Transformation: Failing at the Service Level, Starting in Network Equipment

If you assemble the “little stories” of the last week, looking past the big product/technology announcements, you see the indicators of an industry in transition—or one trying to transition at least.  To understand what’s happening you have to go back to the US Modified Final Judgment back in the ‘80s and look at the carrier data.

When MFJ came about it created a “competitive” telecom business, in that it relaxed regulatory barriers to competition and broke up the basic US telecom monopoly.  That was followed (in 1996) by the Telecom Act, and it was mirrored in other countries.  By the end of the ‘90s we had largely “privatized” or “deregulated” telecom.  But getting back to the US and the MFJ, we saw immediate impact in the long-distance space, where barriers to market entry were being lowered by technology improvements.  Competitors focused on long-distance because there was more profit there, and less capital investment.  Local exchange never really got that competitive (most CLECs died) because there’s simply not enough ROI.

But even long-distance suffered.  As the ‘90s progressed you could chart the cost/price curves for telecom services and see that by the end of the decade they’d cross.  And they did, and the result was the acquisition of the long-distance players by the local exchange players.  We’re seeing those same cost/price convergences today in telecom overall.  The unlimited-usage pricing model has created bandwidth-exploiters because it’s lowered the bar for market entry, but there’s no interest in bandwidth-creators because the margins are already too low, and getting lower.  Mobile is in a better place than wireline, but my own surveys say that mobile ARPU will peak in late 2013 to early 2014, and then decline.

It’s this world that SDN and NFV and the cloud have to address, or at least are expected to address.  Operators have flocked to the cloud, among the primary transformational opportunities they see, because it’s a new market—and “total addressable market” or TAM is everyone’s touchstone.  The challenge with the cloud, though, is to break into new positive ROI territory, and IaaS cloud services is low-margin because it’s a cost play for the buyer.  There are a lot of things you can do to elevate cloud ROI, most notably moving up to SaaS services or hosting your own service elements, and NFV is a big part of making that happen.

But underneath there’s always the network.  Say we have an OTT guy and a telco offering the same service set.  The telco has to deliver both services to the user, and the delivery process is at best marginally profitable.  The OTT guy, free of that burden of low ROI, can offer his service at a lower price because there’s no delivery millstone around the OTT neck.  So in order for telcos to compete, they not only have to be as agile at the service level as an OTT, they have to be profitable enough at the network level that their network won’t force them to price themselves out of the service market.

The early focus of NFV is cost management, cost management that comes about because it’s the perception of operators that vendors have been pushing the notion that somehow the operator has a divine mandate to transport bits under any terms necessary to boost network equipment consumption.  We’ve all seen Cisco releases about the explosion in traffic, the clear implication being that it’s high time for operators to step up and start investing ever if ROI is negative.  Take one for the team.  You can see how the operators might view this as opportunistic and manipulative, not to mention financially unreasonable.  So they counter with a strategy to unload network cost by commoditizing network equipment.

Which will happen, one way or the other.  Open source is increasingly on the operator radar, and one of the things that NFV may bring about is a renaissance of operator interest in the space.  We already have some open-source tools being designed to be cloud-hosted, cloud-operationalized, and NFV-deployed.  Some vendors are also doing that, though carefully avoiding their own market sweet spots.  Huawei and ZTE, who enjoy a price advantage in most deals, are winning and growing even as traditional competitors like Alcatel-Lucent and Ericsson and NSN struggle to find the right story and product mix.  Operators are also rethinking their whole architecture to focus more on transport and less on electrical-layer networking, because it makes sense to flatten layers to reduce both capital and operations costs.

We could have changed this picture perhaps five years ago with enlightened regulatory policy.  Providing for settlement, even if it were limited to QoS-specific services, would have provided some run room for current network design as vendors developed their own strategies to face the future.  It’s now too late for that; we are going to have a network transformation because we’ve refused to support or sanction a transformation at the network operators’ level.  So now it’s time to address that.

SDN is a tool, but it can’t be the solution because it’s limited to the network, or to supporting something above the network.  Offering SDN services is either a surrender to a cost-based model of the future (which will ultimately fail, like it did for the long-distance carriers in the US) or an actual acceleration of commoditization by reinforcing operator dependence on cheap bits as their revenue bastion.  NFV is the better tool, and it’s what both operators and vendors should be watching.  If there is a solution to the problem of the network, a strategy that leaves the largest number of both equipment buyers and sellers alive, then it’s going to come out of NFV.  I think there’s no question of that, only a question of whether NFV as a process can produce the outcome everyone needs before the casualty rate gets too high.

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