Carrier Network Virtualization Conference Recap

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by: Edward Schneider, CFA

Summary

Software Defined Networks are a new paradigm.

M&A activity is picking up in this niche.

Some winners are emerging.

I attended and participated on various panels at the Network Virtualization & SDN World conference in London from May 26-28, 2015. I encourage readers to review my previous Network Virtualization & SDN conference articles from December 2014, June 2014, December 2013, June 2013, and SDN literature from April 2012, as they provide an evolving perspective on this new telecom infrastructure paradigm.

As a primer, SDN (Software Defined Networking) is direct programming that tells the silicon switches what to do. An SDN network can be managed as one virtualized switch, instead of managing many switches or routers at one time. This is accomplished by a separate control plane that can route network traffic ideally with one standard protocol (e.g. OpenFlow) as opposed to thousands of hardware routers with their proprietary network protocols. Below the control plane would be a forwarding (a.k.a. data) plane consisting of high-speed, lower-cost switches, as the intelligence rests at the centralized control plane.

Network Virtualization is similar to SDN but with more of a telecom focus that is less tied to the OpenFlow protocol. Network Virtualization focuses on virtualizing the separate network hardware appliances like routers, firewalls, load balancers, and distribution switches that are all over the network into a centralized virtual switch that incorporates all these hardware functions. An Orchestration layer is then needed to create a total solution that can interoperate with OpenStack cloud computing platforms and other open-source and carrier-specific protocols.

However, various master orchestration platforms need to interoperate with one another to make network virtualization a reality outside of any one carrier's network. The predominant master orchestration systems from vendors such as Alcatel Lucent (ALU) and its CloudBand ecosystem, Cisco (NASDAQ:CSCO), and Ciena (NASDAQ:CIEN)/Cyan (CYNI) currently are not interoperable.

A recurring carrier complaint at recent conferences was the need for standardized APIs (application programming interfaces) to improve interoperability. NTT (NYSE:NTT) took the unprecedented step at last week's conference of directly reaching out to fellow carriers for global interoperability. Most carriers, however, want to first tackle interoperability within their own networks, before attempting to create global interoperability between different orchestration systems. The problem is the value of Network Virtualization is diminished if the applications are limited to a single carrier's network, often wireline only. End users want to distribute their applications globally, not within a single wireline network. Rami Yaron, on behalf of the MEF (Metro Ethernet Forum), served as a beacon for the industry at the conference in trying to promote global orchestration standards, as well as mobile-compatible network virtualization.

Further complicating matters are the plethora of standard bodies trying to create global protocols. A virtualization layer optimally should have one open protocol, such as the original OpenFlow standard introduced five years ago. ETSI (European Telecommunications Standards Institute) was formed two years ago as an attempt to standardize all these protocols at some base level. This noble effort is being hamstrung by an open intellectual property requirement that limits the number of participating companies in ETSI. In the background, vested interests among several vendors, who benefit from the old router-centric networks and/or the non-standardization of current virtual networks, are slowing the process.

But to keep these issues in perspective, SDN and network virtualization, especially for carriers, is an ecosystem change. Engineering staffs of a typical carrier today are still over 90% protocol-based in the older OSS/BSS functions for quality assurance and billing. Less than 10% are software programmers, with even smaller DevOps teams. This type of corporate overhaul does not happen overnight. New ecosystems usually take a decade to implement.

On the positive side, I have seen a lot of progress since attending the first Carrier Network Virtualization conference in Barcelona in June 2013. NTT and AT&T (NYSE:T) have created their own virtualized networks from scratch, setting up their own systems and hardware requirements. Other carriers are depending more on vendors and system integrators.

For all carriers, vCPE (Virtual Customer Premise Equipment) is the first step, where centralized, distributed software replaces a vast number of specialized routers at customer locations. This cloud-based functionality allows the instant initiation and termination of customer applications. vCPE reduces costs while adding revenue streams from new applications that use to take several months to implement. Telefonica (NYSE:TEF) introduced OpenMANO, an open environment for developers to qualify their applications on Telefonica's virtualized network in one week.

One of the next areas potentially to be virtualized is embedded DPI (deep packet inspection) and analytics including traffic shaping. Qosmos specializes in this area, partnering with system integrators like Red Hat (NYSE:RHT), who sell Qosmos solutions as a service component. For the most part, Qosmos does not compete directly with independent DPI companies serving carriers such as Procera (NYSEMKT:PKT) - about to be taken private by Francisco Partners, Allot (NASDAQ:ALLT), and Sandvine (OTCPK:SNVNF) (SVC.TO) (except for Vineyard Networks, a small division of Procera), as the bulk of Qosmos customers are enterprises. However, a substantial portion of Qosmos revenues now comes from a few large carriers, which are indirectly served via system integrators. Allot for one has diversified more into security solutions, de-emphasizing the more commoditized DPI business, and may even partner with Qosmos. But in general, the old DPI big-box business model's days are numbered.

The enterprise world is blazing a trail for carriers to follow, with open-source SDN solutions and highly-scalable data centers. Facebook's (NASDAQ:FB) Open Compute Project is one of several successful initiatives that can help carriers to build their own virtual networks, albeit in a more complex heterogeneous world than data centers.

Industry Consolidation

Another positive sign is industry consolidation. In recent years, there have been too many vendors chasing too few opportunities. Some of these companies offered innovative, open-sourced solutions, but were just too small to support the needs of large customers. As a sign of SDN and network virtualization maturation, several of the leading-edge independent vendors were acquired. On the application side, Cisco acquired Embrane, which allows instant configuration of network services such as virtual firewalls mainly to the enterprise market. Last week, Hewlett-Packard (NYSE:HPQ) acquired ConteXtreme, which provides a SDN controller mainly to carriers for services like load balancing as well as firewall security. On the network orchestration layer, Ciena recently announced the acquisition of Cyan while Cisco previously acquired Tail-f.

M&A is occurring at higher levels of the food chain as well. Nokia (NYSE:NOK) recently announced the acquisition of Alcatel-Lucent. Leading the rumor mill is speculation of Ericsson (NASDAQ:ERIC) taking-out Ciena.

This industry consolidation reduces complexity for customers. Tier-one carriers such as British Telecom (NYSE:BT) and Cox Communications stated that they are moving to a single vendor for each physical layer in the network. On the other hand, carriers are moving away from vendor lock-in, and prefer multi-vendor solutions across their multilayer topologies.

Stock Beneficiaries from Network Virtualization and SDN

Red Hat and SuSE Linux - part of Micro Focus (MCRO.L) (OTCPK:MCFUF) are two clear winners from integrating Linux open source solutions for enterprises and now carriers. Privately-held Cumulus Networks, with its Linux-based network operating system for enterprises and potentially carriers, is also a beneficiary. Linux is more mature/less buggy with richer networking features than other open-source standards. Several carriers are now outsourcing wider parts of the system integration process to companies like Hewlett-Packard, as opposed to depending on vendors for next-generation networks. Although a small part of its overall business, Intel (NASDAQ:INTC) has benefitted from its 150-member Networks Builders partnership, which uses common semiconductor building blocks for these new virtualized networks.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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