It’s probably no surprise to anyone that Huawei turned in record earnings in the last quarter, and I’m sure that the other network vendors have even more to worry about now than before. So do network operators, whose own revenue and profit pressures have been driving them to reduce costs. Nobody in the whole of the network equipment market can possibly have missed the drive for “transformation” by operators. You can transform by radically cutting capex, radically cutting opex, radically raising revenue, or a combination of these factors. With three choices to work with, why is it that Huawei’s competitors have been unable to frame a challenge to the Chinese giant?
SDN and NFV have been driven by capex considerations, by the simple notion that if you want to lower your cost, spend less on equipment. The problem is that operators know in their hearts that capex reduction is the worst of the three transformation approaches. One of the thought-leader giants of NFV, in an open meeting, made the comment that capex wasn’t the real driver for NFV; “If we want 20% capex reduction we’ll just beat up Huawei on price.” That’s a telling comment because it shows both the high hurdle that capex-driven transformation would have to clear, and also why Huawei is winning.
Could either SDN or NFV realize a greater-than-20% capex reduction? Overall, meaning network-wide, I think the answer is clearly “No!” Both technologies have strong capex benefits but in relatively specialized missions. Service Chaining, the poster-child application for both SDN and NFV, is actually a very difficult application to justify at all, given that the profitable applications are limited to business services and could likely be supported by simple cloud-hosted multi-tenant elements because the services themselves are sold on long-term contracts. It would be possible to redo networking completely to optimize both SDN and NFV, but to build a totally new networking model and evolve to it successfully from where we are is a very big problem. Too big for vendors to bother with, and so they present narrow and half-hearted solutions, which Huawei can trump on price alone.
How about opex reduction? Well, there we have a similar issue. Right now we have operators investing in cloud computing, where the cloud community has a growing list of orchestration/DevOps tools available. They invest in SDN, which has yet to settle on a true management model, and they’re starting to deploy NFV even though there’s no indication that its own MANO processes will fully address even local management needs (how do you represent a service chain as a MIB when the user wants to see only a virtual device and the operator needs to see all the hosted elements and connections?) Opex reduction is, in my view, very feasible but it’s not going to happen unless everyone accepts that you can’t gain anything from managing opex in ten percent or less of your infrastructure. However far you think SDN or NFV or the cloud might go, it’s darn sure going to start off at less than 10% of infrastructure, so early benefits will never be significant. That means it’s back to pressing Huawei in price, and they win.
Increasing revenue is the last element, and that can in turn be divided into two categories—improving time-to-revenue on current services and offering new services. “Service agility” (meaning the time from conceptualizing a service to making it available to deploy and then the time from order to deployment) is one of the operator hot buttons. But again a “service” is more than a cloud- or NFV-hosted element or an SDN data center. How agile are we going to be if we tie the Road Runner of SDN/NFV to one of those big rocks that keep falling on our coyote friend?
New services is also problematic. The majority of “new services” people talk about are things like social networking, which are ad funded. The total ad spending worldwide is less than the revenues of one big carrier so even if operators got all of that (which they won’t because less than half is likely to be even addressable online) they don’t really do much. What operators need is new services that people will pay for, and that means either for-fee content services (like Netflix) or business services that drive major productivity gains and so can justify paying a nice fee for the service itself. But equipment vendors settle for saying “Internet traffic is exploding” or touting the “Internet of Everything” and don’t do anything to prepare operators for what for-fee new services might look like. Huawei’s price-leader approach gives operators at least an assured path to higher profit, so Huawei wins again.
This is a big complicated industry, but you can take comfort in statistics at the high level. Right now, operators worldwide spend about 18 cents of every revenue dollar on capex. We can transform them only by making that 18% number smaller by increasing revenue or by reducing the 18% to something like 14% (our hypothetical 20% price reduction by “beating up Huawei”. Operators would love to do better than that in cost and increase revenue too, but they need solutions and not market platitudes. They need, as they’ve said in my surveys for 8 years or so, for vendors to step up and support their transformation needs.
Vendors need that too, because our carrier’s 20% push on pricing to Huawei is working. And because Huawei is at least as likely to See the Light in terms of opex and service revenue increases as other network vendors are. Huawei eight years ago when operators were signaling their distaste for their vendors’ transformation support, was nothing in software, nothing in management. They were simple box-pushers, and now they are becoming not only competitive but dominant in things like mobile infrastructure where there’s a big software element. They’re jumping into OSS/BSS (their Fastwire acquisition just this year proves that). They’re active in NFV. These guys mean business, and business beyond being that player who’s beat up for the extra 20% price concession. Imagine how well they’ll do if their competitors hunker down on legacy technology and vapid positioning. We may see, and soon.
