The news that Cisco and Ericsson are forming a marketing partnership isn’t a big surprise, given the Nokia deal for Alcatel-Lucent earlier. It’s still big news in the industry, though, and perhaps bigger if one casts it into position alongside another news item, which is that Verizon is looking to sell off its cloud business. It’s a story of things staying the same, and things changing…back.
Any Wall Street type will tell you that as a given industry commoditizes, meaning that products there can no longer be differentiated except on price, the inevitable response of businesses is consolidation. A large number of competitors can’t be justified in a commodity market because the total cost of operations and administration is too high. Commoditization also results in a loss of differentiation that can reduce the revenue per sale, making it hard for smaller less “complete” solutions to stay in the game.
The Nokia/Alcatel-Lucent deal is a classic response to commoditization—bulk up by merging and lower your cost points because the combined organization can eliminate duplication (meaning workers). Along the way you can also broaden your product line. Nokia has little other than mobile where Alcatel-Lucent has perhaps too broad a line for their strategy to control. The question with Cisco/Ericsson is whether they’re responding to commoditization or to Nokia/Alcatel-Lucent.
In terms of carrier strategy, Cisco has a problem in that it doesn’t want to support the kind of changes in network cost that operators expect. Cisco has never had a sophisticated strategy for selling to operators. They push their network traffic indexes and things like the so-called “Internet of Everything” and say in essence that more traffic is coming so suck it up and carry the stuff. Cisco doesn’t have a strong mobile story, and that’s a particular problem in an era where operators are investing more in mobile than in wireline and core.
Ericsson is a service company trying to survive in a market that’s focused on product cost. If operators are beating Huawei up on price to get better cost per bit, they’re unlikely to want to spend more on professional services. So if you’re Ericsson and have divested yourself of most products, you start a bit behind the eight-ball with respect to competitors (like Nokia/Alcatel-Lucent) who have product profits they can draw on to raise ARPU. And as competitors get more into professional services themselves, you’re in the position of selling products from vendors who now compete with you in the service business.
By reselling Cisco gear, Ericsson gets at least a piece of the action on the product side, which increases their ARPU. Cisco gets a conduit into complicated telco deals, particularly those requiring integration with OSS/BSS where Ericsson is especially strong. The problem is that to be optimally successful for both vendors, the industry has to pretty much stay the course with respect to the makeup of network infrastructure.
So are Cisco and Ericsson betting against SDN and NFV or hedging? I think it’s clear that Cisco is betting against it because it’s hard to see any SDN/NFV success that wouldn’t put Cisco under margin pressure. I think Ericsson is hedging because there are a lot of recent troubling signs that SDN/NFV isn’t exploding into deployments as many had hoped. What happens to professional services if there’s no change in technology at all?
This is where Verizon and the cloud come into the picture. Like most operators, Verizon jumped on the cloud as a possible new revenue stream, and through M&A gained a quick position there. The cloud jumped ahead of everything else in terms of operator senior management hopes for a real change in their business. Now, we might be seeing a strong signal that the network operator push for the cloud has failed to produce results. Forgetting for the moment what that might mean about cloud computing, for SDN and NFV it would mean that cloud services could not be counted upon to generate data center deployments that would then be suitable for SDN connection and NFV hosting.
Some NFV applications wouldn’t be impacted by this; mobile and CDN generate enough mass on their own to be credible drivers for data center deployment. For service chaining used in vCPE, it could be significant, and it could also be significant for virtual routers on top of groomed tunnels and optics. These applications need somewhat optimized placement of hosting points, and that would be easier if there were a successful cloud infrastructure to piggyback on.
If SDN and NFV are already slow-rolling and if cloud infrastructure isn’t going to be readily available as an early platform to host either, then the game changes in a way that could hurt both Ericsson and Cisco. Operators’ first reaction would be to push harder on pricing of legacy gear, which means that everywhere outside the US (where Huawei has been forced out of the carrier market) Huawei is more likely to win. That’s bad for both Cisco and Ericsson.
But lack of infrastructure for SDN/NFV piggybacking also helps the Nokia/Alcatel-Lucent duality. Alcatel-Lucent has the strongest story for NFV-hosted mobile (IMS/EPC) and content delivery, and these applications are large enough to pull through their own hosting without the help of an in-place cloud. That could mean that Nokia/Alcatel-Lucent would suddenly take a lead in NFV, one that Cisco and Ericsson would have considerable difficulty overcoming.
Far from being a positive revolution, Cisco/Ericsson is in the balance a hedge, and almost a signal of a frantic catch-up move. A sudden success for SDN/NFV would make it moot. A delayed success would empower the combined Nokia/Alcatel-Lucent that is probably an early driver. In both cases Huawei becomes stronger in the near term. Two or three years from now, the deal would either have to become real M&A (and who believes that could happen?) or it fails to deliver any utility to either party and they have to face the new world alone.
It’s obvious that the disrupting factor here is the pace of adoption of SDN and NFV, and if network vendors were the only source of the products for these areas, then Cisco and Ericsson would be on easy street. They aren’t, and this may all end up hinging on HP and Oracle. These two vendors are not part of the network infrastructure game of today, and they have every reason to want to push SDN, NFV, and the cloud to operators as a means of reducing network costs and opex overall. But while HP has all the goodies needed and Oracle has all the positioning determination needed, neither of the two has managed to get both these assets into play.
The worst case for Cisco/Ericsson would be that Nokia/Alcatel-Lucent jumpstart both SDN and NFV through mobility (IMS/EPC) and content delivery (CDN). That would create a network-vendor competitor with a foot on the stepping-stone to an alternative network future (and on Cisco/Ericsson’s neck). But it’s hard to see what a good future outcome would be for Cisco and Ericsson, because none of the options will really save “business as usual” in networking.