Network operators generally do a fall technology plan to frame their following-year budget. The timing varies with geography and operator, but most are active between mid-September and mid-November. This year, a fair number of operators have done some pre-planning, and we can actually see the results in their quarterly earnings calls, as well as the calls of the network equipment vendors. I’ll track the plans as they evolve, but this is a good time to baseline things.
Nearly all the operators reported lower capex could be expected for 2017, and most have actually spent a bit ahead of their budget plans. As a result, the 4th quarter is looking a bit soft, and you can see that in the guidance of the equipment vendors and that for the operators themselves. This shouldn’t come as a surprise, given that operators are feeling the pressure of declining profit per bit, which makes investment in infrastructure harder to justify.
Among the operators who have done some pre-planning, three issues have been raised. First is whether SDN and NFV could bring about any meaningful change in revenue or profit, and for some at least, if “not” then “what might?” Second is whether there is a potential for a change in regulatory climate that could help their profits, and third is just what to expect (if anything) from 5G. We’ll look at each of these to get a hint of what might happen this fall and next year.
What operators think of either SDN or NFV is difficult to say because the response depends on who you’re talking to. The CTO people are the most optimistic (not surprisingly, given that they include the groups working on the standards), and the CFO people tend to be the least. Among the specific pre-plan operators, the broad view is “hopeful but not yet committed”. There is general agreement that neither technology has yet made a business case for broad adoption, and that means neither has a provable positive impact on the bottom line.
Perhaps the biggest issue for this fall, based on the early input, is how a better business case could be made. Nobody disagrees that both SDN and NFV will play a role in the future, but most operators now think that “automation”, by which they mean the automated service lifecycle management I’ve been blogging about, is more important. Full exploitation of automation is outside the scope of both SDN and NFV in current projects and plans, and there is no standards body comparable to the ONF or ETSI NFV ISG to focus efforts.
“No standards body” here is interesting because of course the TMF is a body that could drive full service lifecycle automation. It didn’t come up as much among pre-planning users, in large part because only the CIO organizations of operators seem to have much knowledge of or contact with the TMF. In my view, the TMF also tends to generate its documents for consumption by its own members, using their own terminology. That makes it harder for operator personnel who aren’t actively involved to understand them, and it reduces their media coverage as well. In any event, the TMF doesn’t seem to be pushing “automation”, and so we’re a bit adrift on the SDN/NFV side for the fall planning cycle.
The regulatory trends are another up-in-the-air issue. In the US, the Republican takeover of the FCC seems to be intent on reversing the pro-OTT mindset of previous FCCs, particularly the Wheeler Chairmanship that preceded the current (Pai) one. Under Wheeler the FCC declared that the Internet was a telecommunications service regulated under Title II, which gave the FCC the ability to control settlement and pricing policies. Wheeler took that status as a launching-pad for ruling against settlement among ISPs and paid prioritization, both of which could help ISP (and thus network operator) business models. Pai seems determined to eliminate that classification, but even if he does the position could change with a change in administration in Washington. There’s talk of Congress passing something to stabilize the net neutrality stance, but that might never happen.
Outside the US, regulatory trends are quite diverse, as has been the case for a decade or more. However, operators in both Europe and Asia tell me that they see signs of interest in a shift to match the US in accepting paid prioritization and settlement. If that were to happen, it could at least provide operators with temporary relief from profit compression by opening a revenue flow from OTTs to operators for video. That would probably boost both legacy infrastructure spending and work on a longer-term revenue and cost solution. However, operators don’t know how to handicap the shift of policy, and so far it’s not having a big impact on planners.
The final area is the most complicated—5G. Generally, operators have accepted that they’ll be investing in 5G, with the impact probably peaking in 2021-2022, but the timing and the confidence operators have in a specific infrastructure plan varies considerably. In the US, for example, there is considerable interest in using 5G with FTTN as a means of delivering high bandwidth to homes in areas where FTTH payback is questionable. Operators in other countries, particularly those where demand density is high, are less interested in that. Absent the 5G/FTTN connection, there isn’t a clear “killer justification” or business case for 5G in the minds of many operators. “We may be thinking about an expensive deployment justified by being able to use the ‘5G’ label in ads,” one operator admits.
The 5G issue is where pre-planners think the overall focus for fall planning will end up. Some would like to see a 5G RAN-only evolution, including those with FTTN designs. Others would like to see the convergence of wireless and wireline in the metro, meaning the elimination or diminution of investment in Evolved Packet Core for mobile. Still others with MVNO partner aspirations like network slicing. Everyone agrees that it’s not completely clear to them that 5G evolution will improve things, and they say they’ll go slow until that proof is out there. The pre-planners didn’t see IoT support as a big near-term driver for 5G, interestingly.
4G transition came along, operators say, at a critical point in market evolution, where the advent of smartphones and the growth in mobile phone usage drove demand upward sharply and outstripped old technologies. There’s a question among operators whether that kind of demand drive will work for 5G, in no small part because it’s not clear whether competition will stall ARPU growth or even drive it down. Operators would invest to fend off competition as long as service profits overall were promising, but it’s not clear to them whether they will be. They’ll try to find out this fall.
Which raises the last point, the last difficulty. Operators have historically relied on vendor input for their technology planning, under the logical assumption that it did little good to speculate about technologies that nobody was offering. The problem is that the vendors have demonstrably failed to provide useful technology planning support in areas like SDN and NFV, and are failing in 5G by most accounts. The pre-planners think that vendors still think that operators are public utilities engaged in supply-side market expansion. Build it, and they will come. The operators know that’s not a reasonable approach, but their own efforts to move things along (such as the open-source movement in both SDN and NFV) seem to have very long realization cycles and significant technology uncertainties.
We’re in an interesting time, marketing-wise. We have a group of buyers who collectively represent hundreds of billions in potential revenue. We have a group of sellers who don’t want to do what the buyers want and need. The good news is that there are some signs of movement. Cisco, who more than any other vendor represents a victory of marketing jive over market reality, is reluctantly embracing a more realistic position. Other vendors are taking steps, tentatively to be sure, to come to terms with the new reality. All of this will likely come to focus this fall, whether vendors or operators realize it or not. There’s a real chance for vendors here, not only the usual chance to make the most of the fall planning cycle, but a broader chance to fill market needs and boost their own long-term success.