Protocol | Enterprise

Why AT&T moved its core tech — but not everything — to Microsoft Azure

Like many telcos building 5G networks, AT&T thinks the cloud is ready to support that challenge. But AT&T's Jeremy Legg thinks the cloud is too expensive for some apps.

​AT&T Chief Technology Officer Jeremy Legg

AT&T Chief Technology Officer Jeremy Legg discusses the move to Microsoft Azure.

Photo: AT&T

Telecommunications companies, traditionally concerned with stability and control, have been slower than companies in other industries to embrace cloud computing. Those days are long gone.

Last week AT&T announced plans to move its 5G network technology to Microsoft Azure. It not only signed a deal with the cloud provider to host its mobile workloads, but also transferred its core Network Cloud technology to Microsoft's budding Azure for Operators division. The two companies have been working together since 2019, but this announcement was the telco equivalent of landing in America and burning your ships: There's no going back once the core intellectual property has left the building.

For AT&T, it was simply time to acknowledge that big cloud providers like Microsoft finally offer the hardware, software and networking expertise required to run their networks, said Jeremy Legg, chief technology officer for AT&T Communications, in an interview with Protocol. That just wasn't the case when mobile carriers started rolling out 4G networks more than a decade ago. And AT&T isn't alone in making this conclusion: Verizon signed a partnership deal with AWS in 2019, and Google Cloud is working with European carriers Orange and Telefónica.

But don't yet consider AT&T a total convert to the cloud. Like a lot of companies of a certain age, AT&T wants to shed two-thirds of its sprawling data-center operation, but it also believes that certain applications with certain performance requirements will always make more sense to run in-house both for cost and performance reasons.

Right before the holiday weekend, Legg talked about the Microsoft deal, AT&T Communications's broader cloud strategy and how the company is applying AI in hopes of making its customer service less painful.

This interview was edited for length and clarity.

Can you tell me a little bit about the Microsoft deal and how it came together?

We've been migrating to [the] cloud for some time, but we originally left a lot of the packet core networking stuff inside of our own data centers. But as you sort of forecast out over time the same macro forces that make it reasonable and cost-effective ... to move IT workloads to the cloud, it increasingly applies to network workloads.

Originally, [the] public cloud wasn't really set up to do network workloads at the level that we're talking about. But now the public cloud is capable of doing those things in combination with central compute as well as edge compute. So as you look at that, and you look at, from a pure cost basis, how much is it going to cost us to expand our on-premises footprints over time, and forecast that model out given the increase in consumption across these platforms, it begins to make sense to move it. And then as you also think about it from a software and software development standpoint, it increasingly makes sense to partner with one of the hyperscalers to make sure that you're innovating at the level that you need to.

The deal that was just announced was a little bit more than a standard moving-the-workloads-over-to-the-cloud deal, in that Microsoft acquired AT&T's network platform technology as well. Can you explain a little bit more about what exactly that means and why that became part of this deal?

The intellectual property aspect of that and the employee aspect of that is actually moving and incorporating parts of our core infrastructure into Azure. They will become responsible for the development and upgrading of our software packet cores and how we move wireless packets around. And we have a lot of packet cores.

They bought Affirmed, which is a packet core provider. We think that, in general, it's a better idea to have a company that wants to build the best possible packet core to serve an industry than us just trying to build one for ourselves.

Where does AT&T see the potential of edge computing? What are the types of things that you think will run best at the edge, both now and in the future?

Well, I think this is going to be a long road, not a short road, as it relates to edge compute. What it really boils down to is products.

Network packet cores have to run closer to the consumer in order to move the packets in the most efficient way possible. But when you begin to also think about the types of applications or services or products that you build at the edge, the architectures change quite a bit from things that were traditionally driven off of central compute, or cloud, or something that's in a traditional on-premises data center.

When you go to the edge, there's a lot of edges. You start talking about hundreds of edges around the country, let alone if you started thinking globally.

We talk about connected cars, well, they're moving; they've got to be able to go from one edge location to another edge location depending on where [they're] going. That architecture is very different from doing something through a central computer.

There are also things from a privacy and security standpoint that I think are important as people are working from home. This gets into things like extending corporate networks into the home, and how do you do that as a network provider, to essentially create a home as an endpoint on a corporate network?

What are your relationships with other cloud providers, and what is your long-term commitment to operating your own data centers?

Historically, AT&T has been a "host it and build it yourself'' company, and we're in the midst of transitioning from that model to a public cloud model. We have [around] 30 physical data centers sprinkled across the company that we're trying to consolidate down to single digits.

That's being done in a number of ways. One is to just simply reduce the number of applications that we have; we have more than 7,000 applications sprinkled across the company and we want to eliminate as many of those as we can, particularly where they're redundant or legacy. And then we want to move certain strategic applications into our own data centers that don't necessarily pencil out to the cloud, but move the bulk of the balance up into the public cloud itself.

We've been doing that with Microsoft for some time. But we also have relationships with Amazon as well as with [Google Cloud Platform], where we use certain sets of capabilities in both of those clouds where it makes sense. So you can think about [machine learning] and AI layers, you can think about specific applications that they built on their service layers that we do take advantage of in addition to Azure.

Then what you also have is an increasing desire on the behalf of AT&T but also [other] companies like us to move some of that central cloud, service layer compute and storage capabilities closer to the edge. Many of these companies have these kinds of models — AWS has had Outposts for some time, for example — and so we're in the midst of crafting the relationship with those providers to have relationships with them at the edge.

This gets into a lot of technology governance, particularly in large organizations, where you really have to control what goes into one cloud versus another cloud, but also recognize that there are certain capabilities in each of these clouds that are best in class; it would be silly of us to not leverage those.

You mentioned a few minutes ago that you are keeping some strategic applications in your own data centers. Can you give me some sense of what you consider strategic, what types of things you really want to make sure are running on infrastructure that you directly control?

We have certain things from the public sector standpoint in our data centers. And then we also have situations where certain types of workloads don't make sense to run in the cloud.

If you're running super-high compute 24/7, it's probably cheaper to run on-premises. The beauty of the cloud is you can spin things up and tear them down, and you're only paying on a consumption basis. But if you're consuming 100% of the time compute and storage and the whole nine yards, there's a cost equation that begins to get into that.

You'd have to run those models and look at certain applications and say, "OK, it doesn't make sense to re-architect this application and move it to the cloud. Do you actually save any money or do you gain capabilities?"

What emerging enterprise technology do you think is the most interesting or exciting? You're not allowed to say edge computing for that category, because we've been talking about edge a lot.

[Laughs.] Well, I'd put ML and AI that leads to automation in there. I mean, it really is becoming real.

The way a customer interacts with a customer service agent, and actually automating that through AI and ML so that they're interacting with a computer, not necessarily a person for certain use cases, and that thing is smart enough to solve that customer problem — that's pretty incredible stuff that, if you think about five years ago being able to do that, not many people would have said you could.

Those things are becoming real, and we've deployed some of this. When you're talking about operating at the scale that we do, finding intelligent solutions that enable automation can be pretty game-changing. When we can serve a customer and keep them off the phone waiting to talk to an agent for five minutes and solve that problem with an AI/ML application, I think our customers are going to be happier.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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