Is there a cloud at the end of the telco pipe?

For all the talk of telcos trying to get a higher share of chief information officers’ wallets, there is little to show in one of the hottest recent trends: software as a service or cloud computing. Beyond what gets advertised on their Web sites, there is not much of a visible front line presence among CIOs. Part of the reason has to do with the fact that even CIOs are feeling sidelined in this trend.

Cloud computing is no longer a fad but an emerging deployment model that is reshaping the landscape of what and how the CIO manages. To a recent financial services client, the CIO confided his despair in the lack of control over how his internal customers were entirely bypassing the IT function, setting up relationships with SaaS providers and then turning to corporate IT for back-end processes, such as contract administration and audits. The list of cloud computing success stories is now much longer than the often-quoted (and almost iconic) Salesforce.com case. In fact, it has become another case study for a long-tail phenomenon, with many applications serving very niche applications. The attractiveness of SaaS to the small- and medium-sized business segment has now been transferred to the large enterprise segment, which is adopting it fast and furiously. A recent assessment of the portfolio of IT suppliers for a Fortune 100 identified 50+ applications being delivered from the cloud — and none of them provided by a telco!

Telcos have not dramatically changed their strategy in the enterprise space to take a share of this trend. They seem comfortable in continuing being the pipe, the infrastructure provider. They will certainly benefit from the trend, as SaaS will generate demand for more connectivity (higher bandwidth, more redundancy, hosting space, etc); however, this is business as usual, with the continuation of the “bread-and-butter” strategy, which has become (and will continue to do so) incredibly commoditized (witness the recent surge in requests for proposal). Many telcos will claim that SaaS is part of their strategy to broaden their information and communication technology offering, but where they have gained market share (customer premises equipment resell, managed services, hosting, etc) they are competing in crowded spaces, for businesses with declining margins, and have not gained any share of the SaaS market. Worse, as even CIOs are no longer the gatekeepers, telcos will lose the leverage with independent software vendors (ISVs), which once valued partnering with telcos to get a channel to the CIO. Now with SaaS, ISVs are in many situations disintermediating the CIO, telcos and other infrastructure providers.

Telcos should not concede or surrender their original position of strength. There is a lot that they can do to add value to the enterprise business user. However, if telcos want to be a significant player in this segment, they need to adapt to win and play the “long-tail game.” As no one player will dominate this market, telcos need to pick segments and niche applications where they can provide content. They need to partner, acquire or even develop relevant content. The good news is that there is much of their current competence that can be leveraged in areas such as fleet monitoring, security, content distribution and billing that could be turned into applications. The bad news is that, despite some progress, telcos are still largely seen as the pipe and much effort will be required to change perceptions. Telcos need to change their go-to-market setup to recognize the disintermediation mentioned earlier. They need to reach directly to business process owners who currently don’t even recognize their brand and capabilities.