The end of a week is my usual recap time, an opportunity to try to collect rumors and minor items and combine them with broader and more visible ones to find some interesting trends. This week, the question that seems to come out of this process is “What’s happening with network equipment vendors?”
We all already know that Alcatel-Lucent suffered a loss this quarter and that their CEO is leaving. Oracle bought Acme Packet. We’re now hearing that the joint Nokia/Siemens NSN venture might be breaking up, either sold off (perhaps with private equity help or even to one) or absorbed by Nokia alone. There’s certainly enough evidence of business change to suggest something important underneath, and also to suggest more activity and even M&A to come.
Network equipment is not, overall, a healthy market. Moody’s says that the focus of telecoms is toward returns to shareholders and away from capex and investment, which is hardly a good sign on the demand side. Cisco hasn’t reported yet, but for the rest of the space there continues to be major issues with government spending, telco spending, and in many geographies even enterprise spending. The challenge of the space is simple; you can’t have radical increases in spending and high profit margins in a market that’s focused on managing cost. Anyone who really wants to be a long-term player (or even survivor) in the network equipment space needs to be thinking about how to boost the benefit case for what they sell.
So how? Well, for the service provider the “benefit” is new service revenue. Right now, you can argue that offering a cool phone with a good subsidy does more to get you customers (and retain them) than the network. AT&T is consistently rated at the bottom in service quality and yet it’s doing pretty well with iPhones. For the enterprise, “benefit” is incremental productivity gain. Right now, we’re in a decade-long slump in finding new ways of improving productivity through technology.
I think it’s clear that software is the key to both provider and enterprise benefit-building. Software is what couples hardware to experiences, both for consumers and for workers. Those who have it can get closer to the top of the food chain and claim a larger share of the overall margins, but they can also drive the bus in terms of demand creation. Lower down you lose differentiation and pricing power, and you’re also a slave to the higher players’ ability to make the business case to the ultimate buyer—consumer or worker. That’s why the decision by Oracle to buy Acme Packet is important. Oracle is a software giant, and Acme offers them a way of hooking software to network behavior in a host of different ways.
The challenge for Oracle is then the challenge that Alcatel-Lucent has been facing, that NSN has been facing. Both NSN and Alcatel-Lucent have “software” in that they have a software framework for mobile broadband services and also an architecture (IMS, largely) on which services can be built. So if software is king why have these two players not been able to capitalize on their credentials, and why has Cisco seemed to be stealing the software thunder?
Cisco has always been the master of positioning, with Chambers putting pretty words on even mediocre concepts. It’s not that Cisco doesn’t have substance, but that they realize that you don’t sell a consumer or worker on a “benefit” by giving them a laundry list of technology elements, references to standards, and project roadmaps. You sell them by INSPIRING them, which Cisco has done and which neither Alcatel-Lucent nor NSN has been able to do. Nor, of course, have the other competitors in the vendor space, like Ericsson, Juniper, and Huawei. So the lesson of software is that in order to validate it you have to present an inspiring vision first, and when they’re hooked you get into the educational process. Otherwise you’re a teacher and not a salesperson.
So should we now look for a mad software-vendor rush to acquire network companies? I don’t think so. First, most of the network companies out there are in spaces that software doesn’t have a compelling hook with. The service layer is where experiences are created, and while Acme has most recently focused on VoIP and SBCs, it was also a DPI player and a broader service play in the past. But in any event, the key to creating a software hook to a service is to be able to recognize a service or application, which means DPI, sessions, application acceleration, and all that related good stuff.
So what do we look for? Well, if I were a second-tier network vendor or a specialty player in the application or services area of the network, I’d be positioning myself as an element in a future network where virtualized functions and centralized software was the rule. Some have that capability but have nothing in the way of positioning—they lack that grand vision that we know now is essential in creating any credible link between your product and the top of the demand chain. Thus, look for some serious positioning grooming from the remaining VoIP players, application acceleration players, SDN controller players, and SDN startups in general. And look quickly, because whatever your position in SDN and NFV is in 2013 is probably what you’ll have to live with, in these critical early days of the market.