Cisco’s decision to buy Linksys 9 years ago was hailed by most as an indication the company was going to expand into the hotter consumer broadband space. It was clear to some at Cisco even then that margins on the business were going to be low, and so Linksys was a kind of arms-length business unit. Now apparently it’s no business unit at all; Cisco is rumored to have engaged a banker to look for bidders to take Linksys off its hands. Obviously consumer-market TAM isn’t what it was cracked up to be.
Alcatel-Lucent, as part of its efforts to sell off some assets, has provided more information on its optical business, and business analysts were astonished by the low margins they were facing there. Here we are in the age of broadband, with everyone seemingly demanding bits left and right, and you can’t make money selling capacity? Obviously Internet traffic isn’t the driver of build-out that it was cracked up to be.
You can see the theme here. The industry hasn’t been particularly good at figuring out what’s going to be valuable, and that has created some serious issues and disguised some others. Everyone is paying a price for a simplistic view of the market.
No mass market can sustain margins, simply because you can’t achieve a mass market except by the tightest pricing and most extensive advertising and distribution. Cisco was right in thinking that the consumer broadband space would be hot, but wrong in thinking that the heat could be exploitable by a company who has probably never in its history wanted to be in a space with razor-thin margins.
Cisco and the cloud? Under my theory, Cisco’s success with cloud-exploitation depends on its success in promoting the model of the cloud that I’ve been advocating—not because I’ve been advocating it but because a cloud whose market is those who want to save money is a cloud on a direct course to commoditization. You can’t sell commodity services from high-margin infrastructure. Cisco needs to make its cloud vision into what it says it wants to have–a software vision.
NSN’s optical decision and Alcatel-Lucent’s recent optical disclosures are also examples of narrowthink. First, Internet bandwidth has been dipping in unit cost and profit for over a decade, at an average of about 50% per year. As I noted above, you can’t sell low-margin service from high-margin infrastructure, so operators are building out by doing everything in their power to pressure prices down. That hits the optical space in a direct way, obviously, because it means only the cheapest gear gets sold. But the indirect force is the most insidious, and it’s the metrofication I’ve been talking about.
Nobody makes money on bits any more. So anyone who makes money has to move up the value chain, to selling content, etc. We wouldn’t have a prayer of having revamped cable networks or FTTH absent the delivery of channelized TV to make the process pay. The Internet would never be able to do that. But valuable content experiences are few in number, so you can cache the content locally to avoid rolling your access bandwidth needs deeper into the network. Twenty years ago, the core had more combined capacity than the edge. Now it’s reversed, and it will only get further polarized in favor of metro as we go.
What does this have to do with optics? Well, metro optics is very different because it’s a pure aggregation play, and because the fiber paths follow a logical tree in structure. The majority of fiber in the metro doesn’t need that fancy DWDM stuff because the total downstream traffic won’t justify it. We aren’t doing less optics, we are in fact deploying more fiber miles. But we’re doing more CHEAP optics for the metro mission. The application of SDN principles to metro to create a virtual-single-layer opto-electrical union is driven entirely by the need to reduce deployment costs for wireless cells (WiFi and 3/4G). Core networking will never again be a good business, optics or routing.
Is this bad? That depends on how you define badness. It’s certainly going to be giving the consumer more of that which they want—at least for a while—but it’s also going to change the vendor landscape and the provider landscape forever. The Internet as a seamless pool of bandwidth won’t exist; some will miss the populism of publishing of old when they find that those who can’t cache are second-class citizens. But all of this is a consequence of those simplistic views. We can’t get everything we want, and everything that’s interesting isn’t real.