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If you make a major change to the way a set of buyers adopts technology, you will also make a change in the vendor space that supports those buyers. In fact, transformation -- the process of changing network operator business models and technology -- has a double-whammy effect. The profit pressure behind transformation directly affects willingness to spend, and it also affects just what network operators will spend their Capex budgets on. This is already transforming the network vendor landscape.
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Even before the effect of transformation took hold, vendors continued to deal with an old fear. Every network operator entered its transformation phase fearing its vendors would try to leverage installed equipment to control the direction of the operator's evolution, which would create the dreaded vendor lock-in.
This led to an industrywide series of steps aimed at breaking up vendor-specific, monolithic technology products, which put immediate pressure on the vendors themselves. The wave of mergers and acquisitions that has recently swept the industry -- notably, the Alcatel-Lucent and Nokia merger and the integration-driven partnerships like that of Cisco and Ericsson -- are all reactions to the new challenge of selling pieces instead of product suites. They won't be the last.
The most visible effect of transformation on telecom vendors has been the dramatic growth in Huawei's revenue, which has increased at the expense of virtually every company in the network equipment space. Huawei is the price leader in almost all network product areas, and Capex pressure has driven many bargain-hunting buyers to the company. Even in markets where Huawei hasn't established its business, its lower prices have pressured other telecom vendors to discount their products aggressively. Revenues for most vendors have fallen steadily, and it's clear this trend won't reverse as pressure for transformation grows.
Hardware destined to become commodity
A "pieces versus solutions" strategy also encourages network operators to select individual products over proprietary product suites. This, in turn, puts more pressure on telecom vendors. It also creates the first major shift in vendor opportunity created by transformation: Hardware products are doomed to become commodities, even if no additional pressures are created by a technology shift.
One change that might create those pressures is the shift to the carrier cloud. Operators think there is no way for them to solve the problem of profit-per-bit compression without getting into services other than connectivity and transport. Whether this is done by building new server-centric infrastructure directly or by purchasing a cloud or web provider, the net result is a spending shift to servers and software. This could offset reductions in network equipment spending, provided the growth of the carrier cloud is driven by revenue, and not by an extension of Capex-reduction practices.
Virtualizing devices and separating hardware from software are sources of that Capex reduction. Network functions virtualization (NFV) would accelerate the transformation of physical devices into hosted software instances that presumably run on commodity servers. Not every device is a candidate for transformation -- fiber transport and high-capacity switching and routing are not likely to be virtualized.
But even where NFV doesn't create virtual alternatives, white box switch and router technology threatens further price pressure. Telecom vendors are offering some of their software in unbundled forms, admitting that hardware pricing pressure is making that part of the business unprofitable.
Software as the panacea, or not
So, software is the answer, right? Actually, that may not be true, either. Operators have been rushing to embrace what they spent decades avoiding -- open source software. AT&T -- whose Domain 2.0 was a seminal step in breaking up vendor product ecosystems -- apparently recognized how easy it would be to substitute a software lock-in for an ecosystem lock-in and elected to develop and open-source its own management and orchestration suite, Enhanced Control, Orchestration, Management and Policy, or more familiarly, ECOMP.
Many operators say privately that they would gladly buy proprietary service management software if a complete, functional offering were available and could make the transformation business case. Apparently, that's not the case -- even now. And with every passing day, the risk grows that open source approaches will fill the gap.
Integration and professional services seem to offer some opportunity for telecom vendors, and all of the major players have been boosting their professional services staff and profile. But Ericsson, one of the most integration-centric vendors, has experienced revenue problems, just like other telecom vendors. Operators that have worked hard to dodge lock-in at the hardware and software levels may be just as determined not to let integrators establish themselves as lifelong tenants in their CFOs' offices.
If current trends continue, telecom vendors may shrink down equally, although that's unlikely because most equipment vendors see the problem and are trying to work out a path toward a solution. Data center switching is still strong, and it will get stronger with carrier cloud commitment. The new opportunity to build an agile service layer above current equipment is a potential gold mine for server deployment -- one that could add more than 100,000 carrier data centers worldwide.
The question is whether either of these new power centers will hold enough influence to create real momentum toward transformation. Switching keeps telecom vendors in the game in terms of revenue, but it's a long way from a data center switch to a service that users or advertisers will pay for. A new service layer based on servers requires a technical architecture, but, most of all, it requires new services. Operators and vendors have spent literally decades in a market where service meant connectivity, and neither group seems to have a grasp on how to look beyond that simplistic vision.
If a telecom vendor gets the technology and politics of transformation right, it could become the "new Cisco" -- or if Cisco gets it right, a newly buffed version of the old Cisco. But getting things right means walking away from old positions and value propositions, and that's as much a challenge for telecom vendors as it is for the buyers they serve.
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