Wall Street has been framing Cisco’s recent technology announcements as less technology than business. The thesis is that Cisco sees the future as being revenues from services and a subscription model, rather than from hardware. This, in response to industry efforts to create commodity hardware platforms and in the growing tendency of buyers to keep their gear longer, slowing revenue from refresh cycles.
I’ve blogged before about Cisco’s “intent modeling” initiative, based largely on policies. I don’t intend to reprise the technical issues here, but rather to look at the principle question the Street is raising, which is whether a service-and-subscription model can lift Cisco or any other networking company out of the current doldrums.
We have to start with what got us into the current mess. Commodity hardware, of course. Operators and enterprises continue to struggle to justify more network spending when there are few or no new benefits to justify it. That struggle manifests in putting discount pressure on vendors, switching to price leaders (Huawei, notably) and delaying hardware upgrades.
There is no question that software subscription and services are a viable response to commodity hardware, providing you can meet two requirements. First, your new subscription software can’t accelerate the replacement of the equipment you’re selling. That would accept profit and company shrinkage as inevitable. Second, the revenue gains from success in subscription software and services have to be significant; enough to make a difference in the bottom line.
The response to the first challenge is obvious; you target somewhere other than the data plane. White boxes, hosted switch/router instances, SDN, and even much of NFV are valuable in large degree because they reduce capital spending on connectivity and network features. You could avoid that by presuming that the current data plane isn’t dramatically changed.
Which brings us to the second requirement. The challenge for a company that wants to make money on subscriptions and services is that it’s hard to see how either builds a ginormous revenue opportunity. Is policy control of network behavior as valuable, or more valuable, than networks themselves? If not, then even if equipment vendors were willing to risk their hardware business, any significant drop in hardware sales would likely swamp the opportunity in services and subscriptions.
What has proved tricky in framing a subscription-and-services model is creating truly credible and independent value above the data plane. It’s ironic to me that the formula for achieving that was introduced with SDN and NFV, and it wasn’t developed (by the standards people or vendors) as specs evolved.
Orchestration, as NFV pioneered the concept, is the creation of service features through model-driven deployment. While NFV presumed that the features were to be hosted replacements for traditional network devices, most in the NFV ISG quickly realized that it would be nearly impossible to attain any credible operations agility or efficiency if you couldn’t control legacy elements as well.
If you took network and service features as they are implemented today, and enveloped them in an “intent model” that abstracted their functional capabilities and interfaces from the implementation part, you could apply those models to services today, with the infrastructure we already have deployed. Service lifecycle management and its automation depends on effective modeling, and if you have that the service agility and operations efficiency benefits are largely achieved without further infrastructure change.
This being the case, we can say that service lifecycle automation is that above-the-data-plane layer where opportunities for subscription and services arise. We can say that the application of the management and orchestration principles of NFV in particular, to current device-driven networks, could generate enough benefit to create a subscription software and services business.
How much benefit? Even in 2019 we could generate almost 7 cents per revenue dollar of process opex reduction, which is a 25% savings. By 2025 the number would rise to 13 cents per revenue dollar, a savings of almost 50%, and by 2030 the opex savings associated with service lifecycle automation could nearly match total capex. And, of course, this doesn’t consider the benefits in service agility that lifecycle automation could bring.
This total-service-lifecycle model is separate from the data plane, and it generates significant incremental benefits. The ROI on it, in fact is at least forty times that of infrastructure transformation, and infrastructure transformation isn’t what network equipment vendors are really looking for. If ever there was a (seeming) match made in heaven, this would appear to be it. Which is why it’s so surprising that everyone dropped the ball on it…so far. Are we seeing both Wall Street attitude and vendor response combining to suddenly accept this old paradigm? Is it too late?
To the first question, whether a shift to accepting the “old” paradigm of opex-driven intent modeling of legacy elements is happening too late, the answer is both yes and no. Certainly, the benefits I’ve cited remain to be tapped, and so the potential for a vendor is still there. However, AT&T took a giant step with ECOMP, framing orchestration in the very kind of broad and universal context that’s required to reap those benefits. Now, in the Linux Foundation’s merger of ECOMP and Open-O into ONAP, we have an activity that’s driving an open realization of the architecture.
This is where stuff gets complicated. Nobody ever accused any consensus body of lightning response. If ECOMP recognized all the issues and framed all the benefit-to-feature connections correctly, it would still have to work its way through the inevitable political process of securing support in the Foundation for the implementation. They have not recognized the issues nor framed all the benefit/feature links, and the consensus process may mean it will take them longer. That could mean that a lively and aggressive vendor could jump in and simply do the right thing immediately.
Which would then give the open-source communities in general a nice target to shoot at. Competition firms up the old spec, as most vendors know. There would be a window in which an aggressive vendor could reap enormous rewards from having a total-service-lifecycle story, but it would be only a window. While true persistent vendor dominance has always been rare, it has become especially so as buyers recognize the lock-in goal and work against it. Add a “free” software solution hanging over the picture and you can see why vendor management might take a whiff at the opportunity to get in on the total-service-lifecycle story.
This strategic confusion could be at the heart of Cisco’s own positioning shift. They have to tell the Street something, or they could end up getting negative outlooks from analyst firms. By focusing on their own business model change without getting too detailed about just where all the future revenue is going to come from, they can dabble in fairly tactical stuff and (they hope) save a seat for themselves at the total-service-lifecycle table. That the tactical approach is also less likely to hasten the commoditization of network devices is an added benefit.
The problem with this lovely approach is that there are two classes of vendors who don’t have the same constraints as network equipment giants like Cisco do. The first are the server vendors, who have an opportunity to cash in on any transformation from appliance/device hosting of features to server hosting. The second are the wireless and optical players, who have a potentially enormous play in the future network because you can’t push a virtual bit.
If either of these classes of vendors take their own aggressive shot at the subscription-and-services space through total service lifecycle automation, they could get a major jump on Cisco and other network vendors who hang back. So far that hasn’t been happening because all vendors seem reluctant to undertake the task of positioning a broad strategic story with buyers. But…it could.
So we have two paths that could lead to a dead end in the subscription and services revenue transformation story for network vendors. One is the path where open-source solutions advance enough to erode or eliminate the opportunity, and the other is the path where server/fiber competitors use their immunity from displacement risk to accelerate transformation and cut hardware revenues further and faster than subscription and services can restore.
It appears that vendor business model issues are going to kill off the “stay the course” option for networking, whether or not we accept that some transformational technology will also be at work. That may be the most important point. If the Street is right, then hardware (other than optical hardware) isn’t the business to be in any longer, and for networking that is an enormous shift. It will be interesting to see how quickly the changes come, and who they favor.
