Cisco gave us classic good/bad news in its earnings call. The good was that their guidance for the rest of the year was strong. The bad news was that service provider revenues were down by 13%, and these points were summed up by Light Reading and CNBC . There are a lot of implications to explore, some shallow and obvious and others deep and important. We’ll explore them now.
The most obvious point of the Cisco numbers is that enterprises are still seeing a business case for network investment and service providers are having a problem with that business case. This is consistent with the long-standing view of providers that declining profit per bit was inevitably going to impact ROI on infrastructure, and that in turn would impact capex. OK, that’s happening, which makes this particular insight obvious and shallow.
But it’s a jumping-off point to a deeper question. Operators have two basic sets of cost associated with infrastructure, capex and opex. Opex is, on the average, more than half-again as much as capex. Opex is part of the financial measure EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) typically used to measure operator financial performance. Capex isn’t. There was a major shift in NFV emphasis to focus more on opex reduction, and there was a new ETSI activity (Zero-Touch Automation) to address it. Given all of this, why is capex under pressure?
One possible answer is that the opex reduction initiatives have failed, and that’s true in the sense that neither NFV nor ZTA is contributing anything to reduced cost per bit. However, operators have streamlined operations significantly through less efficient means, to the point where they’ve reaped pretty much all the low apples in savings. Since 2015, in fact, operators have saved more in opex than the 13% that Cisco says capex is down.
Another, probably better, answer is the “new-model-problem”. Nobody wants to buy a “new” car at the end of a model year when a better/newer/cooler model is about to come out. At least they don’t want to buy it without a steep discount. Could we be seeing operators’ belief in a future infrastructure model that they can’t quite grasp and implement, now hanging over sales of the old model they don’t believe has legs? Almost surely, yes, and Cisco is actually benefitting from that very issue, both in the service provider space and also with enterprises.
In my surveys, both groups have shown a shift in how they balance “proprietary risk” versus “integration risk”. Six years ago, operators were at their peak of “lock-in” sensitivity, trying to keep major vendors from creating pull-through across their product lines. They viewed this as a way of keeping prices high, and we all know we went through a media phase on the lock-in topic at that time. Today, the same players report that they believe having a single vendor with a vision of infrastructure evolution cuts their integration risk, their integration cost, and their risk of stranding capital on old technology.
Cisco has always been the master of the paper-it-over school of technology revolution. Someone comes up with software-defined networks. Cisco responds with application-centric infrastructure, which is designed to accomplish at least some of the goals of SDN but without the fork-lift replacement of legacy gear or the leap of faith into a new network paradigm. That’s a pretty strong response to a scary new trend, particularly when it’s the perception of buyers that the new trend is losing steam in the real world.
Operators tell me that they have “lost some faith” in every new network paradigm. Part of the reason is that all “new” things these days are over-hyped to the point where there’s no chance they’d live up to expectations. This problem has been around for decades, but it’s worse in the age of online journalism and click-bait topic management. It’s particularly difficult to get senior management buy-in for something that’s being trashed in the media; nobody wants to take the risk. Remember the old saying “Nobody gets fired for buying IBM?” It’s now “Nobody gets fired for buying Cisco.”
The natural response to fears of integration and technology risk is “communitization”, meaning cooperative work by operators and vendors. Standards groups have been the traditional way of handling that, but standards have proven too slow and too narrow to do much good in the current world of network tech turmoil. Open-source software is a better model, but operators don’t know how to do that and network vendors, including Cisco, have obviously resisted initiatives that would level the vendor playing field.
Another insidious problem operators have faced in trying to manage the risks of multi-vendor is the fragmentation of initiatives. We have a new technology, so we launch something to develop it. The management of that new technology? Out of scope. The use of that new technology in emerging services (like the OTT stuff)? Out of scope. Integration and evolution of the technology into a running network? Out of scope. In short, the nature of the initiatives intended to give us something new has created an even worse integration problem than we had before.
We know how to build basic IP networks. We know their strengths, their weaknesses, their costs and risks, and we accept at one level that something better is going to come along. It just doesn’t seem to be quite here yet, and that has resulted in a hanging back of those buyers with modest business cases. Enterprises, who are generally booming relative to operators, and who see network-linked information empowerment as both a revenue booster and a productivity improver, are more eager to step forward and buy something, but even those enterprises are trying to stay in their comfort zone, a zone Cisco has long defined.
Cisco expects the operators to spend more later this year, and that’s consistent with what operators are telling me. There is competitive pressure on operators to deliver 5G. There is also a recognition that in many ways bandwidth is cheaper than bandwidth management, and building networks with more capacity can be the fastest path to reducing opex. Eliminate the complexities of congestion management by oversupply, not by regulating how capacity is used.
Cisco is the go-to vendor for capacity. They don’t supply 5G-specific technology, but they do supply technology to push bits. You can add Cisco devices into a Cisco-centric network easily, more easily than integrating another vendor in, and far more easily than moving to a new technology. Cisco, financially speaking, is doing the right thing, and that’s what earnings calls are about.
Cisco competitors are doing the wrong thing. Some, like Juniper, try to fill in to capacity plans on a per-box replacement approach, but that strategy has failed, and had failed long ago. Some, like Nokia or Ericsson, rely on providing the single key technology (the radio network) that’s associated with an accepted modernization thrust, such as 5G. That ignores the truth that if the 5G future does all that it’s supposed to, what it consumes most is capacity, and that’s not just in the RAN. We may never see 5G Core, but we’ll surely see 5G backhaul.
The reality is that every Cisco competitor should be working out a single-thrust, single-body, strategy for modernization. The future is scary, the risks you know and take every day seem less so. Cisco is the default path to that risk-you-know tomorrow, and so Cisco competitors need to unite and make the risk-you-don’t-know path seem less…risky.