Last week, Telstra announced it is investing about $800 million to revamp its infrastructure to become a services provider. To do that, the Australian telecommunications company is modernizing its existing facilities and is building a data center in Melbourne.

The move is a bold one in a market that has yet come to grips with the need to be more services oriented.  According to the STL Group:

From a provider perspective, the chief problem with the cloud is commoditisation. At present, major clouds are the cheapest way bar none to buy computing power. However, the very nature of a multi-tenant platform demands significant capital investment to deliver the reliability and availability the customers expect. The temptation will always be there to oversubscribe the available capacity – until the first big outage. A capital intensive, very high volume, and low price business is the classic case of a commodity – many operators would argue that this is precisely what they’re trying to get away from. Expect vigorous competition, low margins, and significant CAPEX requirements.

There is a pretty strong argument that telcos need to re-invent themselves in some manner as service providers.  Why? It’s perhaps the biggest market opportunity in the world worth an estimated $90 billion over the next five year, according to one estimate by IBM.

Telstra seems to recognize the opportunity. As part of its modernization, Cisco, VMware, Microsoft and Accenture will build out an integrated cloud infrastructure for a host of enterprise applications and services.

According to Telecoms.com, Telstra CEO David CEO David Thodey said that sales of the company’s T-Suite software-as-a-service (SaaS) offering tripled in the past year. Its cloud infrastructure has increased by 50%, The company is also seeing strong sales in its voice and video business. The company now manages 100,000 IP telephony accounts.

Shifting Currents

A host of new service providers are recognizing the opportunity to provide innovative technologies to telcos such as Telstra:

• Companies such as Apigee, Layer 7 and Mashery have developed API infrastructures that are suited for telcos to manage services.
• Cloudscaling is a services provider that has worked with Korea Telecom to create a cloud infrastructure.
• Aepona provides a software platform to bring mobile intelligence to a cloud infrastructure.

Telecommunications companies are not accustomed to running IT infrastructure. They find great comfort in being network operators and rightfully so. But the market is increasingly moving to the Web. And rarely have telcos acted like Web companies.

But do the telcos have any other choice? It seems not and that in in itself may be the greatest opportunity for the service providers.