand-alone NAS system, however, is likely not an option for most customers. Such systems require additional backup in case of failure, and accessing the data when not at home requires a robust household broadband connection and relatively complex setup procedures. Some consumer-oriented companies provide solutions; for example, Apple’s Time Capsule and video-sharing pro­grams, built into its operating system, automatically maintain a hard-drive backup and device-to-device synchro­nization, keeping track of terabytes of data with minimal attention. But Time Capsule, too, requires some knowledge to set up. Moreover, as computers, tablets, and smartphones proliferate, many consumers will lack the skill and time required to main­tain, in effect, a complex home-based data server system for their families. And just the power needed by a NAS system may cost as much as 200 a year.

Local Versus Global Delivery

The market dynamics of cloud infrastructure, the network of hardware and connections that gives people access to storage, are quite different from those of cloud services—the range of services and software that people use when online. Thus, the race to provide consumer-oriented cloud infrastructure and services will lead to a separation of the two and a restructuring of the entire cloud computing industry.

“This separation can be traced to the essentially different means by which services and infrastructure will need to be scaled up. Cloud service providers primarily offer the software that is visible to consumers as they manage their use of the cloud, with the underlying infrastructure typically hidden,” said Dany Sammour, Senior Associate with Booz & Company. “Because software by nature can scale up quickly and globally, these providers can operate in very specific niche environments, offering specialized services to relatively narrow groups of consumers living around the world—and maintain quite profitable businesses as a result.”

Cloud infrastructure providers face a very different challenge. As the demand for cloud storage rises, and the business becomes increasingly commoditized, prices will drop quickly. Companies hoping to compete in the cloud storage market will need to massively and rapidly scale up their data centers to maintain a competitive cost structure. Among the requirements will be optimized data centers greater than 10,000 square meters each, dedicated solely to low-cost storage, and co-located with the broadband network infrastructure for maximum performance. Providers must be able to continually expand and optimize every aspect of their operations, from manpower and maintenance to the sourcing of equipment, space, and power. As storage increases, capital expenditure will continue to grow, totaling several hundreds of millions of dollars for a typical midsized operator.

In this environment, a critical question arises: Which players will be able to scale up their infrastructure offerings to the size required, and will it be a local or global scale game?

Operators’ Right to Win

“Should operators enter the cloud infra­structure space? The answer is largely dependent on whether they can define for themselves a clearly articulated way to play and defend their right to win by developing a strongly differentiated set of key capabilities in this domain,” said Sammour. “Already, some operators have dem­onstrated that they can combine their network transport capabilities with cloud service provisioning to differenti­ate themselves from cloud infrastruc­ture and service providers that operate independently of the networks.”

In addition to their technological advantages in combining their networks and cloud infrastructures to offer higher quality at a lower cost, operators could also bring to bear their deep understanding of the local market and customer base. They have an established billing relationship with their customers, allowing them to adapt their offerings to different segments to secure customer satisfaction and retention. Indeed, operators typically know how to segment and address their customers, they have a good reputation for managing large-scale secure infrastructure, and they can flexibly adapt to local legislation and regulation.

Overall, the combination of cloud and network infrastructure management with a good understanding of the customer and the local market situ­ation gives operators a clear right to win in offering consumer-centric cloud infrastructure.

Executing the Way to Play

Network operators need to move fast and be decisive in defining their optimal way to play in the cloud. How they do so will ultimately depend on their market footprint, geography, network infrastructure, and customer base.

“They must also be specific in defining a way to play that gives them a clearly articulated right to win. The way to play for an incumbent national operator will differ from that of a mobile low-cost challenger. The value lies in building a coherent, differentiated set of capabilities and getting the timing of the scale-up right, a choice that will depend greatly on how well a player understands its local markets,” commented El-Darwiche.

  • Operators should begin by assum­ing that very few cloud service providers will be willing or able to take the risk to scale up their own cloud infrastructures to the degree required. They need to take a three- to five-year perspective in building their scal­able cloud infrastructure. Then they have to be ready to open this cloud infrastructure and operating model to third parties based on well-defined open interfaces.
  • Operators must also clearly differentiate their consumer cloud offerings from any corporate public cloud services. They need to offer retail customers a simple user interface, easy-to-use consumer-oriented processes, and personally tailored service levels, all integrated with some social network services. For many operators, this will mean investing in (or acquiring) interface and design capabilities that they have not needed in the past.
  • Operators must invest in up-selling capabilities for their cloud infrastructure that will enable them to add revenue per month to their existing revenue base for some 10 to 20 percent of their key custom­ers, while selling more incremental services to the remaining customer base.
  • Operators need to be ready to scale up their offerings to tera­bytes of storage for millions of users, if required, while maintain­ing an attractive cost structure throughout the scale-up. This will require investing in substantial operational capabilities in scaling up cloud infrastructure.
  • Operators need to get the timing of the scale-up right. Then they must make sure they have the strategic suppliers in place to ensure access to additional hardware, space, power, and the like. And finally, they must be able to design their data centers to achieve the lowest possible operating cost.

The burgeoning market for consumer cloud services presents operators with a significant growth opportunity. To gain a clear right to win in the residential cloud space, however, they must combine their cloud and network infrastructures in a differentiating way and with a focus on their specific geography, markets, and related customer segments. And they will have to carefully define their specific way to play in this game. In doing so, they must develop clear answers to the following questions:

  •  When should I invest in cloud infrastructure, and to what extent?
  • How can I best leverage network infrastructure together with the cloud?
  • On which segments should I focus initially, and in the long run?
  • Which services should I provide on my own, and with whom should I partner?
  • Which capabilities do I need to invest in and develop?
  • How can I best interact with a wide range of third parties?

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