For the current quarter, we’ve seen Ericsson post a profit warning, Nokia warn of deteriorating outlook, and even Huawei slowing its rate of growth (to something other vendors would die for!) Analysts say that “digital transformation” for operators is a must. A Wall Street research company says that only one of the US operators (Charter) increased capex versus expectations for 2017; all the rest have fallen below expectations. This doesn’t sound like business as usual, or maybe it sounds like it shouldn’t be.
I’ve blogged enough about the regulatory issues that have distorted the Internet as an ecosystem. Operators had for decades followed a settlement model among those who cooperatively delivered traffic and services, and that was lost with the Internet. Before the current blitz on “neutrality”, even many in the Internet space believed that settlement among connecting partners in the Internet was essential; I worked on an RFP to support it about 20 years ago. Maybe we’ll see a shift in policy, but whether we do or don’t, we really have to look at what the ideal operator model should be. No matter what the policy shift, you don’t create a vibrant market from trashy ingredients.
The Internet was a transformation in demand. Before the Internet, we defined a “communication service” as a “connection service”. After it, we defined a communications service as a “delivery service”, meaning that there was an experience-creating partner that was sourcing something to the user, rather than two users connecting with each other. Even chat and email has an intermediary experience agent.
What made the Internet great, transforming, was that it was about experiences, then. It follows that if you want to be big in the Internet, you have to be big in experiences and not just in connection. Network operators, including telcos and cablecos, are still primarily connection people in the Internet part of their business. Classical wisdom says that they need to move over to the other side.
Yes, but. The “but” part is that somebody has to do the connecting. It’s not enough that we let operators settle among themselves or with content providers (experience providers). They have to be efficient connection providers because if they’re not, the cost of delivering experiences will rise to the point where a lot of stuff that might happen will become financially impossible.
This means that, given the already-visible profit-per-bit pressure on operators, the first critical task is lowering the cost per bit. I’ve blogged already that my model shows clearly that software automation of the service lifecycle management tasks could provide immediate relief, and do so at a very modest investment (meaning it would generate a very high ROI). Furthermore, any work to create competitive elements of experience services would also demand a high level of agility and efficiency, so the tools used to reduce cost could then be used to improve revenues.
One trap that has to be avoided at this point is the “new-services-mean-new-connection-services” trap, which operators seem to fall into with all the zeal of a fly into a flytrap. I’ve done decades of surveys of businesses, and I know that there are no “new connection services” that have any useful property other than overall cost. Give users elastic bandwidth and they’ll adopt it as long as it means that by supporting faster bursts some of the time, they can lower capacity and thus net cost overall. We should have seen this by now, but we seem to be unable to grasp the reality.
Presumably “digital transformation” would lead to some more realistic revenue options, but the main recommendation that proponents of the notion make is that operators focus on “edge computing”. Edge computing is an infrastructure strategy not a service strategy; you have to deploy something that uses it to add to your revenue line. What that “something” is, remains maddeningly unclear.
We can be fairly sure that it’s not virtual functions. Despite all the hype, it’s actually very difficult to address edge device opportunity with cloud-hosted virtual alternatives. In the business market, you can buy a decent edge firewall and security box for under a thousand dollars, and in the consumer space a residential gateway including WiFi is about fifty dollars. These devices have a five-year useful life, which means that the annualized cost would be two hundred dollars and ten dollars, respectively. It’s very hard to see how hosted technology, including the licensing charges from VNF vendors, could meet even the business price point. In any event, there just aren’t enough businesses to drive an enormous edge deployment.
Then we have another point that’s easy to forget. Most network equipment vendors aren’t providers of computing in any form. My model says that if we had optimum deployment of carrier cloud, server technology in some form would account for about 23% of total capex. Total capex would actually increase by about 9%, which means that the rest would be scavenged from network equipment spending. Edge computing is a transformation of revenue focus to computing, after all.
We are seeing in the numbers that no network vendor is safe from a contracting total addressable market (TAM). Even Huawei will have to accept lower growth, and eventually lower revenue, if the pie gets smaller. Or they and others will have to get into the computing business.
The big take-away from “digital transformation” in networking is that networking becomes a commodity market whether you do it or not. If there’s no transformation, then operators eventually stop spending freely on infrastructure for lack of ROI. If there is a transformation, they stop spending freely on network equipment to spend more on hosting experiences. Vendors in the server space will see an enormous incremental opportunity from carrier cloud, much of which will indeed be “edge computing”.
Right now, I don’t think the server vendors themselves see the real shape of the market as it will develop. They seem to think that operators will suddenly be illuminated by a dazzling edge-computing insight and rush out to dump billions on edge servers, with no specific opportunity in mind. The old “Build it and they will come” approach. Hopefully we’ve advanced beyond taking our inspiration for market evolution from a movie about supernatural baseball, but maybe not.
Could Cisco have a handle on this? Certainly, Cisco has been more articulate about the need to transform itself than most vendors, but it’s never easy to separate what Cisco really sees and thinks from its (frankly manipulative) marketing. We’ll have to wait and see how the company’s product strategy really changes, if it does, and whether other vendors will follow suit. Ericsson and Nokia are two that clearly need to be doing something different, and they might respond to a Cisco initiative. Might we see a server vendor acquired by a network player? Could be, or we could see a network player adopt a commodity-server (Open Compute Project) architecture. Something, I think, is going to happen because Wall Street is the ultimate driver of everything, and they’re getting restless.