Sometimes the interplay of news is more newsworthy than the news itself. Last week we had Ciena’s quarterly report and Cisco’s deal for Acacia, and the two certainly create an interesting combination. Add in the now-almost-routine comments that telco profit per bit is declining and that IP is the dialtone of the connected world, and you have something really profound.
Connectivity sucks, profit-wise. There may be a big appetite for bandwidth, but not for paying for bandwidth. As a result, the climb in service bandwidth has been steeper than the price per bit, and that’s never going to end. There will never be a time in the future when bit-pushing is as profitable as it is today, and it may shortly be not profitable at all. We have to get this point out there because it’s the central truth around which all the other stuff revolves.
The next truth is that when operators can’t make more money with more bits, they put a lot of pressure on their infrastructure costs. That pressure can come in the form of a demand for discounts, or perhaps seeking an industry price leader (Huawei comes to mind), or even a consolidation of equipment—many boxes into one superbox. Any way you look at this, the vendors are in the same box as the buyers are (no pun intended).
There’s no question that optical transport spending is on the rise, because of that big appetite for bandwidth. Ciena’s sales prove that out, at least for the near term. There’s also no question that spending more to produce less-profitable bits can’t go on forever. Thus, operator pressure on optical transport spending will increase, which is also what Ciena’s outlook suggests, and what Street analysts worried about. The Street also worries about Ciena’s margins, for the good reason that price pressure on sellers is inevitable when buyers question their ability to sustain investment.
Ciena, of course, knows all this, and in fact has known the trend would develop for almost a decade now. What they’ve tried to do is frame “packet optical” gear as the answer. Almost all traffic, and probably all traffic growth is in IP. If optical transport could rise above Level 1 and create virtual electrical-layer (“packet”) pipes, it could make routing simpler…and cheaper. That could take some price pressure off Ciena’s products.
By putting it on routers, sold by vendors like Cisco. The prospect of having optical vendor sales pressure relief at Cisco’s expense is hardly appealing to Cisco management, so what’s the solution? Well, if the optical/electrical boundary can be exploited from below, why not exploit it from above? If most optical traffic is IP, then it originates in routers. If the routers have good optical interfaces, say from a vendor like Acacia, then routers could displace optical devices. Turnabout is fair play (or equally competitive play, at the least).
Cisco, figuring that the battle with optical vendors over the “packet optical” boundary was inevitable, also figured it would mean Cisco spending more on Acacia interfaces. Why not buy the company and keep the money in-house? That’s the simple justification for the deal.
Cisco (and the router vendors overall) have an advantage in the packet wars. Optical vendors, perhaps especially Ciena, have failed to make a case for themselves in the packet space, despite attempts from a number of different directions. The packet layer is a lot more complicated, both topologically and operationally. The router-optics story is simple: “Be invisible”. Subduct the whole optical network into a router interface. That’s surely an easier sales pitch, and it also has the advantage of creating a consistent operations framework.
Then, finally, there’s Huawei. The ultimate cost-reduction strategy has always been “Beat Huawei up on price.” Ciena’s greatest successes come in the US, where Huawei isn’t much of a factor. It’s hope for pricing relief in the future is that Huawei will be barred from deals in other geographies too, or that at least there will be a risk in adopting Huawei gear that operators outside the US won’t want to take. OK, that’s a possibility, but you could also hope that somehow “Buy Ciena!” would be written across the face of the moon. The point is that you have to define strategies that can succeed on your own initiatives, or you’re hoping to find gold while digging for worms to fish with.
The thing that nobody has addressed here, but that optical vendors need more than anyone else, is an architectural model of the network of the future. It’s clear that the majority network investment goes into the access/metro part of the network. This portion of the network may carry IP traffic as the dominant mission, but it’s not a classical IP network because nearly all of it is focused on getting traffic to a public-network on-ramp. Think of mobile infrastructure as an example. Whether we’re talking about the 4G EPC or the 5G UP, the mobile-centric part of a mobile network is more aggregation than routing. That could mean it’s more “packet” than IP, and that packet optics might be a natural fit.
Even router vendors have some technical challenges. If a router with an optical interface is to be a true, almost-universal, replacement for a separate optical layer, then it has to be able to do very effective packet-level grooming at the least, meaning it has to have a “Level 2” pipe-like path control process below routing, not one based on MPLS. It may also have to address agile optics and wavelength cross-connect. Cisco can probably make some of this happen, if they have time.
It’s the optical vendors, mostly Ciena and just possibly Infinera, who will decide how much time Cisco has. Neither of these vendors has shown much insight into what a future mobile-like architecture for access/metro would look like if optical devices rose up to assume that Level 2 pipe/packet role. Could one of them break out? Anything is possible, but we’re talking about a decade of fumbling for both our optical contenders, and it’s hard to see how we could credibly presume a revolution when the optical underclass (at least in topology terms) have been idling about for a decade.
All this, of course, begs the question of just what a future architecture for the “packet” overlay part of transport would look like. The challenge is that the whole of access/metro is evolving under a variety of pressures, some real (there will be 5G New Radio and more capacity) and some highly speculative (5G core, IoT, edge computing). Absent a clear picture of what connectivity from the metro network outward to the user looks like, and what it’s expected to do, we can’t really say much in detail. But I do think that we can say that if we had a true network service abstraction goal for virtual networking, rather than a network-of-virtual-boxes goal, we’d be ahead of the game.