Here is an interesting question for you. If the gazelle evolves, does the lion also have to change? Of course, you’d say. A food chain generates a chain reaction to any significant alterations. Well, then, how about this one. If network services evolve to something very different, does enterprise network equipment also have to evolve? That’s the question that should be plaguing Cisco and maybe other network vendors as well.
If you look at Cisco’s quarter you see what probably surprises nobody at all. Their enterprise numbers were pretty good and their service provider results were dim. Here’s Chambers’ comment from the earnings call: “We are managing continued challenges in our service provider business, which declined 7%, as global service provider Capex remained under pressure and industry consolidation continues.” There are two questions begging to be asked regarding these numbers. First, why are operators holding back while enterprises spend? Second, will changes in the operator business model inevitably impact the enterprise?
Everyone buys stuff for ROI. For enterprises, the return comes in the form of improved worker productivity, lower support costs, and lower equipment costs. My surveys suggested that enterprises responded to the 2008 economic crisis by holding back on “modernization spending”. They’re not doing that as much now, though they’re also not backfilling to make up for past neglect. Whatever the details, enterprises really can’t just stop spending on networking because networking supports their operations. If your accounting isn’t profitable you can’t stop making payments or collecting on invoices.
For operators it’s more complicated. They sell services based on expensive and long-lived infrastructure. They could certainly decide to exit service markets that weren’t profitable, or to invest only where profit could be had. Verizon, remember, doesn’t offer FiOS everywhere. They sell it where they can make money, and they’re trying to sell off their access business to rural telcos where FiOS isn’t going to pay off. Operators also have the option to under-invest in infrastructure and allow service quality to decline if it’s impossible to make money by providing what customers want.
I think all of these factors explain the current Cisco profit picture. Operators are saying that their profit per bit is declining so they’re not rushing out to spend on infrastructure to generate more bits. Enterprises are tied to network-centric application paradigms for productivity enhancement. The latter are carrying spending better than the former.
The latter are also spending on the services of the former. When we didn’t have IP VPNs, enterprises bought routers for WAN transport. Today those products aren’t necessary. The question is whether new services could change the enterprise network composition as old ones did. If they do, then Cisco’s enterprise business is also in jeopardy.
The cloud could be another issue for enterprise spending on network equipment. Most enterprise switching goes into data centers, and if there is a significant migration of applications from the enterprise data center to the public cloud, there would be a drop in enterprise data center switching spending. This could be somewhat offset by gains on the provider side, but obviously cloud computing can’t work if there’s no economy of scale, so we’d have to assume that compensatory cloud provider data center switching spending gains would be significantly smaller than the enterprise losses.
The big question, though, is whether the evolution of “services” that network operators and even equipment vendors are proposing would impact the way enterprises buy equipment. One obvious example is the virtual CPE stuff. Today we’d often terminate business services to branch offices in a router or custom appliance. What operators plan to do is to terminate it in a cheap little interface stub backed up by hosted functionality in the cloud. There are a lot more branches than headquarters locations, so if this technology switch succeeds then enterprise branch networking could change radically.
Then there’s NaaS. We hear that SDN could let us dial up a connection ad hoc, letting enterprises buy bandwidth as needed on a per-application and per-user basis. What does this do to traditional networking? Even carrier networks that are at least partially justified by VPN services might be changed if suddenly we were just building connections on demand. Underneath a VPN is IP routing. Underneath SDN forwarding paths is…well, nothing specific.
Virtual network elements could let enterprises bypass the whole notion of Ethernet or IP services and devices and simply funnel tunnels into servers and client devices over pretty much featureless optical or opto-electrical paths. An “overlay SDN” technology like the original Nicira stuff, now part of VMware, or the Nuage SDN products from Alcatel-Lucent could be used to build this kind of network today. At the very least it could dumb down both the client/branch side of the network, and from their latest announcement it’s clear that Nuage is aiming at integrating enterprise data center networking and branch networking even to the extent of supporting combined operations.
If you combine NaaS and NFV principles you get network services that are composed rather than provisioned in the old sense. Think of it as a kind of 3-D printer for services. You send a blueprint to the Great Service Composer and you get what you asked for spun out in minutes. This would be a profound change in not only services but applications, including cloud computing. All of a sudden application features aren’t put anywhere in particular, they’re just asked for and supplied from the most economical source or with the most suitable SLA.
What Cisco is facing, what Cisco should fear, isn’t white box switching. The fact is that we’ve not done much yet to make “forwarding engines” like OpenFlow devices into alternative network components. We’ve just made them into switches and routers. That would have to change, though, if we expect to have the kind of things I’ve noted here, and if it does change at the service level then it will pull through a transformation even at the enterprise equipment level.
This doesn’t mean that I advocate Cisco jumping with both feet into the deep end of the NaaS-and-NFV pool. I think they’d simply have too much to lose. Networking is an industry whose depreciation cycles are very long, and it will take time for the service providers and enterprises to adapt their infrastructure to a new model even if they understand that model and accept its consequences. Cisco could, in a stroke, make the future more understandable and acceptable, but I don’t think they could win in it quite yet. Till they reach that tipping point, I think we’re going to hear the same story of hopefulness for old technology and blowing kisses at the new.