Summary Bullets:
• Alibaba generated industry headlines during the summer of 2017 due to speculation it was poised to acquire ZTEsoft and heavily invest in China Unicom.
• While the rumored acquisition has yet to take place, Alibaba’s potential expansion into the telco software realm affirms the expanding influence of Webscale platforms in telco software architecture evolution and telco digital business models.
Throughout the summer of 2017, Alibaba’s potential acquisition of ZTE’s software unit, ZTEsoft, for ~$440 million and a large investment in China Unicom produced widespread speculation that the Webscale stalwart is ready to expand its presence in the telco software segment. Alibaba covets ZTEsoft’s software assets to strengthen its hand in driving the build-out of cloud and mobile services throughout telco networks, especially data center applications. The rumored acquisition underlines the growing trend of telcos investing more in software-centric solutions, such as software-defined networking (SDN), DevOps, and OpenStack, to prepare their networks to meet the massive scaling demands of Webscale-originated traffic including 5G and Internet of Things (IoT) services. This includes delivering the intelligence and flexibility required to support vast, low-latency throughput among the data centers that serve the most popular Webscale brands, including Alibaba.
So what are the ramifications of Alibaba’s potential acquisition and investment moves? A few things rapidly come to mind:
• Alibaba: Alibaba wants to emulate the success of the most popular Webscale cloud brands, particularly Amazon Web Services and Microsoft Azure, on a regional and global basis. Completing the acquisition of ZTEsoft or a secondary target like AsiaInfo in the near-term boosts Alibaba’s objective to expand its influence in integrated Webscale/telco architecture development as well as promote its brand in new geographic regions.
• ZTEsoft: Being acquired by Alibaba would provide ZTEsoft a short-term sales and marketing boost, validating its expanding role and value of its telecom software assets in driving operator digital transformation and fulfilling the demands of managing and scaling high-demand Webscale offerings.
• ZTE: Thus far ZTE has not pulled the trigger on selling its ZTEsoft subsidiary to Alibaba. Even with an offer that approaches a half-billion dollars, ZTE risks hampering its long-term competitive prospects as it would remove the software component from its end-to-end portfolio offerings. As telcos expand their investment in software-enabled applications and hardware becomes increasingly commoditized, ZTE would miss out on further capitalizing in this fast-growing segment. Plus the value of its remaining hardware assets could diminish without assurances of in-house integration with ZTEsoft software capabilities, obliging ZTE to maintain close near-term relations with Alibaba with no long-term assurances.
• China Unicom and Alibaba: A substantial Alibaba investment would strengthen its balance sheet and boost its strategic goal to win more small-to-medium enterprise (SME) digital business with more direct access to Alibaba cloud computing platform resources. Alibaba would gain direct access to China Unicom’s core data infrastructure resources to enhance the flexibility and responsiveness of its cloud services, but could threaten relationships with China Unicom rivals China Mobile and China Telecom due to the perceived favoritism accorded China Unicom.
The possibility of Alibaba acquiring ZTEsoft portends tighter alliances between Webscale companies and telco software vendors. Likewise it shows that Webscale players are playing a more direct role in telco digital transformation, including software-driven server and network infrastructure upgrades and cloud business model evolution. Regardless of the outcome of the Alibaba/ZTEsoft negotiations, telco software suppliers and telcos themselves must prepare for the expansion of strategic business relations with the top-tier Webscale players.