Profiting from the Transition to Physical + Digital Solutions

Business Models Under Pressure

Network equipment providers’ core business model is under pressure due to a combination of business and technology trends impacting the telecommunications industry.

Technology trends impacting network equipment providers include increasing software intellectual property (IP) component in physical products, mainstreaming of virtualization technology, the ability to decouple software from hardware and an increasing desire for service providers and enterprises to transition from using custom hardware to generic, commercial off the shelf (COTS) hardware powered by software.

Network Function Virtualization and Software Defined Network are two of the more dramatic technology shifts impacting network equipment providers, with the potential to disrupt their business models.

Business trends impacting network equipment providers include pressures from service provider and enterprise customer segments to reduce costs, demand for flexible buying and consumption models that involve a combination of capital and operating expenses (Capex and Opex) and the advent of smaller, nimbler competitors that are looking to capitalize on the technology trends to leapfrog incumbents.

These trends are fundamentally disrupting the core businesses of many network equipment providers and maintaining status quo is not a luxury they can afford.

Network Function Virtualization (NFV) enables certain network functions to be consolidated and performed on standard IT virtualization technology rather than on specialized, dedicated networking equipment with a vision to dramatically change how networks are architected and operated in the future. Examples of network functions that are likely to be virtualized include switching elements, traffic assurance and security functions.

Software Defined Network (SDN) on the other hand, provides the separation of the control and data forwarding planes to simplify compatibility with existing deployments and facilitate operation and maintenance procedures.

5 Considerations for Staying Competitive and Making Money

A successful response to these challenges is dependent on the competitive position of the network equipment provider - their product strength, domain expertise, breadth of product portfolio, relationship with customers and channel partners and the ability to provide an integrated solution.

However, the five considerations outlined below are fundamental to the way network equipment providers need to adapt their business and are imperative to staying competitive and making money.

  1. Manage Business Model Complexity
    From operating a single “one and done” business model, network equipment providers will need to evolve to operate a continuum of business models involving a combination of hardware, software and services. Figure 1, provides a representative view of business models that are evolving in the network equipment provider space.
  2. Develop Software Pricing Strategies and Capabilities
    As network equipment providers shift from physical to physical + digital, much of the value and profit they offer will transfer from hardware to software and as a result the revenue pie is likely to be split across more players and will lead to significant changes to revenues. To counter this, companies will need to develop software pricing strategies that involve effectively monetizing across the application lifecycle, for e.g. try and buy, feature monetization, digital add-ons to hardware, etc. They would also need to support a portfolio of revenue models – from perpetual, to subscriptions to usage – based on the needs of different customer segments.
  3. Capitalize on Software Maintenance
    Software maintenance revenues have traditionally been an afterthought for network equipment providers. Software maintenance revenues constitute a big part, sometimes upward of 50% for pure software companies, and provide higher margins than even the software license sale. With the commoditization of hardware and the increasing role of software intellectual property, traditional network equipment providers will need to adopt software maintenance best practices of traditional software companies and appropriately tweak them to their unique business models to drive recurring revenue streams.