Month: April 2015

Yesterday I blogged about the current state of our technology-side revolutions in telecom—SDN, NFV, and the cloud.  All three of these have taken a bottom-up approach to solving the problems of the industry, and while it’s premature to say that any have failed it’s certain that none have succeeded either.  The reason why, I suggest, is that no matter where you start the problem of “border crossing” remains, and I’d like to dig a bit deeper into that problem today.

I dug up an old presentation by Jochen Hagen of T-Systems, given at a public Juniper event in 2008.  It lays out some problems, makes a statement on what will solve them…all the stuff you see today.  The solution back then was “IP Transformation” but the problem set was so close to what you’d hear today from operators that you could stick the slides into a current deck and they’d make perfect sense.

What this proves is that despite my personal penchant for top-down approaches, top-down transformation hasn’t worked well for the telecom industry.  The reason for that, I believe, is that telco planners/executives can articulate what they want and need, but at some point they have to assign those wants and needs to a solution that can be defined and purchased and installed.  That hasn’t worked.  Transformation documents are like fiction—interesting but not representing reality.

The bottom-up process isn’t a shining example of success either.  SDN and NFV are networking-centric recent “technology revolutions.”  We know how to do, and to buy, both of them.  The challenge for both technologies has been they have to be able to align their technology capabilities to benefits of sufficient magnitude as to fund a network transformation.  That hasn’t worked.  That’s the challenge that SDN and NFV trials and PoCs now face.

Why is this “border” between technology and business so difficult to cross?  The answer lies in part in the fact that we’re looking for revolutionary changes in a multi-trillion-dollar industry.  It’s unreasonable to expect that you’d revolutionize automobiles by changing a bolt on a bumper, and similarly unreasonable to assume that a small “manageable” change to a network is going to bring about a 25% across-the-board reduction in costs or a similar increase in revenues (or both).

You can see the effects of this in both NFV and SDN, where everyone seems to be making a point to think small.  Look at the leading NFV PoCs for example, and you find virtual CPE and virtual IMS/EPC.  Both are attractive but operators have been having a problem proving a big benefit case for SDN or NFV in either, largely because in both cases the operational implications of the new technology are proving difficult to assess.  But even if we had a business case, how much of networking can we touch with both of these?  Don’t SDN and NFV have to be useful on a much larger scale to be worth the effort and risk?  If so, why are we not exploring all of the boundaries?

You can also see the border-inhibiting impact on top-down transformation plans, even the most recent.  I’ve seen a number of them that lay out the benefit requirements very effectively, and thus set the requirements for technology projects that would meet the benefit case.  The problem has been that when you look at the result of these plans, you see a sweeping transformation of network and operations, sales, customer support, and so forth.  It touches a hundred vendors, a dozen major technology areas.  It’s like giving somebody a giant pile of parts and asking them to build a car from scratch.

So how does this get fixed?  I think there are two possibilities.  First, we could actually work to better define our “benefit/technology border” so that crossing it from either side would be facilitated.  That would let projects involving SDN, NFV, and the cloud take a more convincing shots at benefits, and let transformation projects more readily align with our revolutionary technologies.  Second, we could forget both our current approaches and follow the money.  Since the first of these options is what most vendors and operators favor, let’s look at it first.

The biggest problem with the benefit/technology border is a lack of a holistic architecture that unites business goals with technical elements.  If you believe (as I do) that the transformation of operators will involve an application of SDN, NFV, and the cloud to their business, then there should be some sort of architecture diagram possible that shows where these pieces fit in the overall picture.  Such a diagram, if complete, would be aligned with business goals from the top (as requirements to be met) and with technology options below (as features to support requirements and realize benefits).

NFV had the unique opportunity to frame the whole diagram by taking a truly end-to-end view of a service and at the same time supporting a complete service lifecycle process.  That’s because NFV could have addressed services, functionality, operations, and network resources in the same model.  It has not realized that opportunity, nor is it likely to do that in time to drive the market.  We have no credible process in place elsewhere to do what’s needed either.  We have operations processes, management processes, and network technology but nothing that really unites them.  That’s why I said in my last blog that it was up to the vendors to extend NFV and envelop the cloud and SDN to create that border-crossing architecture.  But vendors have become very tactical and that may be hard for even the largest to swallow.

The other option is the “empirical” approach.  Forget technology revolutions.  Assume that SDN, NFV, and the cloud are just new pieces from which cars can be built.  Focus the efforts of all three where there’s the largest number of buyers, the greatest level of natural investment and change.  Based on this approach, for example, you’d reason thusly:  “Right now, most profit comes from metro services and most investment will flow incrementally to metro.  Therefore, support metro in SDN, NFV, and cloud capabilities, and you’ll be available to build what’s getting built.”  You could argue that this is what the MEF is doing; fix “orchestration” for a service that’s getting invested in and you can do at least something.

The problem with this approach is the classic death by a thousand cuts.  If you focus on incremental projects where SDN, NFV, or the cloud can be applied without looking at any of these technologies as a whole (much less as a combined ecosystem) then you risk creating silos that will do what silos always do—undermine efficiency, agility, and economy of scale.

The solution to these issues comes back to vendors in my view.  A vendor with a fairly comprehensive strategy for NFV could spread it out over enough infrastructure and service landscape to insure that key areas would be implemented and operationalized the same way even if they were driven by service-specific projects.

What technology element is critical?  The answer is orchestration of everything.  You have to be able to orchestrate virtual functions, SDN enclaves, cloud components, operations processes, management tools, customer interactions—everything means everything.  Orchestration could be what unifies everything at the border, that turns fleeing mobs into orderly lines.  It’s also something that vendors could do, directly through standards (like OASIS) or simply through the complete articulation of an architecture that’s open but beyond the scope of current standards.

Every operator on the planet has a transformation timeline that goes no further than three years out.  We are three years from inception of NFV as a project and far further than that with SDN and the cloud.  There’s every reason to fear that we’ll diddle around here long enough to make the work irrelevant.  As I’ve said, operators have a timeline set by their business problem and they’re going to meet it, even if they have to start a new and different revolution.

Network Functions Virtualization (NFV) is one of several technologies that operators are hoping will improve their profit on infrastructure investment.  NFV itself was launched to reduce capex by substituting generic hosted functions for embedded-appliance-based functions.  NFV’s benefit expectations have evolved since to include, and even emphasize, operations efficiency and service agility.

The evolution of expectations doesn’t necessarily drive collateral evolution of capability, which I’ve noted in the past.  Last year operators told me that none of their trials of NFV had proved a full business case for deployment.  Early this year they said that they were integrating more operations practices and processes into the trials, and most were hopeful this would resolve the benefit issues.  Even though it’s only the end of April, they’re still evolving their view of NFV and I think it’s interesting to see where it’s headed.

The most significant point I’ve learned is that about 80% of operators’ NFV trials are characterized by operators themselves as “proof of technology not benefits”.  This isn’t a return to the 100% “my trials won’t prove a business case” but it does seem pretty clear that hopes that additional scope for current PoCs and trials would justify deployment aren’t yet realized.

A couple of operators were very candid in their comments.  The problem, they say, is that the trials aren’t really doing much to operations at all.  Vendors, who in fairness are probably influenced by the ETSI vision of management and operations integration, have promoted what can be called the “virtual device” model of management.  Virtual functions, under this model, are managed by adding management components that mimic the management interfaces and behaviors of the original devices.

This seems very logical on the surface.  If you want to validate NFV technology you need to contain the impact on surrounding aspects of your network and business or you end up with a “trial” that includes everything.  The challenge is that if you are mimicking current device management, then it’s hard to demonstrate much in the way of operations efficiency gains.  In fact, you’re likely to create additional operations issues.

Early trials of the virtual device model show that you can manage a virtual device through existing interfaces, with existing tools, only to a point.  There is a kind of border you’ll need to cross in this situation—the border where virtual functions are hosted on or connected through real resources.  The management of those resources tends, in early NFV trials, to be separate from the management of the virtual functions.  The challenge, according to operators, is that separation means that resource management in addition to function management is needed, and problem resolution across the border is more difficult than expected.

A few of the operators attribute all of this to a lack of service lifecycle management focus.  In order to assess NFV benefits, you’d have to be able to test NFV from the conception of a service to the realization as a product to be sold and paid for.  Three quarters of trials, according to operators, fail to provide any such scope and so it’s difficult to assess what the total cost and total agility-driven revenue benefit might be.

Most operators now seem to believe that the problem isn’t NFV per se, but the fact that NFV has to be fit into a larger service revolution.  “I’m not interested in building my business around NFV,” said one, “but I’m very interested in building NFV into my business.”  The challenge for operators is that while there is an NFV architecture (even if it’s operationally imperfect or at least not validated) there’s nothing above they can play with.

What I see now is something like the “transformation” age of operators eight or ten years ago.  At that time they all were looking at business model transformation aided by technologies.  I looked back over the presentations made at that time and found striking similarities with the presentations on current operator goals for building that mysterious layer above NFV (and SDN).  Nothing much came of those old adventures, of course, and that has a lot of operators worried.  They need something complete and effective in play within two years on the average, and they’re not only unsure where it will come from, they aren’t confident they can describe it fully to prospective sellers.

There are people who see this as a failure of NFV, even within the operator community.  About a quarter of Tier Ones seem to have scaled back considerably on their NFV expectations.  I’ve had my own doubts about the scope of the ETSI work—I’ve argued from the first that the limitations in scope risked isolating NFV from most of the benefit sources.  I still feel a broader model would have been better, but I have to admit that it would have taken longer to do and in the end might not have accomplished any more than that which has been done by the ETSI ISG to date.

So what’s the problem?  I have a sense of inevitability here, I guess.  The constriction of profits between a falling revenue-per-bit line and a slower-falling cost-per-bit line is a systemic problem with roots that go way beyond network technology and operations or business practices.  It may not be possible to solve it completely, and even some operators now admit that.  Regulators may have to accept the very kind of consolidation that the rejection of the Comcast/Time Warner deal would have created.  Users and OTT players may have to accept that there will not be continued improvement in speed and quality, and that in fact congestion online may become the rule.

That’s what these new high-level visions are hoping to avoid.  A bit less than half the operators seem to have at least skunk-works projects underway to advance a new service architecture at the highest level.  In a goal sense, most of these new architectures aren’t demanding NFV or SDN or the cloud, but they are all defining objectives it would be hard to meet without all three.  In fact, what these operators seem to be creating is a kind of Unified Field Theory for networking that harmonizes all three.

For vendors this poses an enormous risk and opportunity at the same time.  Much of the work involved in PoCs and NFV trials up to now isn’t going to pay off in direct deployment.  Much of the work needed to drive significant network transformation will have to take place outside the NFV, SDN, and cloud processes.  But remember that about 20% of trials are considered to be making useful progress.  We do have NFV vendors who are successfully (if, in operator views, too slowly) expanding their scope to grasp at the borders of NFV and whatever is above it.  This is where big vendors will have the advantage, because they’re going to have to take a big bite of complexity to get a big bite of benefits.  And only a big benefit case is going to transform networking.

Apple “crushed estimates” according to the headline of a financial website, and they surely did.  In fact Apple turned in what was perhaps the first unabashedly great quarters of tech companies in the current earnings season.  iPad sales were slightly below estimates and some analysts thought outlook was less positive than the current quarter, but other than that it was beer an roses.

The obvious question is whether they can keep it up.  This is important not only for Apple but for the industry, because if Apple is the face of success then we have to reexamine some of the cherished tech illusions we’ve been reading about.

The Driving Principle of Our Age is that of virtualization.  Computer power is cheap and getting cheaper, and its expansion into every aspect of our lives isn’t limited by capital cost but by support or operations.  We have to turn the world into as-a-service because the masses can’t be expected to be computer gurus.  In this world-view, we should be seeing a dumbing down of local intelligence, a shift toward devices being on-ramps to the cloud.

Which is hardly consistent with Apple’s vision.  Apple has three basic value propositions.  One is that their stuff is cool and their users enviable.  That’s a given.  The second is that “their stuff” is something you buy and hold.  It’s not virtual, it’s not hosted, it’s not something that is really created on some nameless server somewhere, because that anonymity would make everyone else Apple’s equal.  Their game is devices.  The third proposition is that sought-after experiences are atomic.  Users want something, and that something isn’t much related to other somethings the user wanted or will want.  We live in the moment.

Amazon tried to beat Apple, at its own game, with Kindle Fire and their phone, and it didn’t work.  It’s very hard to unseat a champion if you agree to abide by all their rules of engagement, after all.  Google bought a phone company, arguably, to try their own hand and that didn’t work either.  So what would work?  Something that eats away at those basic value propositions, and nothing would do that better than a shift to the cloud.

Amazon is the cloud giant, the king of virtualization.  They have the tools to make an experience virtual, not tied to cool devices.  Such a move would hit at one of Apple’s critical foundations.  Google, with Fi, is now taking a mobile service and building layers on it in the cloud and not in the device.  Their Nexus 6 initial offering is weak.  Could they make their next supported handset an iPhone, perhaps?  Suppose they said that any iPhone, even an older model, could be used with Fi.  Will that undermine an Apple proposition?

Alcatel-Lucent may be aiming at the third proposition, through service-provider proxies.  Their new Rapport promises contextual services, or at least an early form thereof.  The more intelligence you draw into giving users what they want, the more costly it is to store all that stuff in the handset or deliver it there for analysis.  The network knows, remember?  Operators have wanted to break the hold phone providers have on mobile services.  Empowered operators, particularly operators inspired by Google’s Fi, might do that.

Context is also the logical solution to the first of Apple’s propositions, the cachet.  Every user may strive to display that Apple logo, but more than even that they’d like to display “Her”, the artificial-intelligence companion that sees all, knows all, and when she (or he) speaks draws admiring glances.  A companion shares experiences, shares context, which is why we automatically expect smart devices to know what we’re seeing or doing.  Can a phone do that sort of thing?  With network help, yes.  A network can do it with nothing more from a phone than a conduit to the user.

The industry, for a variety of reasons, is moving beyond traditional networking and IT and into a new age, an age where context and personal assistants are inevitable.  I think that the signs are already visible.  Yes, Amazon has fumbled its own ball.  Yes, Google’s Fi is tentative, a wisp of what it could be.  Alcatel-Lucent isn’t marketing Rapport to the stars either, and operators confronting a profit crisis and a technology (NFV) that promises to support agile services are instead trying to use it to create the same old crap they’ve sold forever.  There will always be under-realization of every new industry trend, but eventually mass pays off.  An industry-wide profit-starvation trend has a lot of mass behind it, and urgency besides.

The question for Apple is whether they see this or not.  It’s perfectly possible that Cook and his clan have already laid out the Cool Answers to the context-and-services future, that the Apple Cloud offering will eventually just awe everyone into submission.  They’re milking their current model while they can, and will spring when it’s necessary.  It’s also possible that Apple has stuck its head in the (silicon-based) sand and will hold onto the past too long, like so many others.

The question for competitors is the same, the “do-they-see” question. It’s possible to make a better phone or tablet than Apple, but nobody is going to make a phone or tablet superior enough to overcome Apple’s advantage.  To beat Apple you have to write new game rules, rules that favor new innovators.  Amazon and Google and even the network operators, perhaps through NFV or Alcatel-Lucent’s Rapport, have a chance.  They have a chance to undermine the handset.

And to exalt what, exactly?  That may be the problem.  The network isn’t the value proposition for the future; it’s getting commoditized just as fast as anything else.  If the cloud is the future, what exactly is the cloud?  Servers are commoditizing.  Is it software?  Can we earn massive profits from software alone?  What is the engine to create the Big Win that justifies the Big Risk?

If as-a-service is the future then services is the goal.  We will likely spend less on hardware and software to support centralized cloud services of any type than we’d spend if we hosted our gratification on local devices.  The next level of disintermediation may be aimed less at the network operators and more at the vendors.  It won’t kill the market for computers or devices, but it will surely help commoditize it.  Unless the vendors start thinking about how they can be as-a-service players too.  Does that sound a lot like the dilemma the Internet posed for operators decades ago?  It does to me.

There are few who doubt that we are in the Internet Age.  Few doubt we’re entering the Cloud Age and maybe even the SDN/NFV Age, but I wonder whether there’s broad understanding that the cloud and related technologies like SDN and NFV are going to be as transformative as the Internet was.  When the Internet first developed, nobody saw what it would become.  We’re just now starting to see the signs of what might come next.

Our biggest news item last week was Amazon’s first break-out of cloud earnings.  The company reported about $5 billion in cloud service sales and a $6 billion run rate.  If you give Amazon about 28% of the IaaS/PaaS cloud market, that sizes that cloud market at $18 billion, which is about 1.8% of current IT spending.  More significant to financial analysts was that Amazon reported a profit of about $1 billion on the cloud.

I think the most interesting thing about the Amazon number is the way it frames total cloud service sales.  If you believe the cloud will largely displace private IT, it’s clear there’s a long road ahead.  If you don’t, which I don’t, then you have to examine cloud service opportunity more closely to see where we are now and where we’re heading.  It’s that examination that takes us into the future, into the transformation that just might change everything.

The first point is that SaaS is generally viewed as the larger cloud service segment, but it’s hard to size effectively because hosted services and SaaS services are hard to distinguish.  If you eliminate web hosting, my own estimate is that SaaS currently accounts for about $16 billion in spending, which would make it a titch smaller than the “platform” clouds.  Total cloud computing spending would then be about $34 billion.  Include all hosted services and the spending doubles, which shows that SaaS and the cloud are really extending trends that had been established before.

Online sales and similar adventures by enterprises didn’t displace current IT spending, they augmented it.  What that proves in my view is that we had two possible views of the cloud to choose from when it launched—substitute IT or a new opportunity—and we picked the most pedestrian.

The cloud can probably displace only about $240 billion of current IT spending.  Even with that low a target, it’s obvious that we’ve not even reached 14% of likely penetration, which means that public declarations of an Amazon victory are likely optimistic simply on statistics.  Other providers still have a good chance.  That means not only current providers of cloud services, but even new and credible cloud service market entrants.  But while a quarter-trillion isn’t chump change, it’s not transformative either.

What makes things interesting in my view is that right now about a third of the platform (IaaS/PaaS) cloud spending and 20% of the SaaS spending isn’t displacing current IT spending at all, but rather is accretive to it because the cloud is doing stuff that was never done traditionally.  Despite cost-driven targeting, we’ve been witnessing a quiet cloud transformation, a shift from the pedestrian and short-sighted targeting to something exciting.  The future cloud opportunity lies more with this new stuff, which for the enterprise is about $800 billion according to my model.  If you go beyond the enterprise into new consumer mobile and NFV services, you add another $1.5 trillion, which gets you into the realm of real money.

Amazon has an impressive but not compelling cloud position in the “enterprise cloud” as most would see it today.  They have no real position in the extended enterprise, mobile, or NFV spaces.  That means that if the cloud fully develops and Amazon doesn’t push out of its current focus area or change market share, they’d end up with 28% of what is about a $1 trillion total opportunity.  That’s a lot of growth for them, and investors would have every reason to be happy.

The question is the rest of the cloud opportunity, the roughly $1.5 trillion in mobile/NFV services.  This is the space that the network operators (at least the savvy ones) hope to reap with the “service agility” NFV is supposed to provide.  It’s also the space that Google obviously hopes to capture with its Fi MVNO service.

Put into cloud terms, Fi could be a model to transfer network service value upward out of the network and into the cloud, and then to meld it with MVNO network services to create what the user would see as a new native mobile service.  Google is likely betting that the operators, who could create a tighter linkage between true mobile connection services and Fi-like cloud services through NFV, won’t be able to move far enough or fast enough.  In a way, Google is targeting the biggest disintermediation project since the Internet, where the cloud disintermediates operators from higher-layer service value.

As-a-service activity, virtualization, SDN/NFV, the cloud, or whatever you call it, are generators of “new opportunity” that aggregates to well over $2 trillion in annual revenues.  At least three-quarters of this could be viewed as “natural opportunities” for operators and all of it would be an opportunity were operators to position their cloud assets properly.  How do we know that?  From Amazon.

Amazon’s profits on AWS are hard to validate because we all know that it’s difficult to know the formula the company uses to allocate costs on shared infrastructure.  But we do know that in the cloud overall, the highest profits will likely accrue to the guy with the lowest costs.  Amazon’s enormous scope has made it an economy-of-scale play.  The operators, with NFV, could in theory deploy even more infrastructure than Amazon and do so at a lower expected ROI because of their utility-like internal rates of return.  Financially they could win.

We can also draw some insights from the regulatory opposition to the Comcast/TW acquisition that ultimately killed the deal.  Regulators were at least as afraid of the impact on OTT video as they were on other cable/broadband or telco video/broadband service providers.  That suggests that even in regulatory circles there’s a growing sense that services are above the bit.  If that’s true then Google and Amazon have a shot at the whole pie, which could be huge for them.

This also shows why network equipment is lumpy.  Mobile infrastructure needs a higher-layer boost, so Ericsson is seeing a slowdown.  Future services will be based mostly on software and servers, so F5 saw a boost.  Profitable traffic in the metro, to be supplemented by the cloud, still demands carriage of some sort and Juniper is aiming at that and hoping that somebody with a good specific cloud and NFV story won’t step on them.

I’ve tended to call future applications and services “contextual”, meaning that they exploit the sense of context that mobile users (and humans in general) base their behaviors on.  Call them what you like, but I think that these services, whose total revenue value is over $2.5 trillion per year, represent the pie that everyone has to be looking to slice at the provider level, and that every vendor wants to supply with equipment, software, and professional services.  The question seems how and when to start.

Inside every Tier One is a planner who understands the future.  That’s true for about half the Tier Twos and perhaps a quarter of Tier Threes.  Among the largest enterprises, about half see the future as it is, and the rate of insight drops radically as you move toward the SMBs.  The point is that future-speak is nice if you’re a reporter but it’s not necessarily the path to riches if you’re selling network equipment, software, or services.  There’s always a need to build the future on the present, not destroy the present to get to it.  That means that the status quo will hold a powerful appeal until there’s no way to avoid facing future reality.

We may be getting to that point.  Optical players like Infinera are speaking future-truth already and reaping the rewards.  NFV’s principles are becoming clear even if there is still an unknown amount of work to do on specs, and we’re gaining on the 2017 deadline when operators will need something from NFV to save profits, and may leapfrog remaining standards and issues to get there.

I still see this as a kind of face-off-by-proxy, with Google Fi on one side and Alcatel-Lucent’s Rapport on the other.  Can Google figure out how to build superior higher-layer services on top of an MVNO framework?  If so, then they relegate operators to MVNO hosts at even slimmer margins.  Or can operators use Rapport or NFV or both to build agile service layers, not new ways of doing connection services?

We may have other answers even sooner.  Amazon and Apple can’t let Google own this transformation.  If all Fi represented was an MVNO deal, competitors could sit on the sidelines because the risk is great and the upside isn’t that great.  If Fi is a step toward a multi-trillion-dollar opportunity, nobody dares ignore it.  Apple is particularly vulnerable, but also particularly well positioned with a loyal fan base and a legion of related products.  Once they’ve reported (today) can then clear the decks and move more decisively into this new age?  That we’ll have to see.

There’s no denying that networking is changing, but different people or companies see the change differently.  For consumers, it’s mostly about replacing wireline phones and maybe cable TV with the Internet and wireless broadband.  For network operators it’s about sliding profits on basic connection/transport services and growing competition from traditional and non-traditional sources.  For network equipment vendors it’s (so they say) about “deferred spending”.

Well, you are what you invest in, and so networking is the sum of network infrastructure.  We’ve had three network vendor quarterly announcements this week, and it’s interesting to try to synthesize reality from their raw data.  That reality might then give us some indication of where the industry is moving, in the broadest sense.

Let’s start with the biggest.  Ericsson had a bad quarter that surprised nearly everyone.  Revenues were up y/y by nearly 13% but their EPS was off and the stock took an 8%-or-more hit as a result.  Ericsson blames sluggish sales to US carriers for their problem, and obviously if your biggest business source is slow you’ll be impacted.  But any seller can say “I’d do better if my customers bought more.”  It’s not a helpful analysis.  Why do sales matter if they’re up 13% y/y?  Because in adjusted currency form they were off by 9% for networks and 2% for services.

Move on now to Juniper.  Of the three companies who released this week-to-date, they turned in the best results from a Street perspective.  Juniper beat in EPS by a cent and beat earnings by a similarly small amount.  Their guidance was mid-range, contrasting to the other vendors we’re discussing.  The issue for Juniper is that their results beat estimates but they’re still running behind relative to past quarters.  Year over year, they were off in all three of their product categories (routing, switching, security).  Regionally they were up in EMEA and off elsewhere.

F5 also reported, and while it beat a big on revenue and EPS, its guidance for revenue was light.  Interestingly, much of their revenue positive was attributable to the very North America/US market that Ericsson said was “sluggish”.  According to them, the problem is exchange issues—foreign currency headwinds.  Their fundamental trends in ADC and security are strong.

When you look at the three together, it’s clear that there is no clear secular trend driving them all.  We’re not seeing economically or systemically driven demand suppression, but rather a shift in spending that in some areas probably represents a decline in perceived operator ROI potential and in others potential for a gain.  Operators are doing what’s profitable, and that’s changing.

A specific point here is Ericsson’s sluggish wireless spending lament.  Wireless has historically been the bright spot in capex, but for the last five to ten years we’ve seen increased pressure on wireless ARPU.  Couple that with the fact that most operators don’t have a large unpenetrated prospect base, and you have a formula for profit stagnation or even decline.  The operators, like vendors, respond by cutting costs (Ericsson plans that, for example).  An operator cutting cost equals an operator with lower capex.  Mobile has fallen from grace, at least relative to its glory days, because it’s not as profitable.

Roaming regulations in the EU and neutrality in the US conspire to increase future risk.  Reductions in roaming charges mean less mobile revenue and (worse to some operators) loss of a means of avoiding churn in a very competitive market.  An operator usually has the best coverage and performance in their home area, and if they have to share their network with competitors even at home and at minimal incremental cost, then they risk competition.  In the US, neutrality rules on mobile could stymie a lot of broadband usage plans, particularly if “content-pays” is an illegal model.

In contrast, pretty much all future service revenue gains are seen as coming from services whose features are hosted in data centers.  It follows that data center equipment and network equipment associated with hosting points would do well—F5’s ADC and security portfolio for example.  Add to that the fact that unlike Ericsson, F5 gets only about a quarter of its revenues from service providers and you see some good reasons why F5 is different.  The stock was off initially on light guidance but popped back with the announcement (expected) of the new CEO (replacing the retiring McAdams).  The pop is more justified in my view based on the fact that there will be a lot more data centers down the line.

Juniper is (as often is the case) a kind of interesting dilemma.  If you look at their trend line relative to the other vendors, their results are worse.  The Street has rewarded them for not being worse than expected.  But in fundamentals Juniper still has strong assets.  Their security stuff is in the top tier for CSP/NSP buyers.  They have good data center switching credentials.  They have less exposure to mobile than Ericsson, meaning that mobile’s slide from grace won’t impact them as much.  They are what CEO Rahim describes as “maniacally focused on IP networking.”  For all the changes in the industry, we still have to push bits.

Overall, I think we’re seeing an industry in transition, and I doubt many disagree.  The view I hold that vendors in particular might not like is that I think the transition is from connection/transport dependency to higher-layer dependency.  F5 won because it was more higher-layer than the others, less exposed to segments that are in decline.

If you know your current business model isn’t working and you know what the future holds, you’d shift on a dime to fund the new.  If you knew the former and not the latter, you’d withhold spending on the old and wait to see what develops.  That’s where I think we are.  Operators know that pushing bits won’t be rewarded, but they don’t know for sure what will.  They currently can see only that hosting and data centers will have a lot to do with it.  So they trim their sales on traditional products and watch for signs of a clear future direction.

For the network vendors, the question is whether that future direction intersects with any path they can hope to take.  Ericsson wants to bet on professional services, but you need a goal to need a route-planner.  Juniper wants to bet on business as usual, a bet that I think is least likely to pay off in the long run.  F5 wants to bet on the cloud and data center, and that’s the only winning bet available.  Their risk is that NFV and SDN will combine to create a more definitive future path that will subsume their ADC/security mission.  F5 really doesn’t play a convincing role in either.

The situation with these three vendors illustrates the risk Alcatel-Lucent and Nokia face in combining.  If you’re consolidating based on current conditions or even current established trends, you’re shooting behind the duck.  The fundamental problem in networking is benefits to drive new spending.  For operators, that’s revenue from new services.  For enterprises, it’s new productivity gains.  As an industry we’ve come to see offering more bits for less money as a gain; it’s a path to commoditization.  We have to make bits more valuable, and that’s the simple truth that vendors and their customers must all face.

Google has unveiled its long-awaited MVNO offering, Google Fi.  Right now, Fi is in what Google calls “Early Access” so you have to apply for an invite and wait to get it.  It might be worth the wait.  Working in partnership with carriers in over 120 countries (Sprint and T-Mobile in the US), Google has put together a pretty jazzy cellular/WiFi combination that’s integrated with Hangouts (Google Voice) and offers a novel and attractive pricing plan.  It might be a game-changer in the mobile broadband space.  It also might be another DOA concept like Google Wave.

Fi’s pricing is probably the most obvious differentiator and disruptor.  A month’s service ranges from an improbable-alone base of $20 for talk/text, and an additional $10 per gig of data.  The Google plan seems to start with 3 gigs, making the price $50 per month.  You get a rebate for what you don’t use and you can buy additional gigs for ten bucks.  That puts the service price on par or better with respect to most other prepay plans, and much cheaper than traditional post-pay plans.  Fi is post-pay, so it’s probably a price leader in that space for many users.  With service in over 120 countries at reasonable rates, international travelers might find it especially compelling.

Seamless WiFi calling is another plus.  Fi selects the best/cheapest option for connection for a given call, so you don’t have to do anything to make a WiFi call other than be somewhere where public WiFi is available.  That works in the US or internationally.  I have to note that there is seems to be a conflict between Google’s blog and the Fi pages on how WiFi works.  The blog and broad marketing material suggest it works “…whether in your home, your favorite coffee shop or your Batcave”, which would imply that you can register it on secure WiFi networks since most home networks at least are secure.  The Fi FAQs say that the WiFi network has to be an open public network without entered security.

Fi is tightly coupled to Google’s current communications frameworks, once Google Voice now Hangouts.  When you sign up for Fi with a Google account, the Hangout options associated with that account are updated to include the Fi handset (a Nexus 6 is all that’s supported initially).  You can make Fi calls using any other device that’s also linked to the account’s Hangouts profile, and receive calls made to the Fi number on any other device as well.

For a lot of users the Fi offering will be pretty significant, but it’s not for everyone.  Unless you happen to have a Nexus 6 you’ll have to wait until your device is supported or buy a Nexus 6 or other supported device (of which there are none for now, as I’ve noted, so this means only a Nexus 6 for now).  That’s a six-hundred-buck buy-in.  There are no family plans or unlimited data plans either, so people who save a lot with combination plans or who use a lot of data may end up paying more with Fi.  Fi doesn’t pay termination charges either, so switching could be costly even if you can salvage your phone.

The obvious question raised by Fi is whether Google is serious about it, and there’s obviously no answer to that one.  You have a better chance of being able to get Google Fi than Google Fiber, but it’s far from 100% and even if you get it, there’s a chance it might go away.  For “Early Access” read “field trial?”  I suspect that Google is reserving the right to pull the plug during the Early Access period, and even change terms.  I don’t think they’re likely to do either, but it’s possible.

The uncertainty over how serious Google is about Fi extends to cloud competitive responses.  Sprint and T-Mobile are unlikely to jump out to undermine the Google offering since they’re hosting it in the US.  Verizon, AT&T, and the other current MVNOs may stand by for a real national offering to be made rather than to respond to what’s obviously a trial.  In a pricing/offering sense, in fact, I think that may be likely.  In a feature sense I’m not so sure.

Integrated, seamless, roaming between WiFi and cellular is long overdue as a service feature, and Fi will likely accelerate recognition that this is an important feature.  Roaming among operators may also be encouraged just because Fi could otherwise make a big dent in the international traveler market.  Integration of multiple devices—the “virtual phone number”—is also I think a likely outcome of Fi even if Google eventually pulls the plug on it.

What if Fi takes off, though?  AT&T and Verizon will be looking hard at the subscriber stats once the service goes out of its Early Access phase, and at the first indication that there might be serious competition from Fi, I expect these two giants will step in.  Both are experiencing some ARPU erosion for wireless services, in AT&T’s case primarily due to cannibalization by its multi-party plans.  On one hand they don’t want to start a race to the bottom on pricing, but on the other hand they know that 1) they are network operators not MVNOs and so have all the pie rather than a piece, and 2) their low IRR means they could underprice Google if they had to.

Underneath Fi may be the important thing.  It’s a service platform, albeit a currently limited one, that rides on a federation of networks.  In many respects it’s a bit of what Alcatel-Lucent’s Rapport could be used to build.  The platform has to realize any goals Google has to build/socialize a revenue ecosystem on top of Fi, and the fact that there’s a conceptual platform competitor out there a day before the Fi announcement means Google will have to work hard to make Fi more even than it is now.  That, when financial caution may be holding them back.

“Contextual” was Alcatel-Lucent’s tagline and it should be Google’s, but both will have to build some proof points to validate the contextual potential they offer.  There’s limited presence built into Fi through Hangouts.  There’s great potential for building in other such features, and it’s this potential that should be driving Google and striking fear into competing giants like AT&T and Verizon.

Another risk posed by Fi is that mobile services over pure hotspots might emerge, which could create a major price competitor to traditional prepay and post-pay plans.  It’s possible to use smartphones with only WiFi service, but hot-spot-hopping could be limited and difficult.  With Fi you could get enough roaming capability to make WiFi-only a possibility.  Even Google could offer that down the line, and at the least WiFi roaming would likely cap data rates competitors would be able to charge.  That would almost guarantee lower ARPU as time passed.

I think the architecture challenge posed by Fi is the most compelling.  Operators have talked a lot about agile services and NFV agility, but few have really thought about creating a consumeristic competitive ecosystem.  My own experience with Verizon’s business voice and residential IP voice was negative enough to push me to another approach, one that has included Google.  You could argue that Google Voice/Hangouts would have made a significant impact had Google pushed legacy adapters for the service and had it been more directed to the mobile user.  Fi fixes the latter, and this may be the factor that forces operators to look at ways to finally build agile services above connectivity.

I’m a fan of the notion that the future of communications, in fact of applications, is contextual services.  I’ve used that term to describe applications/services delivered to users/workers in part or whole based on their geographic, social, or other context.  It’s not just a matter of answering a question, but a matter of understanding that question in context and providing a contextually reasonable response.

What’s good for services overall should be good for a given service, or for a framework to support multiple services, including the service of collaboration.  Alcatel-Lucent seems to believe that because they’ve announced a new cloud-based communications platform called Rapport.  They use the term “contextual” in describing it, and they’re right not only with respect to how Rapport works but also how it fits in an evolving network/IT industry.

At a high level, Rapport is a set of tools that integrate communications services into existing applications, documents, or experiences.  Rapport creates a kind of unified communications domain by linking PBX and IP network assets into one pool.  This is done with what Alcatel-Lucent calls “Global Routing”, a layer below “Session Control”.  Open Communications and Collaboration builds on this, and above that you’d have applications like Contact Center, which Alcatel-Lucent provides.

In implementation, it’s probably fair to simplify Rapport as being a tool set to create what’s effectively a UCC-platform-as-a-service framework that’s very extensible both in terms of what it covers and in terms of what it does or can do.  This toolkit can be run in a cloud platform by an enterprise or, I assume, a cloud provider who wants to build services based on it.  It could also be offered as an NFV service set to network operators, which is a nice slant on the way relationships between services and applications should be developed.

To make Rapport work, Alcatel-Lucent has re-architected IMS to be friendlier to web-style application development and more accommodating to application models other than the pure 3GPP vision.  IMS gives Rapport the ability to manage enterprise mobility and session continuity both for mobile devices (BYOD) and for more traditional ones, including handsets and computers.  It’s not the first time that someone has tried to make IMS into something bigger and better, but it may be the most relevant given overall trends in mobility both for workers and consumers.

The notion of creating a UCCPaaS that’s portable across virtually any cloud-suitable platform and can be used both by enterprises and service providers is the greatest strength of Rapport.  This is a good idea in today’s world, where it’s clear that buyers of all sizes want as-a-service offerings but may also want in-house hosting either as an alternative or perhaps as an endgame with –aaS as the on-ramp.

The IMS linkage may also be a good idea.  Mobility management is mobility management, whether you depend on 3/4G or WiFi and it’s logical to use what’s proven in the space, particularly when you’re expecting to support the same handsets for enterprise WiFi mobility and cellular mobility.  That’s even true for enterprises, but it’s most compelling for the operators.

The linkage with NFV is also very smart.  Ultimately NFV has to boost operator revenues to deploy optimally, and in many cases perhaps to deploy at all.  There are many different directions operators could take “new services” but they’d certainly be most comfortable with something that involved “communications” in a more traditional sense.  Such an offering would also likely be more credible to buyers.  Rapport is a platform to fulfill the revenue-side NFV benefit case, and if its own APIs are used to enhance service features and even build new offerings, it could be a complete near-term revenue driver.

The biggest upside for Alcatel-Lucent would be that operators started with a UCC-like service and built other service offerings outward from that.  This would create a kind of service ecosystem within NFV, and also perhaps establish the value of having a PaaS substrate to NFV that takes care of some of the messy business of adapting applications to the ETSI model.  I like a more generalized model-driven approach to NFV adaptation myself, but an expansion of Rapport could still be helpful in cutting down on development and also standardizing management practices.

Of course, there are downsides.  My qualifier on IMS (it “may also be a good idea”) is deliberate.  A lot of people will see the IMS dimension as an attempt to validate something Alcatel-Lucent already has and is good at.  Some may even see an IMS link as a chain of the very kind Alcatel-Lucent says Rapport is supposed to break, a tie to the past.  Even if Alcatel-Lucent’s motives were entirely unselfish here, they’ll have to address a skeptical crowd and prove their IMS inclusion is more than self-validation.

The other issue is that while you could do a lot with Rapport, somebody is still going to have to do something more than that provided in the initial suite.  Call center is an important application but it’s not the only one.  I’d have suggested that Alcatel-Lucent bring out at least two applications for Rapport to show that it’s not a one-trick pony.  Three would be better, particularly if one was an open-source application that exploited Rapport’s APIs in the cloud.  That could serve as a model for others to develop even more stuff.

APIs are tricky things on which to base a product offering.  Alcatel-Lucent should know that given that it’s tried to build a service on APIs before with less than spectacular results.  Given that HP is a partner on the enterprise side of Rapport, Alcatel-Lucent should consider playing some ball with those guys to quickly build an inventory of Rapport applications.  That would make the platform more credible.

But such an HP initiative exposes a potential issue.  Rapport for operators is explicitly a cloud offering suitable for use with any NFV platform, but it’s also available for Alcatel-Lucent’s CloudBand.  HP’s OpenNFV is also an NFV platform, a competitor to CloudBand.  In fact, the two vendors have the two most credible large-vendor NFV approaches, but HP has servers and you need servers to have clouds.  With Nokia waiting in the wings, it will be interesting to see how the competition between these two NFV platforms plays out.

IBM’s earnings are always interesting, and right now they’re downright critical.  First, obviously, IBM needs to show it’s getting back on track or it risks a loss of customer credibility that would quickly become impossible to stem.  But second, IBM is likely a barometer for the pace of change in the IT market.  Big guys always suffer during fast shuffles.

At a high level, IBM was a tactical plus and at least a mild strategic minus.  The company beat slightly on EPS but missed on revenues, which I think is the most critical number.  The Street response was generally favorable given that they pick up on EPS, but most financial analysts noted the hole in the boat as well.  IBM can succeed by cost management alone for a while, but unless it wants to be bought part and parcel by Lenovo it needs to do more than just stabilize sales, it needs to increase them.

Part of the revenue problem isn’t IBM’s to solve.  The company lost in Europe and Asia and in emerging market where economic conditions were challenging, but they only managed to be flat in major markets.  But broadly their results were troubling because their big gains were in hardware; IBM lost ground in revenues in other segments of their business.  Nobody, even IBM, could possibly see that picture as positive.

What should worry IBM most is their dip in revenues for global business services and technology services; the former off most sharply.  IBM has kept its place on top of the IT heap largely because they exercised more strategic influence on buyers.  Business services trends are a decent reflection of their ability to sustain that influence, and those trends are off.

Software was also weak, and here the concern is WebSphere, which had in the past shown double-digit gains.  All it could deliver for IBM was 1% growth, and branded software was off overall.  IBM’s development tools (Rational) were off sharply, which suggests IBM is losing the edge in controlling new software creation and enhancement.

What was the hardware gain?  Well, there’s not a lot left but System Z was delivering.  Mainframes are not a growth market, folks.  Buyers who suppressed investment there in doubtful economic conditions were loosening their purse strings but that wasn’t unexpected.  Power systems managed only a small gain even with x86 servers out of the product line.

In their prepared remarks, IBM set what should have been its own tone.  “Our strategy is focused on leading in the areas where we see the most value in enterprise IT.”  Well, is that mainframes?  IBM needed to drive the cloud, SaaS in particular, and carrier cloud most of all.  They did generate 60% growth in cloud revenue (to $7 billion).  They’re pushing Bluemix and Watson successfully in the Enterprise, but from what I can see from my own surveys their success is within the IBM base.  You can’t increase milk production by re-milking the same cow.

Mining the customer base has been a pattern with IBM, and even in the enterprise space their lack of forthright positioning has weakened their ability to influence buyers.  That’s particularly true given that the cloud engages broader constituencies within the enterprise, constituencies that IBM sales doesn’t influence much.  What IBM lost half a decade ago was evangelism.  They need to be able to drive new market opportunities.  In the SMB space that meant x86, which IBM sold, and more application software.  In the cloud space, the opportunity lies with cloud providers in general and with the network operators in particular.

The as-a-service trends that are behind both cloud-SaaS and NFV have enormous potential.  NFV alone, according to my most recent modeling, could produce over 100,000 new data centers (albeit many smaller ones, in central offices) worldwide.  SaaS could generate thousands of additional and larger ones.  These opportunities emerge from a fundamental shift, the kind of shift IBM has in the past embraced when necessary.  The kind they don’t seem to be willing to embrace now.

IBM’s cloud ambitions appear to be taking the form of cloud services to current customers, back to mining the old base.  Not only does that cement them further into their tunnel-vision problem of positioning to the broad market, it directs their cloud initiatives purely at cost savings.  Even the Street admits that if IBM were to transition buyers to the cloud the result would likely be dilutive.

You can’t succeed in IT if you can’t succeed in the biggest incremental data center opportunity in the world, perhaps the largest ever.  That’s NFV, and IBM has consistently underplayed its (actually considerable) assets there.  You could argue that IBM has failed to learn a lesson that HP is rumored to be learning, which is that they will lose more competing with cloud providers than they’ll gain in direct cloud revenue.  IBM may be so enthralled by their 60% growth in enterprise cloud services that they’re losing sight of the enormous pie of hardware/software sales that will accrue in the space.  IaaS is not ever going to be a revenue bonanza for IBM and they have undermined their marketing position to the SMB space most likely to drive SaaS.

In IBM’s prepared remarks, the phrase “service provider” never appears.  Neither does “SDN”, “NFV”, or even “network”.  That suggests that IBM doesn’t appreciate the magnitude of the changes virtualization is driving, or the fact that you can’t lead a buyer to the future by addressing just the steps you find convenient.  Rival Cisco is doing the right thing in the cloud space, engaging with network operators rather than competing with them.  Cisco is also viewing cloud data centers as an ecosystem, including switches and the x86 servers that people want.

It’s possible that IBM sees its own cloud efforts as a means of displacing the commodity x86 stuff that it’s now exited in hardware sales terms.  But even if that’s true, IBM still has to recognize that without software value-add as a revenue kicker, all it would be doing if its cloud plans succeeded would be entering a business with declining margins and selling to a small and static portion of the total opportunity space.  That’s an uncharacteristically short-sighted move.

I have a long history with IBM; I learned programming on an IBM computer 50 years ago and I cherished a notepad with their tagline of the time, “Think.”  I’ve seen them weather more storms than any other tech vendor, seen them prosper when virtually every other computer vendor flagged.  I have to confess confusion here.  IBM has seen the writing on the wall for at least three years and probably for more than five.  Once virtualization raised its head, commodity hardware was the platform, middleware the differentiator, and applications the revenue driver.  With all that time to invest, to develop, to position, what the heck was IBM thinking?

What IBM is going to have to do at this point is buy somebody, perhaps multiple somebodies.  They need core technology in the network, cloud, SDN, and NFV spaces to augment their current capabilities.  More than that, they need somebody who can take fresh and exciting stories to the broad market.  They need to make buyers do what that old notebook of mine challenged us all to fifty years ago—think.

The marriage of Nokia and Alcatel-Lucent is clearly a consolidation.  The question is what the companies see as the end-game.  Consolidation is usually a market response to commoditization, to the loss of pricing power that comes when no meaningful feature differentiation is possible.  Consolidation can also be a step toward taking a leadership position in a new market phase, a way of cleaning up the financials and tidying product lines to align for a new future.  Which is it here?

As a pure consolidation play, the combination of Nokia and Alcatel-Lucent is a reflection of the mobile market, and in particular the trends in 4G RAN.  For a decade, wireless infrastructure capex has been able to sustain itself because wireless has been under less service price pressure than wireline.  That’s changing, and it may change dramatically if regulatory trends in the US and Europe continue.  Loss of roaming premiums and equal application of neutrality would likely be the last straw in making wireless and wireline equivalent in terms of return on infrastructure risk.  Economy of scale would help a vendor in this situation.

But not for long.  Nobody is going to out-price Huawei in the long term, and Ericsson (the other wireless infrastructure leader) is leveraging services and operations effectively to help sustain its position as well.  I don’t think that simply consolidating is going to make the New Nokia a success in the space, much less a leader.

The only defense against commoditization is feature differentiation, and there’s precious little that can be done to differentiate what I’ll call “basic wireless” which means the RAN, IMS, and EPC.  Standards and interoperability have narrowed the range of innovations that can be made in traditional infrastructure.  Which means you have to get un-traditional to differentiate.

There are some basic symbiotic elements in play here.  Nokia has a good agile RAN strategy and strong CSM elements to play with, and Alcatel-Lucent has WAN hardware for mobile networks as well as a good cloud-based IMS and EPC implementation.  The question is whether these will be enough, given that gaining any economies of scale from the merger will surely demand consolidation in the product lines, and any dropping or changing of technologies could put current customers up for grabs.  I think that Nokia will have to look beyond the obvious.

The most obvious opportunity for the New Nokia is to exploit NFV, SDN, and the cloud.  Alcatel-Lucent has the best position in these three spaces of any network equipment vendor, though the company has been (not uncharacteristically) weak in positioning what it can do.  If Nokia could leverage the Alcatel-Lucent assets in these three spaces it could be a player in the new mobile infrastructure revolution.

In a business-politics sense, that’s not going to be easy.  Any big M&A tends to make everyone cautious, both within the companies involved and among the prospects for the companies’ products and services.  This take-root tendency would be particularly destructive right now because of the fact that operators are looking for decisive responses to their own return on infrastructure crisis.  Any approach that can’t be validated and initiated at scale within the next year is likely to be too late.

Another business-politics problem is that Nokia has been perhaps the only company to out-fumble Alcatel-Lucent in terms of marketing and positioning.  No matter what the companies say now about how they’ll divide responsibility in the future, the combined business doesn’t have a great pool of serious song-and-dance types to draw from.  And that at a time when singing and dancing are definitely going to be the order of the day, especially after a big M&A.  And especially when the merger that created Alcatel-Lucent in the first place hadn’t really gelled even at the time of the Nokia deal.

The final issue is that Alcatel-Lucent just named (in January) a new head of the IP Platforms (Bhaskar Gorti), which would run the company’s critical NFV/SDN/cloud activity.  You’d normally expect this sort of change to be accompanied by some substantive strategy/positioning shifts, and there’s been enough time for some of these to get going.  What happens now?  It’s hard to keep driving change without ever really getting it fully developed.

What does the New Nokia need to do?  I think the first part of the answer is clear; they have to fully position themselves to be an operations integration giant for the age of virtualized infrastructure and as-a-service composition of retail offerings for operators.  They cannot beat Huawei on equipment price anywhere that Huawei can sell, as I’ve said, and they have to compete with Ericsson who has the right tools but is also a vapid positioner of their own assets.  Ericsson’s claim to fame for the future is OSS/BSS, but it’s also their weakness.  Traditional operations isn’t enough for a virtual future.  Alcatel-Lucent’s Gorti knows this, I think, because Oracle (where he came from) realized the ops value in NFV and was positioning to exploit it.

Operations integration for NFV has never been handled optimally by ETSI; they’ve considered it out of scope.  The problem is that everything credible in terms of NFV benefits is derived in part (or totally) from operations efficiency gains.  You can’t even save on capex with NFV if the inevitable increase in complexity that NFV creates eats up your savings.

Within operators, the operations integration issue has also created a face-off between those who think that the old-line OSS/BSS systems are dinosaurs and need to be made extinct so the next wave of technology mammals can emerge, and those who think that OSS/BSS is the base of mammals (hidden for millennia under the cover of dinosaur equipment policies and technologies) that must now emerge and become supreme.  I’ve recounted in prior blogs that these two divergent OSS/BSS visions are often represented within the same operator, at the same meetings.

As it happens, it’s in expressing its operations integration strategy that Alcatel-Lucent has been the least successful in marketing/positioning its NFV story.  It’s not clear that there’s a good approach behind the lack of positioning, so the first order of business for New Nokia should be to figure out what needs to be done and insure it’s happening.  The second order is to do a lot of uncharacteristically strong singing and dancing around the story.

This new and good story has to be tied to mobile, of course, and it could be what unifies the troika of NFV, SDN, and cloud.  What do these guys have in common?  Virtualization of course, but more significantly they all have benefit cases that demand extraordinary operations efficiency.  Getting operations, virtualization, and mobile all rolled into a common story won’t be easy, but I don’t see how the New Nokia can avoid pushing to make it work.  Unless they want to watch commoditization continue to eat away at the combined company as quickly as it was eating at the two separately.

The possibility that the New Nokia might launch an effective campaign for SDN, NFV, and the cloud is a problem in itself for competitors, but perhaps a greater one is the fact that a mega M&A event in the industry would be driven largely by mobile considerations.  Neither Cisco nor Juniper has a RAN, nor do they have a strong mobile position.  They have to be wondering whether this M&A is a signal that you have to be in the mobile infrastructure game to be a contender even for M&A consolidation.  Cisco may believe it can ride enterprise IT and carrier evolution even without mobile infrastructure specialization, and they may be right.  Juniper?  I doubt it, so they have to be even more effective in their own NFV/SDN/Cloud positioning than the New Nokia, and that’s going to be hard.

Hard, and ultimately not enough.  A vendor, to have meaningful feature differentiation, has to be aligned with the features that drive the purchases.  What do service providers sell?  Services, obviously, and the most significant thing that’s changing here is the nature of services.  Bits, as I’ve said, will never be really profitable.  No matter what you do to make operations more efficient, you’re only band-aiding the wound that unlimited usage has already created and will almost certainly continue to create.  You can’t make money selling something with a zero marginal price.  So operators have to move upward, and so do vendors.

SDN and NFV are platforms to create the carrier cloud, and while Alcatel-Lucent has a cloud position (in CloudBand) it’s not ideal because they don’t make servers.  Nokia has to realize that without the automatic seat at the cloud table that servers offer, they have to earn a place.  SDN and NFV can create a fabric for applications and services, but both have to be extended to make that happen.  Interestingly, Nuage has done a lot to provide for the SDN extensions so only NFV remains.  The point is that the New Nokia may stand or fall on how well it exploits Nuage and addresses NFV, and it’s just getting those assets now.  The challenge is obvious.