The future is written in the data points of the present, so let’s start today by looking at some of those data points, then reading some tea leaves.
NSN is said to be looking to issue nearly a billion dollars in bonds in a move that may well be a precursor to the joint venture becoming an independent company. There aren’t any rumors of specific new projects or programs to be funded, which would suggest the funds would be used to pay down current debt. Still, it’s not impossible that some new stuff, even M&A, might be included in the billion.
This isn’t too far from the Alcatel-Lucent capital-improvement program that was undertaken recently using private equity investment. Both Alcatel-Lucent and NSN are traditional companies with traditional issues of a large worker base, a large number of low-margin products, and a large number of hungry competitors with lower cost points. NSN has so far been focusing its response on narrowing its product family, which has the collateral effect of reducing headcount.
Ericsson, competitor to both Alcatel-Lucent and NSN, just had an S&P downgrade in outlook, though its BBB+ bond rating was affirmed. It’s been looking to somehow exit its ST-Ericsson semi deal and also sold off a patent portfolio to a third-party patent firm (many would say “troll”). Expectations are that Huawei will pass Ericsson to take the largest network vendor slot in the current quarter.
Now it’s interesting that this is all happening as Telefonica Digital announces a new “Smart M2M” platform that it developed for the machine telemetry space. What’s interesting is that this is the sort of application that network vendors would have been expected to field and sell. Not only that, you’d have expected network vendors to have established an architecture to deploy these new applications on. You can be sure that Telefonica Digital is doing that (yes, a bit retrospectively but still doing it).
The FCC wants every metro area to have at least one gigabit Internet provider. Presumably this is going to stimulate the other operators to match that provider’s speed and launch a new age of Internet and OTT (which, since the FCC Chairman is a former VC, has great interest to him). Never mind that the great majority of users don’t want to pay for even the current highest-tier services, or that objective speed reports from video providers show that the difference between gigabit and 20 meg services in terms of video download is about 10%.
Verizon issued its earnings report, and its profits were hit because of subsidies on smartphones. At the same time it saw a 6.6% increase in data revenues for mobile services. Video and other content that would otherwise be raising costs are contributing to profits in mobile because of usage pricing. Bit-pushing is OK as long as you’re not giving everyone a free ride.
Got the tea? Now let’s start reading.
First, whether we like to admit it or not, we’re entering the end-game of unlimited usage. When data usage growth is the driver of mobile ARPU growth and nothing else is performing, it doesn’t take dazzling deductive logic to see that we’re going to end up tightening up the limits on usage even for wireline. Operators are not going to invest in creating losses.
Second, nobody believes that usage pricing will be popular, so operators will try to alleviate the pressure by cutting their costs radically and by offering services beyond Internet bit-pushing. Their challenge in the former is to break the traditional paradigms of networking, paradigms the operators believe have been manipulated by network vendors to assure rising spending on the vendors’ gear. Their challenge on the service side is twofold; they have to identify what might work and they have to be able to create it at a low enough cost to make the service marketable and profitable.
Third, the trio of the cloud, SDN, and NFV are important to both the cost side and the service side, and operators are happy to ride either side to at least temporary victory in an overall profit sense. Yes, cloud computing can make money but no, IaaS isn’t a good long-term high-margin opportunity so you have to look beyond it. But beyond it lies the problem of creating “experiences-as-a-service” based on a cloud-like architecture that bonds computing and networking in new ways. This is about benefits, guys—the “why do I do it?” has to precede the “how do I do it?”
Nothing meaningful is going to happen in networking without redefining the IT/network relationship, which will have the effect of redefining networking AND IT. To redefine that relationship means focusing on the area of the network where the benefits of change are most easily realized. You all know I believe that’s the metro network. Content delivery is a metro CDN application. Mobile point-of-activity intelligence for consumer or enterprise is a metro cloud application. Cloud computing itself, in any credible large-scale form, is a metro application. Where we should be focusing today is on how to embrace the cloud, SDN principles, and NFV in the metro network. Only that is going to give the network vendors like Alcatel-Lucent or NSN something to spend their cash on with a fair return. Only that is going to give operators a good shot at high return on infrastructure. Only that is going to change the benefit case that either drives or limits our industry.