Network as a Subscription – Opportunity to change the game

Information technology in general, and networking specifically, have benefited greatly from silicon economics for decades. Consistent gains in networking price/performance have been on the capital expense side / hardware procurement. Operations gains have not benefited as much, and are increasingly a barrier to productivity.  Network managers can benefit from replacing large operational expenses, with smaller, OPEX-based, network subscriptions, focused on security, agility, automation, autonomy, scalability, and effectiveness. Network technology suppliers can change the game with an impactful Network as a Subscription strategy.

Summary

  • Decrease total OPEX by increasing OPEX-based technology investments.
  • The industry is approaching a plateau in applying silicon economics to hardware
  • Subscription management platforms are maturing, easing the transition
  • Vendors showing an interest in subscription models for increasing their valuation
  • Cloud disrupts everything and enables a new value delivery approach
  • We live in a “what have you done for me lately” world
  • Focus on software and cloud services
  • Hardware subscriptions in other industries to stimulate conversation
  • Traditionally, radical business model change has come from new companies
  • By 2025 network vendor subscription revenue will be at least 30% of total revenue and could be as high as 50% of total. Future reports will release nearer-term estimates.

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Why subscription business model: value proposition

  • Decrease overall OPEX by increasing OPEX-based technology investments.

Silicon economics bring increasing returns to network managers every year, or at least every silicon cycle: increased throughput at a lower price per bit. Network managers do not experience similar economics in network operations.

Network managers and technology suppliers have been moving towards operational gains but have struggled with the management complexity of virtual environments, unoptimized first generation vNFs, ill-focused missions (replace hardware infrastructure), and SP-specific standards / ecosystems.

SDN/NFV has a limited role in replacing some network elements, those that can and should be deployed on a per-service basis. In addressing the needs of infrastructure, those elements supporting all services, SDN/NFV should be focused on collaborative processing, helping infrastructure to make better decisions; SDN/NFV should be the end point of cloud services for infrastructure in addition to network services.

With silicon economics already paying great dividends in terms of regular price/performance improvements in hardware, the industry needs to tackle the next big nut, with is productivity per network operations employee. Network managers should be willing to tradeoff an overall reduction in operating expense for subscription services that increase productivity, lead to faster and better decisions, increase agility, increase autonomy (not just automation), and increase scalability of services.

Why now: vendor interest and enabling technology

  • Subscription management platforms are maturing, easing the transition
  • Vendors showing interest in subscription models for increasing their valuation
  • Cloud disrupts everything and enables a new value delivery approach
  • We live in a “what have you done for me lately” world

A truly transformative business model requires a compelling value proposition and an aligned operating model. One aspect of an aligned operating model is systems and processes that reflect the value proposition of the business model. For new companies, they can go straight to a subscription business model by leveraging any number of now maturing subscription management platforms. For established companies, the road is rockier, for many different reasons, but it can be made a little less so, by front-ending existing systems with a subscription management platform.

Network vendors are showing more interest in subscription models because of the belief that recurring revenues will lead to higher company valuations. This is a nuanced conversation which will be discussed in a future report. In the context of this article, the important emphasis is network vendors are showing more interest in subscription models.

The expectations of revenue models, of value delivery, of scalability have changed dramatically since cloud emerged. CIO expectations have changed, and network manager expectations will follow. More importantly, the ability for a new approach to value delivery has changed by the availability of numerous highly scalable public cloud platforms, and also by the increasing focus on private cloud solutions. Both of these make it more likely that network subscriptions will be become increasing available.

Brand loyalty still exists, but suppliers cannot be complacent. The ability for a network manager to try before they buy, and then scale from there, is significantly improved with software-centric value delivery mechanisms, and especially with cloud services. This combined with the demands of an accelerating pace of business leaves incumbents exposed to new models that deliver value more frequently than old models.

Today, there is a need to move fast, and keep moving fast – subscription models are a good match for that motion. Network managers need to reduce overall operating expenses. Network vendors are showing interest in subscription models. We live in a what have you done for me lately world, and there is the opportunity to shift the basis of competition in an increasingly commoditized world. The confluence of vendor interest, enabling technology, and cloud disruption, provide a foundation for the trend towards subscriptions to gain momentum.

Against those enabling drivers and conditions, there is the notable inertia to overcome with respect to budget structure. The smaller the enterprise or service provider, the greater the budget flexibility and the more integrated the decision making. Conversely, despite the rattling of cages by internal SDN/NFV advocates, large service providers remain, in general, stuck in traditional procurement approaches. The best way for network vendors to overcome this is to deliver compelling subscription offerings that are services, and therefore  can only be treated as OPEX.

What: Software and Cloud Services Subscriptions

We already see some software subscriptions in networking. While more dominant in security, there are an increasing number of networking subscriptions as well. The big game changing play will involve cloud services (public and private) that cooperatively improve automation, autonomy, and effectiveness of network elements. That play has yet to emerge in any significant way. Operating cloud services is not a trivial new muscle for network vendors, and should not be underestimated. To the extent that network vendors can leverage public cloud, subscription management platforms, and other enablers, the path becomes a little easier, but still not trivial.

Hardware subscriptions are also a possibility, but due to the upfront COGS hit, they are more problematic for vendors to develop. Development of these models also involve numerous internal functions, which takes leadership time and commitment to change. That hardware subscriptions are possible is evidenced across many different industries, ranging from rental models, to newer more flexible car subscriptions, to regular delivery of consumable hardware. Getting the financial model right for hardware subscriptions is not without its challenges, in addition to all the operational and culture changes required.

Who: will, capacity, vision

One of the reasons Cisco continues to dominate the networking business is that in absolute dollars, they have the capacity to outspend their competitors. What they cannot build, they are also willing to buy, which they have shown a propensity to do, Meraki and SourceFire being just a couple of cases in point. There is more. Perhaps little noticed in the Cat 9K announcements by those that do not study value propositions, business models, and strategy, was a subtle linkage between Cisco’s own silicon, its subscription services, and a larger analytics ecosystem. It is hard to know for sure whether this was marketing messaging, the confluence of forces including the desire to deposition merchant silicon, or a larger aha inside Cisco. Whether intentional or accidental on Cisco’s part, they are stumbling forward in the right direction, and may be on the cusp of manifesting what is needed to push the subscription model forward. Competitors should take note not to fall too far behind, especially with respect to operating model capabilities, which can be hard to turn around quickly.

Arista’s strategy implies a continued focus on product capabilities, competing on the basis of best of breed and partnerships. That focus does not lend itself to dramatic or quick business model change. In saying that, I am not necessarily critiquing Arista, there is still something to be said for having the best product. Arista had one publicly communicated flirtation with the subscription model before pulling back. There are numerous software assets that Arista has where the subscription model could be deepened beyond what is already offered.

I will not comment publicly on Juniper Networks specifics until the new year (2019), having recently worked there. What is well known is Juniper has a number of software assets, some of which are already sold using subscription pricing models. Juniper has also previously made available disaggregated pricing on some hardware offerings.

I will also leave comment on Nokia to a future time. It is worth mentioning that looking at what a number of smaller suppliers are doing could yield interesting observations: BigSwitch, Cumulus, SD-WAN suppliers, to name a few.

Across many industries, significant and successful business model disruption usually comes from new entrants. The core routing and switching segments have numerous barriers to entry. It is hard to image a huge disruption to the market as-is, especially through the subscription model, unless something like SD-WAN becomes massively disruptive. The amount of account control incumbents have, the R&D investment needed, etc. make it unlikely that a new player will disrupt.

That said, the term “black swan” exists, precisely because some things are hard to see. It was perhaps hard to see the emergence of Arista ten years ago, but here it is, it found a niche in the networking space, and leveraged it for expanded success. For many, it was probably hard to see the emergence of Nokia (ALU/Timetra) in the aggregation segment, but the journey of IP/MPLS penetration throughout service provider networking was not complete, and here we are today, with Nokia having a significant edge/aggregation share. Then there is the Huawei story…If the subscription model does become part of a disruptive new entrant play, it will probably be because some stone was left unturned by the incumbents. Both incumbents and new entrants should focus on what those unturned stones are, to assess whether there are also compelling unmet needs.

When: Network2025

By 2025, subscription-based revenues (not including traditional separately sold support services) will be at least 30% of major equipment revenue streams, with an upside potential of 50%.

Conclusion

The subscription business model (the manifestation of an end-to-end value chain) is not a given as a disruptive trend, but it is a possibility, and definitely an opportunity to change the game. Who will lead this change, and when this change becomes mainstream, remain questions of ongoing research and assessment.

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