Week in Review: Cloud and SDN drive new growth and unlikely alliances

The most recent crop of industry events – SDN World, Broadband World Forum, NGMN Conference – have highlighted that the mobile network operator (MNO) as we know it is dead. Now, operators must emulate the fixed carriers, the multiplay and over-the-top providers, most of all the cloud companies – while still investing in their wireless networks to support all that. It’s a tough call, and is requiring a painful shift of attention from their core suppliers too.

Ericsson has been suffering from that transition, and badly needs to fill its CEO vacancy with someone from outside its closed community. But the Swedish company has the right ideas – it just needs to accelerate its execution to turn them into revenue and profit. A greatly expanded alliance with Red Hat will be important to Ericsson’s position in those areas which are now so vital to network operators, yet are so counter-cultural for the traditional vendors – open source and software-defined networking (SDN), as epitomized by OpenStack. Alignment of OpenStack efforts, at a time when many large carriers are adopting the platform, could be a significant way to boost the impact of Ericsson’s strategic, but so-far low impact, partnership with Cisco.

A far longer established alliance, Wintel, is further down the road to an SDN and cloud world, whether its partners are working together or separately. Quarterly results from Intel and Microsoft showed that both firms are progressing well in their transition from the world of PCs to that of the cloud.

Microsoft’s commercial cloud services business reached a $13bn annual run rate in its first fiscal quarter of 2017, which is a healthy milestone on the way to its target of $20bn a year in 2018. Its overall Q1 earnings were $4.7bn on revenues of $20.5bn. It was very clear, from the results, where the growth lies. While the Windows and Devices segment was flat, the disastrous venture into handsets continued to hit figures, with the former Nokia phone business down 72% year-on-year to make $799m. By contrast, another aspect of the mobile market was strong – the Enterprise Mobility and Security device management service now has 37,000 customers, and commercial cloud services have hit gross margin of 49%.

As for Intel, its fiscal third quarter set the stage for cloud computing revenues to overtake those from chips for PCs and mobile for the first time. CFO Stacy Smith said revenue from the Client Computing group would soon fall below that from the Data Center group. That may happen in the current quarter, even though the enterprise private cloud sector is under pressure.

Smith said: “I think you have a phenomenon that says the cloud portion of the enterprise becomes so big and continues to grow at a fast pace that we can certainly maintain a robust growth rate even if the enterprise segment is not growing to slightly weak.” Intel is also pushing into many new device chips in the Internet of Things and in autonomous products like driverless cars and drones. These may generate new volume revenues in their own right, though the chip giant’s track record in new devices is not strong, after its repeated failure to tap into the mobile phone market. But these new devices are also important to Intel because they drive more data and infrastructure requirement in the cloud.

Overall in the quarter, Intel reported revenue of $15.8bn and net income of $3.4bn. The IoT group had the highest growth, up 19% year-on-year, followed by Data Center on 10%, Security on 6% and Client Computing on 5%. The only drop was in the  Non-Volatile Memory Solutions Group, which was down 1% year-on-year, but up 17% sequentially.

As the transition to SDN and the cloud gathers pace among operators and their suppliers, there will be more alliances like that of Ericsson and Red Hat, or AT&T and Amazon. There will also be outright mergers as consolidation sets in, and that will reach the huge numbers of standards bodies and industry groupings too. This week saw the merging of two SDN organizations, the Open Networking Foundation (ONF) and ON.Lab, under the ONF brand. It will be led by ON.Lab founder Guru Parulkar, who said: “Over the last few years, it has become clear that SDN standards and open source software development must come together. Open source is critical to SDN deployment.”

Fragmentation is rife and more convergence of open source initiatives will certainly be necessary to build economies of scale and operator confidence in platforms for critical areas like MANO (management and orchestration) of virtualized networks. As happened in enterprise open source, the initial creative free-for-all will give way to platforms which are driven heavily by one, or a few, powerhouses. That already happened in the mobile device arena, where Google’s Android has knocked out all the huge number of mobile Linux operating systems which have been developed since 2000.

Now the battle is on to be one of the organizations which rules the open source SDN infrastructure world. AT&T with its ECOMP initiative, Intel with its expanding web of collaborations, Ericsson with its intensifying OpenStack activities – these are just some of the candidates. And we mustn’t forget IBM, which provides a case study in how to cast off the rules it had largely written, and commandeer the disruptive new open source approach for its own ends. It will no doubt try to repeat the trick in the telecoms world, but incumbents like Ericsson, despite the pain of their transition, will be waiting for it.

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