NSN is selling its optical transport assets to the same private-equity firm who bought Sycamore’s technology assets, and the move doubles down on a bet that NSN is making—namely that broad product lines aren’t valuable in networking any longer. I think that at one level that’s true; my research shows that buyers are much less likely to value a full-house portfolio these days. At another level it’s problematic because it exposes NSN to a critical decision they may not be prepared to make.
Optical isn’t exactly languishing as a market sector. My preliminary data suggests that it will outperform both routing and switching in growth next year, largely due to the fact that metro connectivity is disproportionately optical. Down the line, OTN demands by operators will further boost optical transport by displacing some core routing costs in new network configurations. The problem is that optical profit margins are limited, in no small part because Huawei has exploded in the space and taken a lot of market share.
It’s likely that NSN realizes that at one level it can afford to be out of the optics space; the primary driver of new infrastructure is mobile services and NSN is well-engaged there. It’s also likely that they realize that cutting lower-margin products out of the mix will help their parents. The question is whether it realizes that once you leave the transport layer you have nowhere to go except the service layer.
The margin transformation of networking is being driven by the fact that connectivity and transport have capped revenues as a result of fixed-price connectivity. You can’t have capped revenues and escalating costs, so you have to drive down infrastructure spending. But at the same time even operators need profits, so they have to look to what’s popularly called “over-the-top”. This combination of events creates two service-layer pushes; one by encouraging the migration of functionality out of the network’s expensive real estate to commodity servers in the cloud, and one to hosting of incrementally valuable services in the cloud. Are you seeing the common denominator here? That’s what poses NSN’s challenge.
NSN has a cloud strategy, but it doesn’t have cloud PRODUCTS, and you can’t be a success in the service layer without anything to build the service layer with. Professional services alone are not going to create success because operators don’t want to put themselves in perpetual thrall to vendors (the NFV initiative proves that). Thus, the challenge for NSN isn’t so much what they sell off but what they ACQUIRE. They need to buy some service-layer startups of their own, to follow along the trail that Cisco is clearly trying to blaze.
The problem of the service layer is going to become acute shortly because the three giants of the industry are all aimed at it. Amazon, Apple, and Google are all alike in an important respect—they have a revenue base that’s inherently limited and they need to expand their own TAM to address that limitation. Retail profit margins aren’t ever going to go up, Amazon. We can’t festoon people with hip-looking personal appliances, Apple. Even in total, ad spending won’t put you in the black forever, Google. In all three cases, the only track that’s open to the online giants is “the cloud”, and anyone who believes that means shifting IT spending from in-house to cloud is smoking dust.
All of our giant friends have been puffing, but that’s going to change. All three Internet giants all need to go where NSN (and other vendors in the network space) need to go. Yes, none of them have been as smart as they could have been, but are they ALL going to stay stupid forever? Doubtful, and if they don’t then any one of them who moves will radically narrow the range of opportunities for vendors like NSN because none of these players have any reason NOT to commoditize the network. Only the network vendors have that motivation, and I think they need to get with the program…while they can.