A tale of two announcements; that’s a nice literary play on my blog topic. Cisco announced its earnings, and it’s always a useful barometer on telco spending trends. In addition, Microsoft announced the acquisition of Metaswitch, and that seems to me to decide the question of how its recent Azure Edge Zone stuff should be assessed. What connects the two could be pretty interesting.
Let’s start with Cisco. They said on the call that their quarter was ahead of guidance prior to the pandemic and lockdown, and they still beat their revenue and earnings expectations, and guided better than expected. This shows that networking is still broadly strong and that it likely was impacted less by the pandemic than some other tech sectors.
The IP giant reported a decline in switching and routing revenues in the service provider sector in the quarter. If you consider that in the context of all the pandemic comments Cisco made on their earnings call, you’d likely jump to the conclusion that spending was suppressed by the virus. The problem is that service providers wouldn’t be expected to react to a broad market force like a pandemic so quickly, since during Q1 it wasn’t known how long it would last, and since a lockdown would seem to increase the need for network services.
At the same time, Cisco’s bright spot was its as-a-service software model, which gained strength in the quarter. Cisco cites the pandemic as a driver for its WebEx stuff, of course, but it’s also reasonable to say that in chaotic financial periods, companies would tend to move to expense-based acquisition of stuff rather than outright purchase. Cisco was also positive about their traction in the cloud space, meaning their support for multi-cloud via SD-WAN.
To me, this adds up to an enterprise segment that’s not prepared to curtail networking investment, either in terms of products or services. Unless there’s a major long-term depression, I think that what Cisco’s numbers and guidance suggests is that enterprises may slow-roll some network projects, and may try to expense rather than capitalize enhancements, but they’re not going to hold back their networking significantly.
Not so for the service providers. They were already putting downward pressure on capital spending before the pandemic, and few have suggested they’d be increasing capex in response. Cisco’s guidance doesn’t suggest to me that they believe the sector will be exploding in opportunities at any point in 2020. The problem of profit per bit, which I’ve harped on for half-a-decade, are biting their return on infrastructure.
The presumption normally made (including by me) is that service providers would move to higher-layer services, the “carrier cloud” model. But carrier cloud has always been a kind of threading-the-capital-and-first-cost-needle proposition. You needed to have some early applications for carrier cloud as part of legacy service topologies, in order to fund early deployment to a scale large enough to be competitive for public cloud and other consumeristic services. These early applications have not emerged; the NFV initiatives that operators hoped would be the first application of carrier cloud have been minimal and have only driven “universal CPE” rather than cloud-hosted functions.
Where does this leave operators? The second phase of the carrier cloud driver evolution was supposed to be 5G. Despite all the market hype, there is no credible set of new services emerging from 5G that would drive incremental revenue. Thus, there is no ROI out of 5G infrastructure other than that which could be associated with higher cell densities, which is more related to lower cost than to higher revenue. This puts the 5G driver in jeopardy, which would virtually guarantee that carrier cloud overall is in jeopardy. Which leads us to Microsoft.
Microsoft positioned its Azure Edge Zones as targeting 5G and telco applications specifically, in contrast to IBM/Red Hat, whose edge story is generalized. Why not, in an emerging space, use a shotgun rather than a rifle in going after opportunity? Answer: You think there’s one absolutely prime target. Why? Because you believe that the financial situation service providers find themselves in forecloses big carrier cloud investment as part of 5G. Thus, they will want to outsource it. Thus, Microsoft wants to supply it.
The challenge for Microsoft is that it’s not enough to have a cloud platform to host 5G components, you need those components to host. To paraphrase a song from “Camelot”, “Where in the world is there in the world a 5G virtual function set so extraordinaire?” Pause with great anticipation…Metaswitch.
There is nobody in the market who thought longer and harder about creating cloud-compatible telecom software than Metaswitch. Their “Project Clearwater” IMS application was the one I’d picked to be the foundation of the first use case submitted and approved for NFV, because it was clear that it would be IMS and not virtual CPE that could drive carrier cloud. They have carrier successes already, and they’re well-known in the carrier space. Of the 77 operators I’ve talked with in the last year, Metaswitch was known to every one, visibility that matches that of the major network vendors.
Metaswitch augments Microsoft’s 5G mobile story, already supported by its Affirmed acquisition, completed earlier this year. I think Microsoft could have gotten Affirmed’s stuff to where they wanted to be, but I also think Metaswitch was closer. If operators are serious about 5G Core, then they could move quickly, and so accelerating Microsoft’s capabilities is smart. Not only that, Metaswitch running wild and free in the market could stimulate others to consider getting into the virtual 5G space. Both Cisco and Juniper could use such a story, and a few insiders have told me both considered a Metaswitch deal themselves.
You have to wonder whether they should have. The problem with being a “platform player” is that nobody needs you until they have something to put on the platform. The network vendors who have 5G are able to deliver the solution and the platform. For everyone who doesn’t have a solution, Metaswitch would have been a great addition.
That doesn’t necessarily mean that Microsoft’s edge approach, depending on carrier cloud and 5G outsourcing, is the best (or even the right) approach. IMHO, they’re betting that operators are going to push for full 5G deployment, meaning 5G Core as well as the New Radio. Up to now, the emphasis has been on the radio network and 5G Non-Stand-Alone (NSA) hybrid of 5G NR and 4G IMS/EPC. However, it’s obvious that isn’t going to create much (if any) new revenue for operators. The increased operator interest in 5G Core, and in edge computing and outsourcing, may be based on a hope that broader-technology-scope 5G implementation will boost revenues.
By itself, it will not. Microsoft is now in a position where it will need to address the more complicated higher-level services that were drivers to carrier cloud, services like the IoT “information fields” I’ve blogged about, or personalization and contextualization. I can’t say whether Microsoft knows they need this additional layer, or that they know how to get it. I hope they do, because traditional network vendors have been nesting like hens in a henhouse for a decade, on this same issue set. We need progress, not more hens.