A Financial-Conference View of SDN and NFV

I’ve blogged in the past on how the Street views various companies or even the networking industry, and today there’s been an interesting report by equity research firm Cowan and Company about how SDN and NFV will impact the market.  This is the outcome of the company’s Trend-Spotting Conference and it includes some industry panel commentary and also audience surveys.  As usual, my goal here is to review their views against what I’ve gotten in my surveys of enterprises and operators.

The top-line comment is that our revolutionary technology changes are all going to have an adverse impact on the industry, with attendees saying it will commoditize networking within five years (by an 80% margin).  The vision is that white-box devices will suck the heart out of the networking market, and here I think the view of the audience is short-sighted.  Yes, we are going to see commoditization but no, SDN and NFV or even Huawei aren’t the real driver.

Any time you have a market without reasonable feature differentiation you get price differentiation and commoditization, and that is clearly where both networking and IT are already.  Buyers of all sorts tell me that what they want is a low price from a recognized player, period.  But despite this, buyers also say that they have to be able to “trust” their supplier, to “integrate” their current purchases into extant networks and operations practices, and to “protect their investment” as further changes develop.  When you add in these factors to see who’s exercising strategic influence, it’s not the newcomers who have white-box products or revolutionary software layers, it’s the incumbents.  So my conclusion here is that five years is too fast to expect the kind of radical result people were talking about with Cowan’s conference.

The second major point from the conference is that this is all about agility and not about cost savings, which on the face of it shows that simple commoditization is too simple.  When you dig through the comments in the report you get the picture of a market that’s coping with changes in information technology, changes that necessarily change the mission of networking.  They see that change as focusing on the data center, where they want networks and virtualization to work together in a nice way.

I think, based on my surveys, that the “agility” angle is a common evolution of early simplistic benefit models for SDN and NFV alike.  People start by thinking they’re saving money on equipment, realize the savings won’t likely be enough, and then begin to think about other possible benefits.  But whatever the motivation, if it’s true (as I believe it is) that neither SDN nor NFV will pay off enough in equipment savings, then we have to start looking for how the additional savings will be achieved.

The report says that there are two camps with respect to impact on existing vendors; one says that the paradigm shift in networking could help Cisco and similar firms and the other that it would hurt.  Obviously, everything has this kind of polar outcome choice, so that’s not much insight, but I think the reason for the two camps is the agility angle.  If there are real benefits that can be achieved through SDN and NFV deployment, then those new benefits could justify new spending, not reduce existing spending.  So you can say that we have a group who believe that vendors will figure out how to drive new benefits, and a group who thinks the vendors will fall into commoditization.  That’s likely true.

In my view, the “new benefits” group will indeed win out, but the real question is “when?” and not “if.”  Going back to the five-year timeline, the industry has to either develop something new and useful to drive up spending or face continued budget-based pressure to cut it.  No matter how those cuts are achieved, they’ll be tough to add back later on once they happen.  So I do think that there’s a five-year timeline to worry about—an even shorter one, in fact.  If we can’t identify how networking generates new benefits in the next three years, then those benefits won’t get us back to a golden age.  They’ll simply let us hang on to today’s relatively stagnant market picture.

When you look at the details of the Cowen report you see things like “rapid provisioning” as key goals, things that make the network responsive.  To me, that makes it clear that the revolution we’re looking for has little or nothing to do with traditional SDN concepts like “centralization” or even with NFV concepts like hosting efficiencies of COTS.  What it really is about is operationalization.  We have networked for ages based on averages and now we want to have more specific application/service control over things, without incurring higher costs because we’re touching things at a more detailed level.  No more “Shakespearian diagnosis” of network problems; “Something is rotten in Denmark.”  We need to know what’s rotten and where in Denmark it’s happening.

The issue here, of course, is that the classical models of SDN and NFV have nothing specific to do with operationalization.  You can argue strongly that neither SDN nor NFV brings with it any changes in management model (you can even argue they don’t even bring a management model).  The interesting thing is that when I’ve gotten into detailed discussions with operators (about NFV in particular) what I hear from them is that same agility point.  That means that the operators do really see a need for a higher-level benefit set, and they’re hoping to achieve it.

Hope springs eternal, but results are harder to come by.  The reason is simple; nobody really understands this stuff very well.  Among buyers, SDN literacy is satisfactory only for Tier One and Two operators and NFV literacy is unsatisfactory everywhere.  In the Cowen audience polls NFV wasn’t really even on the radar, and yet if you are going to transform network agility it’s hard to see how you do that without hosted processes.

Vendors are, of course, the real problem.  My straw poll of vendors suggests that their literacy on SDN and NFV aren’t much better than buyers’ literacy.  Why?  Because they’re really not trying to sell it.  Startup vendors want to create a “Chicken-Little-Says-the-Sky-is-Falling” story in the press so they can be flipped.  Major vendors want to create a “Chicken-Little-is-Right-but-It’s-Still-in-the-Future” mindset to keep current paradigms in control to drive near-term revenue.  The Cowen panel said that the SDN world was getting “cloudy” in the sense of becoming obscure.  Do we really think that happens for any reason other than that people want it to?  That’s why we won’t see revolutionary change in five years, and that may be why networking will in fact lose its mojo, just as IT is now losing it.  But there’s still time, folks.  Just face reality.

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