Cloud transformation is a major opportunity and a huge challenge for service providers and their suppliers.

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This LightCounting report focuses on the changing marketplace facing the communications service providers (CSPs) and the impact of their adoption of cloud services and technologies on the industry supply chain. The report also explores regional differences in the transformation approaches being taken by the CSPs, including timelines and priorities.

The adoption of cloud technologies represents a key inflection point for the CSPs that are changing how they build and operate their networks. The move to transform networks is still in its infancy but the early-mover CSPs are committed. These CSPs have already consigned to history the traditional way of building networks using proprietary platforms and complete software stacks from individual companies. Such bleeding-edge CSPs see the embrace of cloud as defining their futures in a world experiencing unprecedented technological change and which is increasingly being led by the large-scale datacenter operators, referred to in this report as the internet content providers (ICPs).

Traditional telecom equipment and optical module makers also face dramatic changes due to the adoption of cloud technologies by CSPs. As AT&T ‘s John Donovan, now CEO of AT&T Communications, said over a year ago: “We are in a technology evolution that has seismic impacts on our vendor community.” In an extreme scenario, all specialized optical networking equipment will be replaced by commodity white boxes, forcing equipment vendors out of business. However, we believe this scenario, illustrated in the figure below, is unlikely.

Figure: How the expertise of system vendors is under assault from several directions

Source: LightCounting 

Supply chain restructuring is not the main priority for the CSPs, at least none will admit it directly. But recent actions of leading CSPs such as the Open Networking Foundation’s Reference Design initiative and the keenness of the likes of AT&T to promote white boxes do raise questions. Can CSPs repeat the success of the ICPs in adopting white boxes and open source software, drastically changing the telecom industry’s supply chain?

CSPs can use all the help they can get from suppliers of networking equipment with their expertise in hardware and software design. As the priorities of the CSPs shift to SDN, NFV and software, equipment vendors are also embracing these technologies, acquiring relevant expertise and striving to become key partners for CSPs during this transition. But it is also opening the door to new players such as white box player Edgecore Networks, and Affirmed Networks which provides virtualized, cloud-native mobile products. Such players are unencumbered by traditional telecom businesses that must be protected. The new white box players are also helped by developments in the industry: they don’t need to master ASIC design and can use sophisticated merchant silicon instead, CSPs are dictating to a large degree their requirements while the open-source community and other vendors are providing the software elements needed.

There is a risk for CSPs in blindly copying the open-source software and white box strategies of the ICPs. These approaches make economic sense in situations when a single vendor monopolizes the market. For example, Linux started as an alternative to Microsoft’s monopoly of computer operating systems. OpenStack software and white box Ethernet switches were a solution to break Cisco’s monopoly in those products. However, there is no single vendor monopolizing telecom software and hardware products. It is just the opposite: there are too many suppliers competing for the CSPs’ business, innovating as fast as they can and often selling products at a loss. Guiding these suppliers in the right direction may be a more efficient way for the CSPs to get the software and hardware functionality they desire.

The traditional networking equipment vendors will be different companies in five to 10 years’ time. Their business will be centered around software and services, but specialized hardware will remain an important part of the total. White box solutions will find applications in high volume, low-end parts of the market, such as access and aggregation layers, but the most critical elements in core networks will continue to rely on high-end specialized hardware for some time yet. 

Suppliers of optical modules, including ROADMs and pluggable transceivers, will have more opportunities to sell products directly to CSPs. This is already a common practice in access telecom equipment, not to mention in the enterprise and large-scale datacenter markets. However, there is more to optics than the pluggable transceivers dominating the market today. It is not a coincidence that several equipment vendors, including Ciena, Cisco Systems, Huawei and Juniper Networks made acquisitions in silicon photonics between 2012 and 2016. High-end optics remains a key competitive advantage for these companies, as they navigate in this new environment.