What does AT&T’s decision to buy Leap Wireless, Cisco’s decision to do a cloud partnership with Microsoft, and Amazon at three hundred bucks a share have in common? They’re symbols of a market in transition and a call for action to start gathering your troops for some coherent planning.
Traditional communications services, which are services of connection rather than experiences to be delivered, have been commoditizing for some time. The current model, where all-you-can-eat Internet is the service dialtone, compromises network operators’ ability to gather profits from their massive investments in infrastructure. Wireless, which has been less a victim of the shift than wireline, is now demonstrating that it’s not immune, just perhaps resistant. Leap, a low-end player, is a way for AT&T to get more subscribers and that’s your only option in a market where all the major wireless operators believe that ARPU either has plateaued or will do so by year’s end.
If you’re facing ARPU pressure and lack of additional customers to grow into, your most obvious option is cost control. A couple of analysts and reporters have remarked on the astonishing level of support operators have given the whole Network Functions Virtualization thing. Surprise, surprise! It is an initiative aimed at gutting the cost of the network by translating more functionality into software (preferably open-source software) to be hosted on cheap commercial servers. That this will gut the network vendors along the way should be clear to all, but hey if you’re the buyer your own life is paramount. If you die off, vendors get nothing.
The second option for the operators, of course, is the one they should have taken from the start and wanted to take from the start—get into the experience-based services game. One of my big surprises about the NFV process is that it’s so focused on cost that it almost ignores opportunity. That’s something that the vendors involved should be very worried about, but they don’t seem to be. Perhaps that’s because operators have for five years tried to get vendors to help them with service-layer monetization and vendors have simply ignored the requests. The operators didn’t stop buying then, so why believe something different will happen now?
One of the darlings of the operators, everywhere in a geographic sense, wireline and wireless, business or residential, local or national, is the cloud. Operators read the rags (or whatever an electronic rag is called) and they’ve been infatuated with the cloud hype too. Yes, cloud hype. The whole of the cloud market wouldn’t keep the lights on for a big Tier One for a month at this point. Which brings us to Cisco and Microsoft.
The big issue with the cloud, which is a positive to the prospects of the operators, is that the best cloud value proposition exists for the SMBs, and nobody much can sell to SMBs directly. Most can’t sell at all. Microsoft and Cisco would love to get the SMB cloud socialized for both their benefits, so they’re banding to push back the boundaries of darkness and ignorance, the big problem with the cloud for SMBs. If you look at SMB literacy in the cloud space you find that it’s below the percentage who can sing the Star Spangled Banner. Teaching them to sing might be easier, but hardly as profitable, so Cisco and Microsoft forget their traditional enmity and hope to find common programs to advance cloud adoption. Ultimately that has to lead to SaaS, because what else could a non-tech-literate player consume? Cisco and Microsoft have the same challenge, so cooperation is logical.
Which isn’t the case with respect to either Microsoft or Cisco and Amazon, our new stock-market darling. One giant cloud seller is hardly in Cisco’s interest, and Amazon doesn’t sell Azure so Microsoft doesn’t care much for them either. Plus Amazon is in a core business whose profit margins (online retail) are in the noise level. They’ve been smart by opening up electronic media (Kindle tablets) and the cloud, but they will have to struggle to justify that kind of stock price in the real world. Because the Street trades on momentum, they sky’s the limit in the near term but a high P/E multiple demands some “E” to justify the “P”. From IaaS? I don’t think so.
In many ways, Amazon is like a telco. Their core business is a cash cow but hardly a generator of big margins. The IaaS market, which is the low-margin king of cloud services, is something that can be as profitable to them as online retail is. Telcos, as former public utilities, have similarly low ROI on their core business and so they can also be profitable in the IaaS conception of the cloud.
But remember Cisco and Microsoft? If SaaS is really what SMBs want to buy and what vendors would really like to sell them, then SaaS has to be where the cloud is going. So the question for Amazon, and Cisco/Microsoft, and even AT&T and other operators is how to get there. You have to have software to deploy. You have to have effective deployment/hosting processes, and you have to be able to manage what you do so that the quality of experience is good enough that users will pay for it. And, of course, you have to do this in such a way as to make a profit.
So that’s what all these companies, all these news items, have in common. We are trying to elevate services, and the logical place to do the elevating is in the cloud space where the transition from basic (IaaS) to advanced (SaaS) is fairly well defined both in terms of business model and technology model. But what we’ve now got to do is fit all this into a framework that can be profitable. That’s something that the NFV people could undertake, if they want, but they’re going to have to start down that track soon if they want to make useful progress.