Microsoft & ATT – Packet pushers.

AT&T admits that it can’t compete.

• By selling its Network Cloud platform to Microsoft and moving all of its 5G core over to Azure, ATT is admitting that it cannot compete in this area and is looking to lower its costs as much as it possibly can to compete on the cost of packets.
• This is in line with its other moves to exit from its content business and cut its dividend both of which signal a business that will attempt to compete mostly on cost.
• AT&T is moving its 5G mobile network to Microsoft cloud and at the same time, Microsoft is acquiring AT&T’s technology and will be able to sell it to other operators as part of its offering.
• Financial terms were not disclosed but I suspect that AT&T will get an upfront payment for its IP as well as an ongoing royalty should Microsoft have some success in selling it to others.
• The net effect will be to reduce its Azure bill which will now be substantial given the scale of its move to Microsoft Azure.
• This is a logical progression of the relationship where AT&T is already a customer of Azure and has used Affirmed Networks and Metaswitch both of whom have since been acquired by Microsoft.
• AT&T was one of the first operators to virtualise its core network which should have given it a competitive edge over its rivals.
• However, this does not seem to have worked very well as had it been successful, AT&T would have kept the IP to itself and leveraged it to earn superior returns.
• Instead, it would appear that AT&T has decided that allowing others to use its technology will make no difference to its competitive position other than to lower its costs by selling it to Microsoft.
• AT&T will now focus on delivering services over this network which it thinks will be cheaper (and maybe better) to deliver as a result of this transaction.
• The real winner here is Microsoft which is on a mission to catch up to Amazon’s AWS and is gradually delivering on that through faster organic growth.
• Furthermore, this transaction will boost the attractiveness of its Azure for Operators offering as it will be able to offer a more complete solution using AT&T’s IP.
• This is going to be attractive to smaller operators who lack the scale to create their own 5G core and be competitive at the same time.
• This will also increase pressure on the managed services businesses of Ericsson which is also developing a 5G core cloud product for its customers.
• The advantage that Microsoft will have is that it is demonstrably vendor-agnostic meaning that it will able be to advertise that its solution will work just as well with the infrastructure of any vendor.
• Ericsson will be able to counter that with the Apple argument of better vertical integration giving superior performance.
• Hence, I think that different solutions will suit different operators, but Microsoft’s ramp up here will increase competition for Ericsson in particular which has a long history in network services.
• The net result is that this a tacit admission by AT&T that it is unable to compete in an area once considered core to its business.
• Hence, I think that this inches AT&T (and many other operators) closer to an inevitable destiny of becoming packet pushers.
• There is nothing wrong with this, but one has to be rigidly focused on it in order to offer the best packets at the lowest price.
• Those who fight this will struggle as they will be trying to do other things at the same time meaning that costs will be higher overall.
• I have long since sold AT&T and have no intention to buy it back.