We have an interesting counterpoint today in the evolution of technology. HP’s user conference has been a not-unexpected cloud love-fest, with the company pushing itself as a leading cloud architect and even provider. And Wall Street is trashing Ciena because they’re not holding onto revenue and profit growth. At one level, this stuff seems pretty disconnected but it’s not.
HP sells computers and network gear, right? Cloud computing, if you believe the classic hype, is designed to eliminate private IT in favor of public hosting because it’s cheaper, right? OK then, how can something be cheaper to buyers without requiring less cost to produce it, especially since the cloud provider would have to earn some profit margin? Thus, cloud computing in its universal form would create a smaller market for computers. So is HP presenting a vision of the future where its own revenues fall?
Ciena makes network equipment, primarily deep-layer optical transport. According to the Street, the company isn’t making enough progress on its next-generation products, products that are designed to offer ever-cheaper bits. But if video is making the Internet traffic load explode, then why aren’t ever-cheaper bits really important to operators—important enough to be driving up their revenues and profits? Is it just that somebody else is doing a better job, or is it that even cheap bits are getting too expensive?
What’s unifying these stories is the fact that HP is targeting network operators who want to get into cloud computing. HP reasons that the build-out created by such a move would drive up their profits at least in the near term. They also probably believe that the whole cloud-eats-everything story is hype and that it will in fact have little impact on enterprise system sales. The operators are interested in the cloud because those cheap bits everyone wants them to produce aren’t profitable enough to grow their own revenue and profit and satisfy their shareholders.
But why the sudden push to get network operators into the cloud computing business? The total potential global revenue stream for cloud computing services according to my model is about $250 billion per year, and that’s about one fourteenth the total service provider revenues. But it’s at least six times the global online adspend. What makes cloud computing unique from an operator perspective is that people pay for it; it’s not ad sponsored. With the sum total of all online adspend far less than the annual capex of operators, they can’t see advertising as replacing pay-for services. What’s valuable about the cloud is that it taps the direct-payment revenue model, something that online services and OTT players have been largely unable to tap.
We can also see, if we look closely at the HP announcement and also at the announcements of network operators (one of which, Verizon, is a kind of flagship HP cloud account) we can see that operators aren’t trying to make money selling the cloud as much as by selling services of the cloud. Nearly all the operators who have made cloud announcements are making it clear that their longer-term focus is SaaS, and that they’ll be buying software companies or partnering with them to get services to sell. That makes sense because if the cloud is a cost-savings strategy, higher-level services like SaaS displace more cost and thus can look more attractive to the buyer. Enterprises told me in our spring survey that a pure IaaS or virtual-hosting cloud service with enterprise-grade reliability cost them on the average 75% more than it would cost for them to acquire and sustain the services on their own. In contrast, there are SaaS applications that even for the largest enterprises reduce costs by over 60%. For SMBs and consumers, some services offer them things they couldn’t possibly produce and sustain internally, for lack of skills.
So what we’re seeing here is another transformation of the notion of what we once called a “service provider” and then a “network operator”. The shift in terminology came because the OTT players were increasingly the “service providers” and the traditional carriers were simply operating the transport/connection network. Now they want to be service providers too.
Things are sort-of-happening down at the network level, of course. Yesterday was “IPv6 day” and like pretty much everything these days it proved to be over-hyped. The company doing the monitoring for the testing admits that there was only a modest uptick in IPv6 traffic, and most users reported that their ISPs did not apparently offer them IPv6 connectivity for the test (an even greater number probably couldn’t have figured out whether they had it or not). So is IPv6 another pure hype event? At one level, yes, but it didn’t have to be.
All the network vendors are obsessed, like HP is, with growing their market. An enormous network refresh accompanying an explosion in pent-up M2M demand or something, created by the sudden adoption of IPv6, would sure sound good to them. Next to saying that traffic is exploding, saying that “IPv6 is coming” is a sure path to media attention, or it was. The problem is that IPv6 is largely a conversion project, and any project manager knows that the best you can hope for in a conversion project is that nobody knows you did it. The media is hoping for a nice collapse, with hundreds of millions of people crying out in pain. Nobody wants to oblige, so they’ll stop covering it.
Where the “it didn’t have to be” comes in is that there are potential benefits to IPv6 in security, stability, and performance. To harness these, we’ll need some changes in the Internet business model and in how ISPs are regulated, to be sure. We’ll need some of that “put-law-and-order-into-the-online-world” message that we heard from France this month. But all that stuff just takes sooooooo long to accomplish, and everyone wants instant sales gratification so we won’t go there, and we’ll lose the support of the users of the Internet in the migration of the Internet to the next level. Doesn’t sound too smart to me.
It seems to me we’re reaching a critical point in sticking our heads in the sand where the whole body sinks out of sight, or maybe where we come through on the other side and see clearly again.