I’ve blogged a lot about declining revenue per bit and commoditization of hardware in networking. The same thing is happening in IT, driven by the same mass-market and consumerization forces. You can’t sell a lot of something that’s expensive; Ford made the automobile real by making it cheap. So arguably networking and IT are getting real now, and that means that perhaps we have to look at the impact. As I’ve noted before, you can see some signs of the future of networking in current IT trends. Look further and you see clouds and brown paper bags.
In the old days, Microsoft would not have made hardware, and Intel would not have made systems or devices. It’s pretty clear that’s changing and the reason is that as prices fall, profits pegged to a percentage of price will obviously fall too. Declining margins will nearly always have the effect of forcing intermediaries out of the food chain. You want to keep all the money.
In networking, this is going to put pressure on distribution channels over time. We can already see some of that in the fact that the network vendors are working with larger and larger partners on the average, moving away from the VARs and the populist networking in favor of presenting products directly to mass-market retail. A small business can get everything they need in networking from Staples or Office Depot, and in my survey of mid-sized businesses this fall, they reported that their off-the-shelf investment in networking had almost doubled versus 2012.
The other impact of commoditization is that it quickly runs out of its own value proposition. If gear is really expensive then getting it for ten percent less really means something. As prices fall, the discounts are less significant in dollar terms, but more important the component of cost that network equipment represents is less important overall. Five years ago, businesses said that capital cost of equipment was 62% of their total cost of ownership, and today it’s 48%.
From the perspective of network services, commoditization is hurting operators more every day and increasing their disintermediation problem. If the industry’s services are driven by people riding on a stream of bits that’s getting cheaper (in marginal cost terms) every year, then those people are gaining additional benefit while the operators carrying those bits are losing. This is the basic force behind operators’ need for “transformation”. First and foremost, they need to be able to get into the “service” business again. That’s important because their network vendors are doubly impacted—they’re increasingly expected to help their customers, and they are also increasingly at risk because their own core business of bit-pushing is less the strategic focus.
Translation to services isn’t as easy as it sounds. If I’m an operator and I’m selling stuff over my network instead of from my network, am I not killing my ability to differentiate what I spend most of my capex doing—which is pushing bits and making connections? Look at what’s happening in the enterprise. Ten years ago, the CIO was likely to report directly to the CEO, while today they’re more likely to report to the CFO. Twenty years ago, the head of enterprise networking had influence nearly equal to that of the head of IT, and today both these positions say that networking has about a fifth the influence of the IT counterpart. Think of the political impact of this shift, and how it might impact service providers—people who are essentially all networking types.
That poses, to me, what should be the critical question about the evolution of networking, which is whether we can envision new services from rather than just on the network of the future. It should be obvious that if anyone is going to empower the network as a source of goodness and not just a brown paper bag to carry it in, that someone will have to be a network equipment vendor. IT or software giants have everything to gain by encouraging commoditization of networking—it’s more money on the table for them.
Are those vendors empowering the network? At some levels you can argue that they are. Cisco’s application-centricity model would at least expose network features to exploitation by applications, but that’s not enough because it gets us back to being about carriage and not about performing some useful task. What is needed for networks to be valuable is for more of what we think of as the cloud to be subsumed into the network. Right now, the cloud to most people is just VM hosting—IaaS. If the cloud is adding platform services (to use my term) to build a virtual OS on which future applications can be built, the mechanism for that addition could just as easily be something like NFV as something like OpenStack. Or it could if network people pushed as hard as cloud people, meaning IT people, are pushing.
It’s important for our industry to think about this now, because (returning to commoditization) the rewards of success are greatest when the benefits created from success are the greatest. Revolutions may be hard to sell, but they bring about big changes and create big winners (and of course losers). If we wait for the right moment to do something in networking when things like OpenStack are advancing functionality in the network space (Neutron) two to four times per year, they’ll move the ball so far that all networking will be able to do is dodge it.
Commoditization at the bottom creates revolutionary potential in the middle, in the adjacent zone. I think that the evolution of the cloud is taking it “downward” toward the network and the evolution of the network must necessarily take it upward to respond to its own commoditization pressures. That boundary zone is where the two collide, and in that zone we will likely find the opportunities and conflicts and players and risk-takers who will shape where networking, the cloud, and IT all go as their own safe core markets commoditize. That battle cannot be avoided; it’s driven by economic forces. It can be won, though, and networking needs to win it to avoid becoming a brown paper bag.