Alcatel-Lucent became the latest network equipment vendor to announce their numbers, and the company made some very helpful progress in its “Shift” program to reorient its efforts into areas like mobile and IP, where future profit growth could be hoped for. However, it didn’t have a breakout quarter, and that’s not unreasonable given the early state of its transformation efforts. What Alcatel-Lucent did was to keep the wolves at bay in order to create a chance of success this year. Now they have to actually create it, and their risks are a bit of a poster-child for the industry at large.
If you look at the numbers, Alcatel-Lucent shows signs of a shift in capital focus by operators. While mobile was still strong, wireline optical numbers were better and so was the IP routing picture. What this suggests is that operators have indeed been augmenting capacity for IP traffic and that the augmentation is perhaps a bit more optical-focused (Alcatel-Lucent’s optical switch did much better, for example). I’m of the view that we’re seeing a shift from bandwidth conservation (an electrical-layer function) and bandwidth production (an optical-layer function). If traffic growth is still accompanied by declining revenue per bit (as operators all report it is) then there would be a logical drive to build flatter, more optically intensive, infrastructure. That would also manage operations costs by reducing the number of layers you manage.
Responding to operator (customer) pressure is important for any network vendor, but at the same time Alcatel-Lucent faces the question of whether they can increase the operators’ spending organically. Otherwise they fight for market share in a pond that’s evaporating. Even the recent Alcatel-Lucent focus on “cloud” or “NFV” versions of IMS and EPC can be argued to be offerings that will appeal to buyers to the extent that they set new and lower price points. Again, that’s not bad in the current market, but in the long run it’s only fanning the pond to generate more evaporation.
There are two areas where Alcatel-Lucent could make some hay. One is on the SDN side with Nuage, and the other is in the NFV/cloud area where their CloudBand offering is perched. Nuage is one of the very best of the SDN approaches, with more strategic potential than perhaps anything out there from anyone of any size. CloudBand is one of the very best carrier cloud and NFV approaches too. My concern is that in both cases, Alcatel-Lucent is hammering on tactical issues and not facing up to the broader strategic ones.
A good Alcatel-Lucent plan for success would look something like this. I start by shedding all of the stuff that’s never going to contribute to my long-term revenue growth. Project Shift is doing that, so you can fairly say that Alcatel-Lucent has been successful with this step. My second step is to apply strategic technologies to the tactical mission of cost reduction by focusing on lowering opex so that I’m delivering additional benefits without reducing capital spending on what I sell. The third step is to use those same strategic technologies to augment revenues for operators thus allowing them to spend more on equipment.
Obviously Alcatel-Lucent is in stage two here, and there is a pretty clear indication that the notion of opex management isn’t as easy as they might hope. Ericsson has a strong commitment to operations enhancements and Ericsson owns Telcordia, the largest of the old-line OSS/BSS vendors. They had a bad-ish quarter, which suggests that operationalization to improve TCO without reducing capex hasn’t been able to drive their professional services or OSS/BSS businesses up enough to create overall gains. In fact, Alcatel-Lucent did better than Ericsson did. To me, this means that the hardest part of a three-step program to solidify growth is that second step.
I’ve noted an earlier blog that next-gen management and orchestration was arguably the key to operationalization, but also that it could easily become a “category eater” by forcing all of the changes in network technology and service direction into a single harmonious something that would blur boundaries between the operations categories, (BSS, OSS, NMS, EMS). What I wonder is whether the smartest move for Alcatel-Lucent might be to encourage that category-eating effect.
Nuage could create a completely new model for cloud networking, and my work with NFV has convinced me that such a model is needed. When we have both virtual services and virtual resources, and when the virtual resources are often created by linking virtual devices that are tenants on a common pool, an awful lot of traditional IP principles are tossed out because they don’t work well. It could be that for SDN the most compelling mission is supporting the second-stage mission of operations enhancement by supporting optimum connectivity models. Nuage is well-equipped for that, but so are other SDN strategies. You can argue which is best in this mission but the most convincing answer would be “The one that explicitly accepts the mission and demonstrates its fulfillment.” Nobody does that yet.
CloudBand could create a completely new model too. MANO or Management/Orchestration, as I’ve pointed out, has to address the creation and management of virtual stuff on virtual stuff. Yes, SDN support of the connectivity dimension of this mission is an independent opportunity, but there’s never a better seat during the plowing of new fields than on the top of a big tractor. The furrows are the last place you want to be, waiting for something to happen. Like most orchestration stories, CloudBand is focused mostly on what I call structural orchestration. Overture’s Ensemble OSA stuff proved that you can take a structural mission and serve it with tools that can do functional orchestration as well. Why not look at doing that within CloudBand, Alcatel-Lucent?
New demands for revenue and the success of the OTT players have combined to create a future for network services that make connectivity—the old mission—blasé. If the services of a network are transformed, it is illogical to assume the network itself isn’t transformed in turn. That’s the high ground that the second and third stages of business progression have to be aimed at seizing. Alcatel-Lucent has nice jumping-off points, but no convincing momentum there. So, Alcatel-Lucent, it’s time to stop talking about “The Shift” and start talking about “The Charge!”
In economic news, we’re still in the doldrums in terms of real market momentum. There are clear indications that the global economy is recovering, and clear indications that the financial industry is torn between getting in on the ground floor and running screaming with some near-term profits clutched in their hot little hands. Large-cap stocks have been seen as safer, and even in tech there are indications that the traditional players in the IT and networking spaces are seen as attractive. But smaller caps have been depressed by fear that the recovery is either not real or is anchored on different principles, principles that might make jumping too far into a momentum trend a major risk. We need more earnings reports, in other words.