Huawei is certainly on a roll. It reported revenues up 40% in the latest quarter, up from a 30% gain the quarter before, and that’s certainly the best in the whole industry. At a time when rival Ericsson is shedding its CEO and rivals Alcatel-Lucent and Nokia are merging for efficiency, Huawei seems to be heading yet again for the deposit window at the bank. What’s really interesting is that this isn’t “news” in a literal sense. It’s not novel, not surprising. It’s also not over.
What did we think was going to happen here? It’s been four years since I heard Stu Elby (then of Verizon) talk about the converging revenue- and cost-per-bit curves. The sense of that talk, and of others made by other operators since, was that operators had to do something to push those curves apart or infrastructure would become unprofitable. Vendors have, in general, shrugged. Cisco’s ongoing story has been “People demand more bandwidth, and you’re a bandwidth supplier. Suck it up and buy more routers!” Well, the operators are doing that. Except for here in the US where Huawei has a political problem, they’re buying more routers and other gear from Huawei.
The Chinese giant networking vendor doesn’t break out its market sectors so you can’t draw a specific conclusion on carrier sales from the overall numbers, but it’s hard to see how any credible level of smartphone sales growth would push up revenue that much. It’s also interesting to note that gross margins declined, which is what you’d expect to see if your buyers are under cost pressure. Telecom equipment is a commoditizing market.
Consolidating to be more competitive is a fine response in such a market, but I don’t think there are any CFOs or CEOs out there who believe that they can match Huawei’s pricing. If they do, then why haven’t they done so and why isn’t Huawei seeing a revenue plateau? But unless those CEOs and CFOs are sticking their heads in the sand (or elsewhere) they can’t escape the fact that their business is going to decline because their buyers’ own business is already declining, and Huawei is living proof.
So, what do vendors to? What should they do, since clearly they’ve not been doing anything much that’s useful?
First, recognize that there is no easy, painless, solution to the declining profit per bit. You can’t fix this problem with SDN or NFV or white or gray boxes, you can’t cover it up with bogus TCO calculations and meaningless technology proofs of concept. Ten well-integrated elements that don’t make a business case still don’t make one. Every vendor except Huawei is going to be under pressure unless they have a specific, credible, short-term-result-generating, approach to pressure release.
Replacing gear with new technology isn’t going to solve the problem because it would take too long given the long depreciation cycles of network equipment. Chambers was right in not fearing white or gray boxes. NFV hosting doesn’t impact even 5% of equipment budgets based on current credible virtual function targets. You can get 20% off from Huawei with negotiations, and with no risk to current investment, practices, or infrastructure—and you can get it right now.
Second, recognize that the only short-term technology initiative that could create a significant financial impact is operations automation. The challenge is that you cannot make operations automation dependent on the very fork-lift infrastructure change you’re trying to avoid. Operators spend fifty percent more on “process opex” today, the cost of support and the prevention of churn through enhanced features and accelerated programs, than they do on capex. They have to automate today’s processes, the ones dependent on today’s infrastructure.
Everyone says that network operations is about fighting fires. Well, you don’t get fires to follow an orderly workflow. They’re events, and in order for operations automation to work the software has to manage events. The problem we have is that standards bodies and operations software companies tend not to think in event terms. I blogged earlier about the NFV ISG’s framework and the fact that the literal application of the structure of their end-to-end model would yield a workflow rather than an event-driven software application. The detailed work being done now, even though this wasn’t supposed to be an implementation description but a functional specification, is taking the ISG deeper into a flow-based implementation.
The final step is to focus next-gen changes on the cloud. As I’ve noted in other blogs, operators have an enormous asset in the number of places where they can locate cloud data centers. Event-driven processes are better in cloud-hosted form in any event, but even were the capabilities equal the cloud option would promote a shift of processing toward the service edge that would benefit operators. That in turn could improve their position in the longer term.
Operations automation improvements will help operators relieve the pressure of profit compression, but once you’ve automated operations you’ve reaped the benefits and you’ll probably still face compression down the line. If services are migrating to a hosted form, via whatever technology you like, then operators have more experience in achieving infrastructure economy of scale in other areas, and they should be able to do that in hosting too—if they prepare by making their stuff cloud-dependent.
Things also have to be benefit-centric, both in positioning and architecture, for operators to utilize them. Since SDN and NFV got started, we’ve been stuck in a capex focus when every operator I talked with said that capex reductions wouldn’t be enough to drive either SDN or NFV. That’s why operations automation really has to lead, to guide the way we apply all these points. You can see progress in the opex-centricity of things in Netcracker’s emphasis on NFV (and their leading position in Current Analysis’ survey), and most recently in a white paper by Amdocs whose title (Beyond Next-Generation OSS) says it all.
Will this, if other vendors follow the outline, help them compete with Huawei? Perhaps, but it’s far from sure that any of the other vendors really want to compete as much as to somehow (against all odds and logic) preserve the status quo. In fact, of all the network equipment vendors out there, Huawei is probably the most active in building the kind of vision I’ve described here. Competitors aren’t shut out, but they’re losing first-mover advantage. When you lose that to a price leader, you’re in big trouble.
Router vendors like Cisco and Juniper (who just reported their quarter) are benefitting from protection from Huawei competition in the US market. Juniper said on its earnings call that of their top ten customers, only two were outside the US. There are signs of resistance to the current ban on Huawei in the US carrier market, and if it’s lifted then sales and margins for a lot of deals will be at risk. But Juniper, at least, made a very big point about service automation on its call, and it’s also retargeting its Contrail SDN offering for the cloud, wrapping agility and automation into one package. That may be a helpful trend if it spreads.
The key point, in my view, is that every visible signpost in the industry is pointing to cost-pressured capital spending by operators. Staying strictly with current equipment and practices will simply cede the market to the price leader, Huawei. It’s way past time to propose a helpful evolution of networking, if you don’t like the Huawei-wins-it-all outcome.