At MWC, US FCC Chairman Wheeler tried to clarify (some would say “defend”) the Commission’s Neutrality Order. At almost the same time Ciena released its quarterly numbers, which were light on the revenue line. I think the combination of these two events defines the issues that network operators face globally. I just wish they defined the best way to address them. Maybe the third leg of the news stool can help with that; HP and Nokia are partnering on NFV. Or perhaps the new EMC NFV initiative might mean something good. Let’s see.
Ciena missed on their revenue line by just short of $30 million, about 5% less than expectations and down about a percent y/y. This is pretty clear evidence that operators are not investing as much in basic transport, which suggests that they are holding back on network capacity build-out as they search for a way to align investment and profit better. It’s not that there isn’t more traffic, but that the primary source of traffic—the Internet—doesn’t pay incrementally for those extra bits.
Operators obviously have two paths toward widening the revenue/cost-per-bit separation to improve profits. One is to raise revenue and the other to lower costs, and it’s fair to say that things like the cloud, SDN, and NFV have all been aimed to some degree at both. Goals are not the same as results, though. On the revenue side, the problem is that operators tend to think of “new services” as being changes to the service of information connection and transport. I think that the FCC and Ciena are demonstrating that there is very little to hope for in terms of new connection/transport revenue.
The previous neutrality order, sponsored by VC-turned-FCC-chairman Genachowski, Wheeler’s predecessor, was a big step in favor of OTT players over ISPs. It had a stated intention of preserving the Internet charging model, meaning bill-and-keep, no settlement, no paid QoS. It didn’t actually impose those conditions for fear of running afoul of legal standing but even its limited steps went too far and the DC Court of Appeals overturned it. Wheeler had the opportunity to step toward “ISP sanity”, and in his early statements he seemed to favor a position where settlement and QoS might come along. That hope was dashed, perhaps because of White House intervention.
We still don’t have the full text of the order, but it seems very clear from the press release that the FCC is going to use Title II to establish its standing to make changes, and then do everything that Genachowski wanted, and more. The order will ban paid prioritization—as far as I can tell no matter who pays. It will “regulate” interconnect, which seems likely to mean it will not only sustain bill-and-keep but also take a dim view of things like making Netflix pay for transport of video. And the FCC also proposes to apply this to mobile.
The Internet is the baseline connectivity service worldwide. More traffic flows through it than through everything else combined, and so you can’t hope to rebuild losses created with Internet services by subsidizing them from business IP or Ethernet. If Wheeler’s position is what it appears to be, then profitable ISP operations isn’t possible for long, perhaps not even today. Whether that will mean operators push more capex into independent content delivery mechanisms, which are so far exempt, remains to be seen, as does the technology that might be used. Certainly there will be a near-term continued capex suppression impact while the whole thing is appealed.
To me, that’s the message of Ciena. If operators knew that they could make pushing bits profitable they would sustain fiber transport investment first and foremost because that’s where bits are created. They’ve instead focused on RAN, content delivery, and other things that are not only not bits but also not necessarily sustainable given neutrality regulatory trends. Dodging low ROI may get harder and harder with mobile services subject to neutrality in the US and roaming premiums ending soon in the EU.
Does that leave us with cost reduction? Is there revenue out there besides connection/transport? Some sort of non-traditional connection/transport could help. SDN might offer some options here but the work isn’t moving in that direction—it’s all about white boxes and lowering costs. The cloud is a pure new revenue opportunity, but my contacts among operators suggest that they’re not all that good exploiting cloud opportunity yet. We’re left, I think, with NFV, which is why NFV has gotten so hot.
Up to now, NFV vendors have fallen into three categories. One group has network expertise and functions and a collateral interest in sustaining the status quo. Another has the resources to host stuff, but nothing much to host on it. The third group has nothing at all but an appetite for PR, and this has sadly been the largest and most visible group. Perhaps that’s now changing.
I’ve believed for some time that HP was one of the few vendors that actually had a full-spectrum NFV implementation that included operations integration and service lifecycle management. They also have a partnership program, and now that program is expanding with the addition of Nokia. Nokia has functionality and mobile expertise, but no respectable hosting capability and no MANO or OSS/BSS integration.
Nokia says IT and the telco world are merging more quickly than expected, which is true. NFV is a big part of merging them, in fact. Nokia wants to be the connected environment of the future, where virtualization can deliver the lower costs that operators need for profit and that users need to sustain their growing commitment to the Internet. Nokia is strong in the mobile network, RAN and virtual IMS/EPC. They’re essentially contributing VNFs to the picture, but VNFs in the mobile area which represents the last bastion of telco investment. That could prove critical.
HP is strong in the infrastructure, cloud, and management areas, plus service-layer orchestration. Their deal with Telefonica suggests that big operators see HP not as a kind of point-solution one-off NFV but as a credible platform partner. That’s critical because wherever you start with NFV in VNF functional terms, you pretty much have to cover the waterfront in the end or you’ll fail to realize the benefits you need.
The two companies told a story to TelecomTV that made these basic points, though I think without making a compelling link to each company’s own contribution and importance. Both were careful to blow kisses at open standards and to acknowledge their pact, which includes integration and professional services to sell and support as a unit, isn’t exclusive. This, I think, is attributable to the vast disorderly mass of NFV stuff going on. Nobody wants to bet on a single approach, a single partnership.HP
That’s likely what gives EMC hope. EMC has to be worried that almost everyone in the NFV world is treating OpenStack and NFV as synonymous. Even though that’s not true, and even though even the ETSI ISG is now seemingly accepting the notion of orchestration both above (what I’ve called “functional” orchestration) and within (“structural” orchestration) the Virtual Infrastructure Manager (VIM) where OpenStack lives, it’s worrying to EMC’s VMware unit. Which obviously EMC wants to fix.
How far they’ll go here is hard to say. I doubt that EMC/VMware are interested in doing a complete MANO with OSS/BSS integration, so they could create a VIM of their own to operate underneath this critical functional layer. The fact that they’ve included Cyan as an early partner suggests this, but IMHO Cyan doesn’t match other NFV players like Alcatel-Lucent, HP, and Overture in terms of MANO and operations integration. EMC can’t drive the NFV bus without MANO but only ride along, and everyone who has a good MANO is already committed to OpenStack. EMC is also colliding with full-solution player Oracle, who presented their own NFV approach at MWC and targeted some of the same applications the HP/Nokia alliance targets.
My guess here is that EMC will be looking to other telco network vendors (such as Alcatel-Lucent or Ericsson) for partnering in a way similar to that presented by HP/Nokia. I’d also guess that EMC’s NFV initiatives will put more pressure on Cisco to tell a comprehensive NFV story. Here their risk is that “partnership” after the HP/Nokia deal will almost have to include much tighter sales/support integration, and a perfect partner for EMC will be hard to find.
Perfection in networking is going to be hard to find, in fact, and we are on a track to search—if not for perfection then at least for satisfaction. NFV and the cloud could provide new revenue for operators, but there’s no incentive for them to subsidize an under-performing Internet investment with those revenues. A decade ago, responsible ISPs were calling for changes in the business model because they saw this all coming. Well, it may now be here.