Sometimes in business you make big, tough, bets. Sometimes they turn out well, and of course there are those other times. Right now, we have two players in networking making those big bets, one vendor (VMware) and one operator (AT&T). Right now, they’re looking a bit sketchy but still just possibly viable, if they players get smart.
AT&T is a poster child for a lot of truths about the network business. First, they have been experiencing the almost-universal compression in profit-per-bit numbers. Second, they’ve been quite aggressive in working on the cost side of the equation to buy some legroom. Third, they have a new revenue strategy that they hope will pick up once costs are controlled, and finally they have a fundamental disadvantage in demand density that means all their efforts will be more difficult.
Demand density, for those who’ve not read my blogs on that topic, is roughly the GDP per square mile, a measure of the opportunity a network can harness. AT&T’s is less than 15% of rival Verizon’s, which means that things like large-scale FTTH just aren’t going to pay back for AT&T. That was a problem because video delivery, in the form of channelized TV, was the most credible revenue driver for wireline services. AT&T, with U-verse, learned that you can’t really make channelized video work over DSL, which is what led to the DirecTV deal.
Now, satellite TV and channelized TV in general is under threat. AT&T wants to move to a new model for TV, a model that’s based on streaming over IP and in some ways harkens back to the old U-verse approach. However, the new DirecTV Now model doesn’t have specialized delivery technology. It rides on any broadband connection with enough capacity, which means it rides on other operators’ broadband services too. DirecTV Now has been a growth leader in the streaming TV space, achieving second place in the most recent numbers, behind slow-growing Sling TV.
There’s always been a connection between AT&T’s streaming TV plans and its mobile broadband services. The most recent development in that space is a new offering called “Watch TV”, which offers limited (at least for now) channels at a very low ($15) per month charge, but free to AT&T mobile customers with a high-end unlimited plan. Unlike other offerings (including DirecTV Now), Watch TV is actually more targeted to non-TV use than to streaming to the TV. Ah, but there’s still a problem—several, in fact.
One problem is that DirecTV Now is suffering from growth pains. In many areas of the country, AT&T experiences regular problems with viewing, particularly during prime-time hours. The rate of outages reported online is high, and the outages sometimes last long enough to make people miss shows they want to watch. I did a blog on DirecTV Now, and a fair number of users contacted me over the last 6 months to say they’ve dropped the service because of viewing problems. One who had switched from DirecTV satellite to DirecTV Now said “it’s worse than satellite”.
The other problem is profitability, particularly for the Watch TV offering. AT&T wants the industry to move to a different model of channel content licensing, a model based on actual viewers rather than just a license for the content, and that’s going to be a very hard sell to an industry that’s worked the other way from the first. Harder, if other TV providers don’t put that same pressure on.
These points align to create AT&T’s big bet. If they can’t make DirecTV Now work, they have a major challenge making TV work, making the Time Warner deal pay off, and keeping themselves in the TV game. Absent that TV story, they’d be forced to compete with other mobile operators and broadband ISPs on price, and as I’ve said, Verizon has much better geographic fundamentals to work with. AT&T would almost surely lose.
VMware is a vendor I’ve written about regularly recently, largely because of their own big bet. Here’s a company who literally pioneered virtualization (what do you think the “VM” in VMware stands for?) and who’s been seeing their stature (and market share) in the enterprise space steadily eroded by open-source VM solutions (OpenStack) and containers (Docker, Kubernetes).
The biggest reason for that erosion is public cloud computing. The public cloud providers, uninterested in paying VMware for the foundation software, have elected to build their own, often from open-source tools. As it became clear (as it should have been from the first) that enterprises were going to be 100% hybrid cloud users, creating some technical symbiosis between data center and cloud was seen as valuable, and data center virtualization took a more cloud-centric turn. So not only did VMware not get a big piece of public cloud hosting, it’s started to lose traction among hybrid cloud users.
Then along came carrier cloud. As I’ve pointed out in blogs for literally half-a-decade, carrier cloud is the largest single source of incremental cloud deployment opportunity in the marketplace. By 2030, we could see one hundred thousand new carrier cloud data centers, each obviously equipped with a nice array of hyperconverged servers and running a host of virtualization software elements. No wonder VMware has been touting the enormous potential of carrier cloud.
The problem is that carrier-something has been a touted giant of opportunity for everything from frame relay and ATM to third-party API support. None of these things panned out, and my data shows that something on the order of 7 out of 8 new technologies that the CTO people explore never achieve widespread deployment. That, we must note, applies to products that are primarily directed at the network, where operators are comfortable. Imagine how difficult things would be for hosted processes and experiences?
VMware aspires to a win in carrier cloud, but I’m not sure it has plans. I don’t think VMware really understands the potential drivers for carrier cloud, except for the hosting of cloud computing services. That driver has little chance of shaping carrier cloud vendor decisions, either in the near or long term. They also have little experience dealing with a buyer who exhibits the classic “You can lead a horse to water, but you can’t make it drink” behavior. In fact, their marketing and positioning of their carrier cloud stuff is mediocre at best, so even the “leading” part is at risk.
I don’t know of any major vendor who has ever made such a gigantic bet on a single market initiative. VMware, if they were to get this right, would become the leader in cloud/virtualization technology to the point where everyone else would be a footnote. If they get it wrong, they may well end up being a footnote themselves.
So there we have it; two players in different parts of the industry, each making a very risky bet that could spell a great victory or a crippling defeat. The common ground? We’re seeing a networking market in turmoil, driven by the collapse of old business models and the uneven opportunities the new models create for the players. It’s not surprising that many in this market, even giants, will have to take a deep breath and do something risky. It’s not surprising that we don’t know now how these bets will play out, and how they do will shape our industry.
