Looking Ahead to the Operators’ Big Fall Technology Planning Cycle

Every year in the middle of September operators launch a technology planning cycle.  By mid-November it’s done, and the conclusions reached in the interim have framed the spending and business plans for the operators in the coming year.  We’re about two months from the start of the cycle, and it’s at this point that vendors need to be thinking about how their key value propositions will fare, and what they can do by early October at the latest to get the most bang from their positioning bucks.

According to operators, the big question they have to consider this fall is how to stem the tide in the declining profit-per-bit curve.  Network cost per bit has fallen for decades but revenue per bit has fallen faster, largely driven by the all-you-can-eat Internet pricing model and the lack of settlement among Internet and content providers.  SD-WAN, which is increasingly an Internet overlay that competes with provisioned VPNs, threatens to further undermine revenue per bit and introduce new service competitors who look like OTT players.

The challenge, say the operators I’ve talked with regularly, is that there’s no clear path to profit-per-bit success, either at the approach level or at the technology level.  Cost management is a credible approach, but can you actually achieve significant cost reductions?  Revenue gains would be even better, but how exactly do you introduce a new service that’s not just a cheaper version of a current one, and thus likely to exacerbate rather than solve the problem?

Capex isn’t the answer.  Operators say that new technology choices like SDN and NFV might reduce capex somewhat, but the early calculations by CFOs suggests that the magnitude of the reduction wouldn’t be any larger than the potential savings achieved by putting pricing pressure on vendors.  Huawei has clearly benefitted from this everywhere except the US, and some operators here are starting to lobby for a relaxation of the restrictions on Huawei’s sales here.  In any case, a fork-lift change to current infrastructure is impossible and a gradual change doesn’t move the needle enough.

Opex efficiency is a better candidate, but CFOs tell me that nobody has shown them a path to achieving broad operations economies through SDN or NFV.  Yes, they’ve had presentations on how one particular application might generate operations improvements, but the scope of the improvement is too small to create any real bottom-line changes.  Not only that, the math in the “proofs” doesn’t even get current costs right, much less present a total picture of future costs.  However, this is the area where CFOs and CEOs agree that a change in the profit curve is most likely to be possible.  One priority for the fall is exploring just how operations efficiencies could be achieved quickly and at an acceptable level of risk.

One interesting point on the opex front is that operators are still not prioritizing an operations-driven efficiency transformation that would improve cost and agility without changing infrastructure.  Part of the reason is that while vendors (especially Cisco) are touting a message of conserving current technology commitments, none of the equipment vendors are touting an operations-driven attack on opex.  In fact, only a few OSS/BSS vendors are doing that, and their engagement with the CIO has for some reason limited their socialization of the approach.  Technology planning, for operators, has always meant infrastructure technology planning.  Will some big vendor catch on to that, and link operations transformation to the opex benefit chain?  We’ll see.

On the revenue side, most operators believe that trying to invent a new service and then promote it to buyers is beyond their capabilities.  Simple agility-driven changes to current services hasn’t proved out in their initial reviews; they tend to be sellable only to the extent that they lower network spending.  The current thinking is that services that develop out of cloud trends, IoT, agile development and continuous application delivery, and other IT trends are more reasonable.  This fall they’d like to explore what specific technology shifts would be needed to exploit these kinds of trends, and which would present the best ROI.

There are two challenges operators face in considering new revenue.  First is the fact that the credible drivers for new services, the ones I noted in the last paragraph, are all things waiting to mature even as market targets much less as a place where real prospects are seeking real services.  Operators think it could take several years for something to develop on the revenue side, which means that something else has to be done first to reduce profit pressure.

Another issue operators are struggling with this fall is 5G.  Nobody really expects it to be a target for major investment in 2017, and all the operators see a 5G transition as a kind of new-weapon-in-an-arms-race thing.  You can’t not do it because someone for sure will.  It would be nice if it were extravagantly profitable, but fully three-quarters of mobile operators think that they’d have to offer 5G services for about the same price as 4G.  Further, operators in the EU and the US think that regulatory changes are more likely to reduce profits on mobile services than to increase them.  Roaming fees are major targets, for example, and neutrality pressure seems likely to forever kill the notion of content providers paying for peering.  In fact, content viewing that doesn’t impact mobile minutes is becoming a competitive play.

One question operators who retain copper loop have is whether 5G could be used as an alternative last-mile technology, making every user who isn’t a candidate for FTTH or at least FTTC into a wireless user.  Another question is whether 5G might help generate opportunity in IoT or other areas.  Unfortunately, few of them think there will be much in this area to consider this fall.  It’s too early, and there are regulatory questions that vendors are never much help in dealing with.

The big question with 5G is whether it introduces an opportunity to change both the way mobile infrastructure works and the way that mobile backhaul and metro networks converge.  One operator commented that the mobile infrastructure components IP Multimedia Subsystem (IMS) and Evolved Packet Core (EPC) were “concepts of the last century”, referring to the 3G.IP group that launched the initiatives in 1999.  There’s little question in the mind of this operator, and others, that were we to confront the same mission today we’d do it differently, but nobody believes that can be done now.  Instead they wonder whether application of SDN and NFV to IMS and EPC could also transform metro, content delivery, and access networking.

This is the big question for the fall, because such a transformation would lay the groundwork for a redesign of the traditional structure of networks, a redesign focused on networks as we know them becoming virtual overlays on infrastructure whose dominant cost is fiber and RAN.  If operators made great progress here, they could revolutionize services and networks, but the operators I’ve talked with say that’s going to be difficult.  The problem in their view is that the major winners in a transformation of this kind, the optical vendors, have been slow to promote a transformative vision.  While some operators like AT&T have taken it on themselves to build software to help with virtualization, most believe that vendors are going to have to field products (including software and hardware) with which the new-age 5G-driven infrastructure could be built.

The transformation of metro is the most significant infrastructure issue in networking, and SDN or NFV are important insofar as they play a role in that, either driving it or changing the nature of the investments being considered.  Operators believe that too, and their greatest concern coming into this fall is how to reshape metro networking.  They know they’ll need more capacity, more agility, and they’re eager to hear how to get it.

I’ve been an observer and in some cases contributor to these annual planning parties for literally decades, and this is one of the most interesting I’ve ever seen.  I have no idea what’s going to come out of this because there’s less correspondence between goals and choices in this cycle than in any other.  One thing is for sure; if somebody gets things right here there could be a very big payday.