18 Sep Webscale operators ride the high tide of Covid-19—report
While various economies in general, and SMBs in particular, endure steep declines due to the Covid-19 crisis, web scale operators set several records in Q2. According to a report by MTN Consulting, webscale network operators (WNOs) hit all time highs across several financial measures including capex, R&D expenses and revenues during Q2 and the first half of this year.The top-four WNOs, which MTN Consulting listed as Alphabet, Amazon, Google and Facebook accounted for 68% of the market for the four quarters that ended in the first half of this year. That total was up from 63% capex in the second half of last year.
“Stock market valuations of key webscale players have climbed throughout the pandemic,” the report said. “The big are getting bigger, and fast.”
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Free cash flow as a percent of revenues, or FCF margin, rose to 19.3% in Q2 on an annualized basis, which was the highest since the fourth quarter of 2017. WNOs’ stockpile of cash and short-term investments reached $735 billion, up 11% year over year, and “comfortably higher than WNO debt of $483 billion,” according to the report.
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For network investments, annualized capex grew 9% year-over-year to reach $114 billion halfway through the year. The network/IT portion of capex accounted for almost 50% of that total.
In the second quarter, webscale capex was $29.9 billion, which was a roughly a 20% increase over the first quarter of this year and the second quarter of last year.
“New data center construction, though, did not contribute much to capex growth in the first half of the year,” according to the report. “Some construction projects were delayed by COVID-19, and operators focused on scaling out existing facilities. Alphabet noted that its capex reflected ‘relatively more spend on servers than on data center construction and benefiting from our ongoing focus on server efficiency.’”
Telcos team up with webscale operators, but there are risks
Walker also highlighted Amazon Web Services, Microsoft Azure and Google Cloud Projects’ ongoing attempts to cozy up to telcos.
“Cash-strapped telcos are increasingly eager to work with them, for a mix of workload shifts, joint development of services and sales partnerships,” according to the report. “Early deals seemed more aimed at workload shifts where the telco is essentially avoiding the expense of building out cloud and development capabilities by relying on the webscale partner. Recent deals are more in the nature of service partnerships, involving joint development and customization aimed at specific target verticals.”
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Carriers, including telco and cable, have thousands of last mile endpoints that the cloud providers lack. By partnering with a telco, cloud providers can move their services and applications closer to the edge, and to end users.
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Last year, AT&T partnered with IBM and Microsoft to cut network costs and provide new services to joint customers. Earlier this year, Telefónica announced cloud partnerships with both Azure and Google Cloud Project.
While the major hyperscale cloud providers have been courting and winning over service providers, there have been questions over whether the alliances are true partnerships or more of a move by the cloud providers to make carriers “dumb pipes” for their services and applications, which Walker echoed.
“Some have questioned whether it’s short-sighted for telcos to partner with webscale cloud providers, and open up pieces of their network in the process,” the report said. “There are real risks for telcos, to be sure. Yet, many of these deals save time or money for the partnering telco. Moreover, the cloud services business continues to grow, whether telcos like it or not. Telco enterprise revenues are under threat as a result, and partnering early with these cloud players may be sensible – even if just motivated by the philosophy ‘keep your friends close, and your enemies closer.’”
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