SDN and NFV are revolutions in a sense, at least. They both offer a radical new way of looking at traditional network infrastructure, and that means that were they to deploy to their full potential they could change not only how we build networks, but what vendors make money on the deployments. A lot of really good, and bad, things can happen to people in the networking business.
But what will happen may be a lot more pedestrian. The future of SDN and NFV is a classic example of the “irresistible force and immovable object” paradox. It made for a nice song in the days of my youth (“Something’s Got to Give” for those interested, a theme I’m sure you know I’ll be returning to here). It’s likely to make for a messy five years or so, and thus it’s important we understand what the “forces” and “immovable objects” are in my analogy.
Let’s start with the force of declining revenue per bit. Networks produce bits as their product. Yeah there can be higher layers to deliver experiences, but the network itself is a bit-producing machine. Network equipment moves bits around, and as the price of using these bits declines in marginal terms (price per bit), there is corresponding pressure on equipment vendors to provide the bit-producing gadgets cheaper. SDN and NFV are not transforming carrier capex, what’s transforming it is financial pressure. If SDN and NFV don’t present any more favorable cost points, either something that does will be explored or eventually investment in bits will slow and stall.
There’s a financial immovable object, too, which is the residual value of current infrastructure. Operators have hundreds of billions of dollars of sunk costs, assets they’ve purchased with strung-out expectations of useful life so they’re written down over a period of years. If an asset with two years of a five-year depreciation cycle is replaced, you bear 40% of the cost of that asset (assuming straight-line depreciation) when you toss it. That’s over and above what the new gadget costs. That means that any new approach that comes along will likely have to be gradually phased into the network to avoid big write-downs. That, in turn, creates a pressure on buyers to stay the course, and in particular to manage their expected benefits and expected costs very carefully to avoid having to go through another replacement cycle a year or so down the road.
In the network operator space, over the last ten years, we’ve experienced rapid declines in revenue per bit. Wireline broadband was impacted first, but you can see that as users shift more to mobile services we’re also seeing declines in return on infrastructure for mobile. It’s these declines that are putting pressure on the vendors, not onrushing SDN or NFV. Some operators are fleeing their home markets to invest in services on other continents because they can earn a better return there. We got rid of regulated monopolies in public networking in the ‘90s, and so the operators of today have as much a right to earn a profit and shareholder return as the vendors do. That may turn them into businesses less dependent on bit-pushing.
Obviously we get now to the “something’s got to give” phase. If you define return on infrastructure as your total service revenue divided by your total cost of network ownership, you have to raise the former, lower the latter, or both. What could be done?
Capital cost management is an obvious approach, and in fact it’s the one that drove the founding of the NFV Industry Specification Group about two years ago. The notion was simple; shift from custom devices to hosted software-based features on commodity servers and save money. The problem is that operators quickly realized that the gains likely from this source were less than 25%. One operator’s response to that was “If I want those kinds of savings I’ll just beat Huawei up on price.”
Why isn’t 25% enough? In part because of the financial inertia existing infrastructure poses; we can’t change the network quickly so it would take three or four years for net benefits from NFV to be fully available. In part because NFV is a lot more complicated than just sticking a gateway device at the edge of a customer network. Read the ISG’s public documents and you see all the steps they want to support—scaling, optimization of selection of locations…you get the picture. Complexity costs, and even in today’s networks the total operations costs make up about half of TCO. Suppose we cut capex by 25% and raise opex by 30%?
This is how we got to our current vision of what SDN and NFV could do—they could improve operations efficiency and enhance service agility, raising revenues. These benefits are in a sense more credible than capex reductions—we can’t disprove their value. The only problem is that we can’t really prove it either. Just how do we improve operations efficiencies with SDN or NFV? According to operators they’ve not run trials that can establish the operations efficiency of NFV or SDN, largely because there is at the moment no firm way of operationalizing either one of them. We’re hearing a lot about how faster deployment could lead to higher service revenues, but what it really leads is to revenue acceleration. If somebody orders a corporate VPN with a bunch of features and you can deliver it two weeks earlier, you get two weeks of revenue. I saw an article that said that could increase service revenues by 4%. Wrong. It only applies to new services, and it presumes that the customer would be prepared to accept the service two weeks earlier in all cases. My spring survey this year asked buyers how much two weeks’ improvement in service availability would change their total spending for the year, and the result was chilling; a quarter of one percent was the consensus.
We are almost exactly two years from the seminal white paper that launched NFV, and over three years from the dawn of SDN. We’re busily defining protocols and processes, but are we addressing those irresistible forces and immovable objects? Not yet, but I think we will be. Every day that we move forward is a day of greater pressure on operators to improve revenue per bit and return on infrastructure, and a day of lower guidance from equipment vendors whose own plans are starved by buyer budget constraints. Watch this market, particularly operations, in 2015 because (let’s all sing it!) “Something’s got to give, something’s got to give, something’s got to give!”