As we move into an age of personalization, virtualization, and 'softwarification,' M&A assessment is likely to show us a lot about 2020 and beyond.
We seem to be having more than our share of mergers and acquisitions in networking these days, ranging from relatively small (Ciena gets Cyan or Brocade gets Connectem) to pretty big (Alcatel-Lucent and Nokia). Look closely and you'll see that some of the deals are driven by strategic technology changes while others, paradoxically, are driven by simple commoditization. Aren't we one industry here? How can feature opportunities be expanding and profits and sales contracting at the same time? The answer to that riddle is probably the same to where we're heading in the next five years.
A hundred years ago, selling buggy wheels was at least as good a business as selling fancy auto rims, but that's obviously not the case today. Technology industries go through transitions just as other industries do, and at an even more rapid pace. Back in 1984 when the Bell System was broken up, everybody thought the long-distance business was going to be the big success. Hardly anyone pays for long-distance calls today, and the companies that provided the service have largely been absorbed. At the highest level, the changes in networking are responsible for both M&A and commoditization at the same time.
There was a time, not so long ago, when a typical business bought 56-Kbps lines and those that had a couple T1s (1.5 Mbps) were hot stuff. Today the FCC doesn't even want to classify anything less than 25 Mbps as "broadband," and most consumers in industrial nations have higher speeds available to them. T1s in the '80s cost thousands of dollars per month, and obviously consumers couldn't be spending that. That means we've made bits cheaper, more consumeristic. We're commoditizing bits.
From This to That
Commoditizing bits has to lead to commoditizing bit-producing stuff. Operators can't offer 25 Mbps for a tenth the price of a T1 without an enormous reduction in cost per bit. The increased demand consumers generate helps offset the lower revenue per user, but operators all draw charts that show revenue and cost per bit both declining, with the curves crossing over in 2017 or thereabouts. The obvious answer is to push harder on vendors, and that pushing is why Huawei (the price leader globally) has been so strong and why vendors like Alcatel-Lucent and Nokia want to merge. Consolidation lowers costs.
Consolidation and commoditization also increase interest in re-architecting networking for much lower cost, and in new services or features that could boost revenues faster than costs. Software-defined networking (SDN), network functions virtualization (NFV), and the cloud are interesting to network operators because they do one or both of these things. NFV, for example, has arguably more support than any new networking technology has ever enjoyed. Operator support, meaning buyer support, means vendors want to support these technologies too. Since building up your own new-technology portfolio takes time, a sensible move is to buy companies that have essential pieces so you get a lead on the competition.
We like to think that technology shapes our industry, but technology is just the potter's wheel and not the potter. Benefits are really what do the shaping, because those are what generate return on investment for buyers -- they're the "R" in "ROI." The "I" is the investment in software and equipment, and that requires vendors and products. Vendors, then, are racing to address the prices of legacy technology components through improved engineering and consolidation while, at the same time, they want to support the new technologies and their features and services in order to add revenues. As an industry we're in a race to adapt to change.
How about standards? In the old days -- i.e., the "build it and they will come" era of networking -- standards bodies carefully crafted standards to insure interoperability, which in turn assured multiple sellers for devices and controlled costs. How do SDN and NFV interoperate? Truth be told, we don't really know very much about that, and the problem of commoditization is rushing to a critical revenue/cost convergence in just a couple years. Operators can't wait, so vendors won't wait. We're heading into a Wild West period not unlike the one we had in the early days of IP or computing.
Mind Your M&A
This vendor rush to create value will shape the industry, not standards or technology. Nobody can build networks on a technology for which no workable products or surviving sellers exist, so the network of the future will be built by whatever the current businesses of "vendors" can create from whatever insight they can build into or purchase for their product lines.
M&A is the signal of the future direction of networking -- both the direction of the technologies that will be used and the services that will be offered and consumed. They are literally shaping your future as buyers. We know, in a general sense, that we're moving into an age of personalization, virtualization, and "softwarification." Technology discussions won't tell us what all that will mean, but M&A assessment is likely to show us a lot about 2020 and beyond.
In the next couple of blogs, I'm going to look at the M&A trends and trace them forward to the network of the future. I think it will be an interesting ride.
Follow Tom Nolle on Google+!
Tom Nolle on Google+
