We’re now hearing that Alcatel-Lucent’s “Shift” may not be shifting enough and that the company is planning to lay off 15,000 and hire back 5,000 new employees for a net loss of about 10,000 workers. There are lessons here for Alcatel-Lucent, obviously, but also I think for the industry. Alcatel-Lucent’s problems fall into two simple areas—anemic capex growth among operators and commoditization of the equipment base. What’s less simple is what to do now.
Operator capex is tied to revenue. Historically, operators have tried to keep their capital spending at a level between about 17 and 24 cents per revenue dollar. It follows that if revenue isn’t growing spending won’t grow either, and if you’re an equipment vendor you need “organic” growth in spending to drive up your own revenue, or you’ll have to steal market share.
That’s where the second problem comes in. If you sell a product that buyers can’t differentiate based on features, they’ll price-shop instead. Networking has lost its innovative luster in many areas, but in particular in the lower OSI layers that weren’t exactly bastions of visible features to start with. A price-shopping buyer is a buyer of Huawei’s gear, and all you need to do to validate this is look at Huawei’s growth at a time when other vendors are struggling.
It’s into this mix that we have to toss the innovations of our time—the cloud, SDN, and NFV. How do they impact the potential capex and differentiation future?
The cloud, if successful, is an incremental revenue source to operators, which is why the cloud has outpaced all of the other “monetization project” categories in rate of progress over the last three years. But the cloud is about IT, not networking. IaaS services as they’re framed today substitute hosted for in-house, and that substitution is going to be price-based, so you can’t command a large cloud margin. Many operators tell me that IaaS is as bad a business as the one they’re already in! That means that cloud success can’t subsidize network capex even if carriers would let that happen. You have to move up the food chain to make the cloud more valuable and useful.
SDN and NFV might arguably help in doing that. By making the network more agile, by linking its services more effectively to software, you might be able to conceptualize new services whose margins would be better. Since these services would have been formulated in part with “network ingredients” it’s reasonable to believe that the agile features would spawn network spending and provide differentiation.
The problem is that we’re not looking at either SDN or NFV in those terms, at least not effectively, and that’s as true for Alcatel-Lucent in particular as it is for the industry in general. NFV is actually dependent on solving a problem, a series of problems, that every cloud buyer and provider will have to solve. So is SDN, but in the most recent survey we did, we found that buyers had no statistically significant awareness of that point, even in the operator world.
Alcatel-Lucent has the best-articulated NFV position of any of the major vendors, but the buyers don’t have a good understanding of Alcatel-Lucent’s SDN strategy. On the NFV side, one of the strengths of the Alcatel-Lucent position lies in its notion of an ecosystem of NFV stakeholders, and another strength is the cloud linkage. What’s lacking, in my view, is a strong vision of the value of NFV and SDN to the buyers’ futures. Operators need to be “service providers” or they’re simply commodity bit-pushers who will be annually sharpening their pencils to generate more cost cuts until they vanish to a point or get supported somehow by governments.
I know that the operators themselves are partially to blame here; visionary thinking happens inside every Tier One but you’re not likely to run into it because it’s buried in the cotton ball of traditional Bell-head thinking. The thing is, you can’t have a market where the buyer is responsible for making the sale. The seller here, including Alcatel-Lucent, has to show that they can be the solution to buyer needs, not wait till the buyer has an epiphany.
There is a need for a “shift” here, but not the mechanistic shift that Alcatel-Lucent proposed and that isn’t addressing the innovation or articulation gap. With a million-buck budget, Alcatel-Lucent could create the next generation of NFV, SDN, and the cloud. So could any of the other vendors in the networking space. Technically the problems aren’t that large that we don’t have solutions for them literally staring us in the face. The challenge is that when it comes to grasping those brass rings, we somehow hold back.
I know that Alcatel-Lucent frames the job announcement as an implementation of its shift plan, and I don’t disagree that emphasis changes are needed, and will nearly always mean workforce changes too. I do think that seizing the vision and making it their own in the marketplace would have been an easy low-apple task to undertake. It could help them understand just what specific areas of technology needed to be shifted from or shifted to. To say “I’m shifting to IP” as every operator fights to reduce their spending on IP technology seems as risky to me as not shifting at all. What part of IP?
We have three revolutions—the cloud, SDN, and NFV. Every network vendor, from Alcatel-Lucent to Huawei, has to either play those cards or invent another revolution. Doing neither, which is what’s been happening up to now, is not an option for anyone.