A Realistic if Unsatisfying View of the “Market” for SDN and NFV

You can hardly pick up (virtually) an online publication these days without seeing an extravagant market forecast on NFV.  I don’t have much faith in forecasts in general; they usually turn out to be aimed at validating the largest market possible because the buyers of the report are usually vendors.  NFV is particularly problematic, though, and SDN follows only slightly behind in terms of forecast difficulty.  There’s a lot of junk science out there.

Gartner made news this week by saying that neither SDN nor NFV are markets at all, which I also disagree with.  Yes, SDN is an architecture.  So is IP, and it’s a market.  Yes, NFV is a deployment option.  So is cloud computing and even Gartner agrees that’s a market.  So we can’t define our way out of facing the basic question of what the two technologies are likely to do.  We can’t fall back on avoidance.

OK, then let’s give the analysis of the SDN and NFV market our best shot.

SDN is the substitution of central control for packet forwarding using adaptive technology exchange.  If we stay with that purist definition, then SDN advances in two distinct phases.  In phase one we have the enclave model of SDN, where we apply SDN to connection problems that are limited enough to avoid the intrinsic truth that one controller couldn’t possibly software-define the Internet.  In phase two we develop or stumble on a reasonable federation model for SDN that preserves SDN value across enclave boundaries by avoiding the need to harmonize to pre-SDN network-to-network interfaces.

In the enclave SDN phase, my own model says we’re limited to penetrating about 4% of total switch/router spending.  Right now it looks like SDN would be most likely to find its place in cloud data centers first, followed by slowly advancing into metro infrastructure.  During that advance, SDN would break out of the enclaves and become a more broadly useful technology.  In phase two, my model says that it could penetrate almost 75% of the switch/router market, but this will take quite a while.

When?  The current timing my model offers is that phase one SDN cannot possibly achieve full penetration until 2018, and that by 2020 phase two would be well underway, with SDN then owning about 11% of switching/routing.  However, it’s important to note that the growth beyond that level would come largely from SDN control of virtual switch/router elements.  SDN, in short, wins by having lower OSI levels take on more of a role in grooming and fault response, and the partitioning of services and applications would then enable the use of virtual switch/routers.

NFV is a lot more complicated, primarily because it’s far from clear what specific drivers for NFV would look like.  You have to take two views—based on current benefit expectations and based on “magic bullet” expansion.  In both cases you have to look at NFV as being first a “market” in that there would be spending on NFV technology, and second as a market transformation driver that’s shifting carrier capex from network equipment to data center equipment.

Capital savings was the first NFV benefit to be cited, and most operators have abandoned it at this point.  For good reason, I think because my own model says that if that’s the justification for NFV then the maximum impact of NFV would be to shift about a percent of capex to servers.  It’s a pimple on the market posterior at that level.

If opex can be targeted, things get more interesting.  A full solution to service orchestration could justify a lot of incremental NFV spending, but interestingly enough it wouldn’t result in an enormous change in how operator capex is distributed.  In order for NFV to be operationally efficient it has to spread its wings to cover legacy infrastructure.  In doing that it creates a significant benefit even where network equipment remains the same.  What drives the transformational spending changes is the fact that the improved operations practices can then support the third benefit.

Which is new services—“service agility” in the current vernacular.  An agile and efficient operations framework would start to open new revenue opportunities for operators, which would be fulfilled increasingly through the use of servers.  In my model, this benefit-driven but unfocused drive to NFV creates a shift to servers that eventually ends up involving about a third of all carrier spending by 2025.

You noticed that I’ve not talked about what gets spent on specific NFV technology, and that was also true for SDN control.  In neither case are the expenditures a significant piece of carrier spending and my model won’t forecast something that small accurately.  A lot of this will be open source, some will be given away by vendors who will make money elsewhere.  The transformation will impact OSS/BSS spending, though, to the point where NFV-fashioned orchestration will make up almost 40% of that market, also by 2025.

My magic bullet approach does a bit better.  Recall from prior blogs that the magic bullet says that there are a small number of successful NFV applications (vCPE and mobile infrastructure, with perhaps IoT coming along).  Under this model, early NFV success is promoted in the low-apple areas where it makes sense, and these successes serve to justify near-term changes more efficiently because they limit the areas where infrastructure changes don’t pan out in immediate revenue or savings.

In this model, NFV shifts about 2% of carrier capex to servers by 2019 and that number grows to 5% by 2020.  If we could start to address IoT in respectable terms by 2016, that 2019 number would be 5% and 2020 would be 11%.  OSS/BSS impact would also be larger; 65% of that market would be orchestration-driven by 2025.

The combination of SDN and NFV would have significant impact on carrier capex.  Up to around 2020, the combination would actually increase capex slightly year over year as operators have to pre-capitalize to some degree.  By 2022 that’s turned around and there’s a decline of about the same rate, with capex stabilizing at just a bit more than 90% of current levels by 2030.

So there we are, at least as my current model shows things.  Many won’t like the lack of absolute numeric precision in my results, but I don’t think it’s possible to do an absolute forecast—not because SDN and NFV aren’t markets but because they are both alternatives to legacy equipment and their adoption will be driven by their benefits and by overall capital budgets.  I can’t forecast the latter—there are too many variables.

The most critical time for SDN and NFV is the period between now and 2018.  Any technology option that can prove its business case will drive infrastructure spending in its own direction at that point, and that which can’t prove out will be put on the back burner as operators look for better capital strategies going forward.  The moral for SDN and NFV vendors is simple.  You can’t just ride the wave here, because you’re going to have to be the wavemaker.  Otherwise something else wins.