Wall Street is a lot more intertwined with the networking industry than just in the logical financial sense, or as a big network technology user. These people are the ones who win big or lose big by betting on company successes and failures, so it’s a good idea to take their pulse from time to time to see just what they’re betting on. Right now, it seems to be mixed.
Analysts are saying that basic switching and routing are losing steam, but more are attributing this to the current Euromess than to anything fundamental in the industry. I think the truth is that both factors are involved. Operators in my fall survey indicated a major shift of spending toward the metro aggregation network, which tends to focus the bucks on optics for wireless backhaul and cloud/content networking and on Ethernet. Aggregation is not an IP mission; you only need to concentrate traffic from a lot of access points back to a small number of service points. Add to that the fact that operators are not earning a good return on bandwidth and you see the problems.
We know they’re not earning a good return because more and more operators are moving to usage pricing. TW said it was expanding its trial footprint for usage pricing at the low end, where it helps “light” Internet users. Yes, that doesn’t add cost for everyone but I doubt anyone is naïve enough to think that once usage pricing goes in anywhere in the spectrum of usage, it won’t expand to become the norm. But this isn’t going to make the network “profitable” as much as it will stop it from becoming excessively unprofitable.
What IS profitable, then? The cloud. We think of network operators and the cloud as being a Tier One adventure, but I was in Latin America earlier this year and met with a Tier Three operator there who had major-league cloud aspirations. In fact, the largest change in cloud computing interest my survey showed this fall was among Tier Threes. Is it any surprise that Chambers wants Cisco to be an IT company and not a network company, and that Gartner says that Cisco is one of the bright spots in the server market?
Cisco’s success in servers shows something else, though. They’re the newest kid on the server block, their sales force hasn’t historically called on the IT guys but on the network guys, and they don’t talk the talk and walk the walk yet. They’re not a software company, relying instead on other software players to round out their data center story. And yet they’re a bright spot? I would argue that’s because the notion of the cloud is bringing about a planning/buying fusion between IT and networking. And remember, even though servers form the resource pool, the network forms the cloud. Cisco is demonstrating that playing on cloud positioning can sell networks and servers as well. By inference, absent cloud positioning, you may not be able to sell either.
One impact of this is suggested by a Street prediction that Huawei will strike a reseller deal with IBM. If that does come about, it would be seismic for the enterprise network space. Might it be true? Well, it would darn sure be good business for both parties. Remember that Lenovo is a Chinese company. Remember that in any reseller agreement, you need to start with a box provider who can tolerate low margins so the additional layer of overhead doesn’t push the retail price too high. Remember that if you need to have your image sanitized for the US market, it would be hard to find a better antimicrobial spray than the IBM logo.
The SDN and NFV stuff fit into this too. When you have services that are margin-pressured you have to lower the base cost of infrastructure for those services. Both SDN and NFV are examples of buyer revolt; we need to make the network into what it really is, a business pipeline and a platform for the cloud. Vendors have resisted that change, Cisco perhaps more than most. Cisco must now embrace it—sort of—in order to make its transition. As they do, they will make the penalty for not following suit rather dire. Market leaders set market trends, after all.
We have three network challenges today. Number one is how to fuse a vision of the cloud as something that’s the SUCCESSOR to the concept of the Internet, because from a business perspective that’s exactly what it’s going to be. Number two is how to create a unified architecture for metro aggregation that combines optical agility and limited, software-directed, electrical forwarding control. Otherwise we can’t make metro networks effective as mobile broadband, content, and cloud drive them. Number three is how to create a framework for adding services to networks to take advantage of the fused network/server vision that the cloud represents. Services are cloud applications, but what is the cloud platform on which they run?
We’re heading into a new year, one that’s going to be challenging for everyone because it will force transitions on everyone. There’s no hanging back in a race for the future, or at least there’s no survivors among those who do hang back. Alcatel-Lucent and Cisco and Ericsson and Huawei and Juniper and NSN are all vulnerable in this coming year. One mistake may be all it takes for any of them, and doing nothing will be the largest mistake of all.