Edge Leading the Positive Growth for Router Market in Q2

The Worldwide Carrier Routing and Switching market increased both quarter over quarter and year over year, 14% and 5% respectively, with revenues of $3 billion. The core routing segment posted revenues of $590 million, down 6.6% y-y but up 7.4% q-q. Core has been in a soft cycle but we anticipate growth as the delays in upgrades are now starting to be addressed. The edge market posted solid revenues of 2.4 million, 8% y-y and up 16% q-q. The SP edge market continues to be competitive because of the diverse range of applications and solutions, requirement variations in the regions, and cross-technology solutions. 

       

Worldwide Carrier Routing & Switching Market Shares
Vendor	Rank	Revenue ($M)
Cisco	1	$ 1,524.8
Alcatel-Lucent	2	$    586.9
Juniper	3	$    515.2

Trends

·  Operators are more focused on the drivers in the edge of the network, which is increasing demand for edge products. Carriers are increasingly moving to 100G, which is contributing to the caution carriers are exhibiting as they choose their next core routers.

·   Enterprise networks will continue to lead SDN adoption even though the really big potential impact will eventually come from carriers, which will take place when carriers have WAN infrastructure in place to support new services.

·   A key driver contributing to service provider router and switching market growth is the increasing demand for mobile broadband and providers investing in wireless networks to meet that demand.

·   Interest in software-defined networking has increased in momentum for two primary reasons: 1) a less than positive macroeconomic environment and 2) SPs are searching for a new way to deliver services and realize OpEx savings.

In spite of weaknesses and challenges in some global economies, the long-term demand for high-performance and innovative networks continues to be strong. Mobility, Big Data, capacity constraints and better utilization on network assets, which is instigating a significant shift in networking, is top-of-mind for providers. Service providers are looking to vendors for solutions that support these demands. In response vendors are delivering cutting-edge products and services that address virtualization, software-defined networking, and cloud. For more information about ACG's router and switching service, contact sales@acgresearch.net.     

Ray Mota

rmota@acgresearch.net

www.acgresearch.net                                                                                                                

Arris: First Earnings Post Positive since Motorola Home Division Acquisition

In the interest of full disclosure here are my biases: When Google first announced its acquisition of Motorola Mobility, from a strategic standpoint I was mostly negative. Other than the patents, I did not see much value or a fit with culture, expertise or products. I also assume that Home Division customers were probably uncomfortable making long-term architectural commitments to Google. If the acquisition was just about patents, then Google paid a premium. During the short tenure, there was little hard information, but anecdotally, it seemed that my assessment was correct and that Motorola Home was losing momentum. When Google announced that it was selling the Moto Home division to Arris, I was mostly bullish. There was a much better fit with Arris’ culture, management expertise, and products. This purchase gave Arris a more diverse customer base.  

As with any large acquisition, assessing the long-term success is tricky especially with a dearth of information. Now, with Arris’ first earnings post acquisition, we have some more insights. Revenues grew a huge (and expected) 186 percent, roundly beating earnings expectations. Arris is moving quickly to integrate Moto, and the company is already starting to see cost savings with supply chain efficiencies. On the product side Arris is seeing significant shipments of the E6000 (mostly to Comcast), with deployments and trials in multiple geographies. The company can boast wins in infrastructure and CPE, for example, Comcast XG1 hybrid QAM IP gateway.

The negative news came primarily from Moto, which lost momentum because of Google ownership[1]. Gross margins were down to 23 percent from nearly 34 percent last year, and the traditional STB business is down 8 to 10 percent from last year. I am most concerned about the gross margin. A back of the envelope calculation reveals that Moto’s gross margins[2] are 17 percent (see the delta column in Table 1).  

The challenges of integrating the two companies, rationalizing products, processes and organizations are more straightforward because the levers of change are mostly under the company’s control, which allows it to find the duplication/inefficiencies, make tough choices and address damage control. Boosting gross margin is a greater challenge, because it takes longer and is more nuanced. External factors, such as technological change, competitive pressures, customers’ needs, and internal factors, such as product design/life cycles, and manufacturing processes, limit degrees of freedom in moving the needle.

While I am still mostly bullish on the Arris/Moto combination, there are significant challenges ahead for its management team. Increasing Moto’s gross margins is one I would put at the top of the list. 

---

[1] From Robert J. Stanzione in the earnings call on August 7, 2013: “As I mentioned during our call, after the close of the Motorola Home transaction, there was a loss of momentum caused by disruptions and distractions within Motorola, as well as a parent customer reluctance to fully engage our new product initiatives, given some of the uncertainties surrounding the business.

[2] This is not the exact number as it includes some organic growth and excludes the $66M revenue/$6M margins, pre-acquisition results but is a good approximation for analysis purposes.

For more information about ACG Research's Video Infrastructure service, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Hybrid Cloud Services: Do Your Customers Have to Re-architect?

Many public cloud offerings require that existing applications be extensively re-architected to run on their infrastructure. If providers offer hybrid cloud services, does this take away the need for customers to re-architect? The answer is sometimes yes, sometimes no. Let's take a look at an example for each case to understand why.

Read more at SearchCloudProvider.

For more information on ACG's cloud services, contact sales@acgresearch.net.

Paul Parker-Johnson
pparkerjohnson@acgresearch.net
www.acgresearch.net

Building a Scalable Infrastructure: How Can Cloud Providers Do It?

Many steps are available for cloud providers to take to enhance their platforms' efficiency and scale. I mention three techniques here that have great upsides and are possible in a number of different platform environments. Of course, the exact method of deployment and the types of outcomes an operator achieves depend on the local circumstances, but each  of these provides a relevant and compelling opportunity for service delivery enhancement.

Read more at SearchCloudProvider.

For more information on ACG's cloud services, contact sales@acgresearch.net.

Paul Parker-Johnson
pparkerjohnson@acgresearch.net
www.acgresearch.net

Sea of Change Ahead for the Optical Market

The financial and analyst community tend to roll up equipment vendors’ revenues for product lines into a single high-order number to gauge market size and simplify the reporting and analysis. GAAP reinforces this mindset as the majority of public companies that are equipment and/or software suppliers generally report only two types of revenue, product and service. Any further breakdown of financial disclosure is not mandated though some vendors provide it in the interest of providing more transparency to their shareholders. Yes, analyzing top-line revenue is a way to judge overall market size and gain a sense of direction, but if you look only at the market performance at the highest level you could easily get a false impression of the market and its opportunities.

The optical market is a good example of a calm surface that doesn’t immediately reveal the strong currents underneath. If we review the historical performance of the optical networking equipment market revenue (Fig 1), we see a spike in 2007 to 2008, which was driven by build-outs by wireless and wireline service providers. The wireless service providers were building 3G and 4G networks using optical as the preferred backhaul. The wireline service providers were building out business Ethernet services using optical metro rings and long-haul optical technology to interconnect the metros. Optical technology was also being deployed to interconnect data centers and to drive revenue growth.

Since the optical infrastructure build-outs that peaked in 2008, the overall market has remained relatively flat with some slight variation but averaging around $12.65 billion per year for the last four years. Based upon this top-line revenue growth, or lack thereof, you might quickly conclude this market is flat with little growth or upside revenue potential. 

However, by segmenting the optical networking market revenue along product/technology lines we see a vastly different view of the same market (Fig 2). The revenue spikes for the technology commonly used (MSPP, Metro WDM and Long-Haul DWDM) in wireless and wireline applications. Although MSPP seems to be in decline, the Metro WDM and Long Haul segments are showing growth. SONET/SDH and OXC are declining, both dropping well below the $100 million per quarter run rate. The POTS technology segment launched in 2008 has quickly grown to be a significant contributor to the optical market. The growth in POTS is somewhat cannibalizing the MSPP segment and has become a big contributor to the overall market.  

The true takeaway from all this is that the optical market is very dynamic with robust growth in specific segments and major declines in others. Similar to the router market, the optical market has benefitted from the de facto standardization of Ethernet and IP as the primary subscriber access technology for wire line networks. This combined with the users’ insatiable demands to support bandwidth-hungry video applications will continue to drive this market.

Competitors cannot be complacent and expect to grow at market rate by doing nothing more than what they have been. Because there is little Greenfield in this space, competition is fierce and vendors will be aggressive to win against or unseat an incumbent optical supplier. There is also a melding of the optical technology into the routers and vice versa that will tend to further confuse the market (as does the need for SDN in all network elements). Product technology cycles tend to run on a seven-year cycle, placing the next wave of network build-outs and expansion in the 2014 time frame. The industry will see optical convergence, SDN and terabit level trunking driving changes within this industry over the next several years.    

For more information about ACG Research’s optical services, contact sales@acgresearch.net.

         Jeff Ogle
jogle@acgresearch.net   
    www.acgresearch

Snapshot: Mobile Data Usage

The following are points about mobile data traffic for North America Tier 2 mobile operators:

• Four major consumption usage buckets: Media,Web/Search/Maps, Social, Utility Traffic. 

• Consumption of multimedia applications (YouTube, Netflix, and ESPN) is approximately 70% of total usage; capping of unlimited data plans has led consumers to consciously move toward using multimedia apps, mostly smartphones, while on Wi-Fi coverage.

• Utilities traffic is approximately 25% of the total data: Signaling (GTP attach, detach messages & PDP context activations) and IP control plane & session establishment traffic, initiated by smartphones; mobile carriers have been inaccurately complaining about smartphone control and signaling traffic, claiming that it is huge.

• Apple, Google & Microsoft are emerging as the smartphone OS & app store leaders: Google dominates in the mobile application eco system, both from data traffic consumption and percentage of users; Facebook is second in data traffic consumption and percentage of users.

• Most would assume that the largest percentage of video use is in the service provider space; however in actuality it is consumers that use the greatest percentage. The largest percentage of video use (70%) is on smartphone on WiFi networks.

To download the data, click here.

For more information about ACG Research's mobility services or video services, contact sales@acgresearch.net.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Transport SDN: A New Flavor for Software Defined Networking

Software defined networking has the potential to reduce cost, accelerate service delivery, and increase the flexibility of transport networks (Layer 0 and Layer 1). The Open Networking Foundation's (ONF) initial efforts, however, have been directed at defining SDN and the OpenFlow standard for packet networks. 

Read more at http://www.fiercetelecom.com/story/transport-sdn-new-flavor-software-defined-networking/2013-07-08.

Click here for more information about ACG's business cases analysis consulting research service.

Michael Kennedy

mkennedy@acgresearch.net
www.acgresearch

Cisco’s Cloud Orchestration Platforms Showing Increased Versatility and Strength

As providers more clearly understand the fundamentals of cloud computing (in areas such as activating virtual machines and allocating storage pools to support them) they are turning their attention to and focusing on broader capabilities in cloud service creation and management. Expanding capabilities in these areas is crucial for clouds to become the scalable engines of service delivery the industry envisions. Developers’ energies are also focused on streamlining service creation, flexibly supporting multiple cloud combinations, and integrating cloud service creation with broader IT service management to make leveraging the cloud easier to achieve.

Cisco has been steadily assembling an array of cloud service management capabilities over the past year, and this week at Cisco Live! a number of them were on display. They demonstrate that Cisco’s efforts are bearing important fruit. Three areas showing substantive progress toward important service management goals stand out: automatic integration of multiple clouds into single service offerings, automatic installation of application profiles into target virtual infrastructures, and architectural flexibility from integration of OpenStack and other platform services.

Cisco’s Intelligent Automation for Clouds (CIAC) portfolio allows managers to consolidate many clouds into one by incorporating support for public cloud services, such as Amazon’s, Verizon’s, and HP’s, into multicloud service provisioning that can also include resources from an organization’s own infrastructure, such as ESX, KVM or Hyper-V VMs. The process enables service managers to automatically blend functionality from any of the supported offerings into a whole service offering for users. For most organizations this capability will be table stakes over time for realization of cloud deployment goals.

A second area of equal importance is streamlining the relationship between application development and operations in a target environment. There is a growing premium placed on shortening the time between creating a new application function and being able to put it in users’ hands. Vendors are developing tools that support this process and help cloud service managers achieve this creation and delivery goal. The challenge is how to successfully combine development and test and ultimately operations in well-defined execution environments and tightly coupled workflows to reduce the time between application innovation and application use.

Cisco is growing its capabilities in this area through work with its partners Puppet Labs and OpsCode by integrating these partners’ devops platforms with its own service automation platform. In doing so Cisco’s platform leverages the application profiles developed in both Puppet’s and OpsCode Chef’s environments and incorporates them into the cloud service management environment it is enabling. This again shows new muscle in creating cloud management capabilities well-suited to the agility and pace of innovation required in the virtual enterprise.

The third indicator of growing versatility and strength in the CIAC portfolio is expanded support for OpenStack software distributions. This is important because as suppliers bring capabilities to market in areas where they have unique strengths to offer (such as harvesting network analytics in support of service optimization in Cisco’s case) there may be other cases where a seamless integration of another supplier’s capabilities via a platform like OpenStack will bring a richer environment into play for the customer. For example, an OSS application may uniquely leverage OpenStack’s emerging Ceilometer metering functionality to create distinct service bundles in a multicloud environment, and facilitating integration of this application with other service management capabilities may be enabled by leveraging the modules and API suites of the CIAC environment. Support today in CIAC for OpenStack’s Nova (compute) and Horizon’s (dashboard) APIs is the first step toward realizing this objective and show strong insight about what the operating requirements of many cloud computing customers will be. Eventually, the opportunity to provide a truly versatile service creation platform for enabling both innovation and efficiency may very well emerge.

In each of these areas Cisco has shown it is making tangible progress toward its goals of excelling in the world of multiple clouds and enabling the open and elastic services required for success in the new virtual enterprise. If you were using a compass to gauge the utility of these developments for virtual IT, the indicator would be reading direction correct.

For more information on ACG's cloud services, contact sales@acgresearch.net.

Paul Parker-Johnson
pparkerjohnson@acgresearch.net
www.acgresearch.net

Vendor Commitment to SDN in the Optical Environment

Not wanting to create the perception that their solutions are behind the times and anything less than state of the art, the telecommunications equipment vendors are always fast to embrace the next thing. However, the reality is that adopting new technology/methodology into diverse multivendor elements that comprise a service provider’s (SP) network is a significant undertaking. This has caused some of the larger content service providers such as Google and Facebook to undertake the building and deployment of their own private infrastructures to support their businesses. Because users’ demand for content delivery is outpacing the cost per bit to deliver the data, traditional SPs are getting squeezed. Simultaneously, the time to turn up a service offering has become a real and competitive advantage. This has forced SPs to look toward new approaches such as software-defined networking (SDN) to reduce service turn-up times and better leverage the infrastructure to support content delivery and achieve CapEx and OpEx benefits. But for SDN to deliver on these benefits it must work in a multivendor environment and end to end across all services supporting elements in the network.

Currently, this level of SDN deployment has only been achieved in a couple of private networks with proprietary implementations undertaken by the providers. Although this validates the need and benefits of SDN it by no means makes it mainstream. The question remains, how long will it be before SPs can implement SDN in a key portion of their networks such as optical transport? Examining some recently published vendor activity indicates just how ready for prime time this technology really is.

April 11, 2013, Ciena to Showcase Service Provider SDN at Open Networking Summit. Ciena demonstrated two service scenarios that leveraged the automation and central intelligence of its OPⁿ network architecture to show automated provisioning, virtualization and bandwidth on demand.

June 12, 2013, Cyan to Demonstrate the First SDN Application Spanning Enterprise, WAN and Data Center Environments at Interop Tokyo. This demo tested several use cases and showed interoperability between vendors. Cyan’s goal was to demonstrate the virtualization of the data center and network resources. It included members of the recently formed Blue Orbit Ecosystem

June 18, 2013, Coriant announces Intelligent Optical Control (IOC), industries first solution advancing SDN for optical networks. Coriant claims its solution, which is the first, allows for the optimization of the optical portion of the network. Its solution reduces CapEx by as much as 50 percent.

June 24, 2013, Infinera Demonstrates Transport SDN and Packet Technology on DTN-X Platform at Nissho Labs. This demo featured the DTN-X working with an external SDN controller and different network applications. It provisioned bandwidth on demand using OpenFlow and included VLAN switching and MPLS pseudo-wire transport over a 500G super-channel.

Although these press releases are show demos or lab trials they are key indicators of market direction and vendor uptake — to get to the demonstration stage the equipment vendors have invested in development resources to achieve this level of interoperability. The testing also helps harden the solution as nuances are identified and addressed by the vendors; it is a gauge of the technology maturity level of the solution. Multivendor environments must operate end-to-end to receive the full value and promise of an SDN networking environment. At this stage, at least for the optical transport portion of the network the equipment, vendors seem very committed to SDN and are poised to begin delivery of SDN ready systems in earnest as soon as 2014.  

For more information about ACG Research’s optical services, contact sales@acgresearch.net.

           Jeff Ogle

jogle@acgresearch.net   

     www.acgresearch

Takeaways from the Cable Show 2013

It was apropos that the 2013 Cable Show was held in Washington D.C. considering the big role that regulators play in the industry. Not only did attendance seem lighter than last year, but opening sessions on Day 1 also were disjointed with speeches that were self-congratulatory, lacked substance, and made claims that were hard to believe, such as “the industry is an innovator; the US is really a leader in average Internet speeds.” And “all content will be available on all screens regardless of what MSOs and programmers think, and today’s disruption is really about business models.”

In Day 2 Michael Powell’s (president and CEO of NCTA) interview with Mignon Clyburn (current acting chair of the FCC) was interesting from a human perspective but lacked any real content. Brian Roberts demonstrated the Xi3 box and the new X2 user interface for Xfinity, which include voice commands and seem to be as good if not better than Siri. It appears to be powered by Veveo. I was impressed because it seems that Comcast finally got religion about user experience; it will be interesting to see how fast they can roll it out and how well it will actually works in the home.  

Other themes

M2M/IoT: CPE vendors and service providers were demonstrating home security, monitoring and control capabilities—a huge growth opportunity and a natural extension of their existing markets.  

Cloud: Cisco demonstrated cloud DVR (http://www.acgresearch.net/knowledge-insights/videos/cloud-dvr-perspective.aspx). ActiveVideo demonstrated cloud-powered guides. ActiveVideo showed that mission-critical functions can be moved to the cloud. The company also announced wins with Charter and Cablevision.

CCAP: Cisco, Arris/Moto and Casa demonstrated their capabilities, and we are starting to see commercial shipments, which should continue throughout the year. 

Gateways are starting to gain traction as well. Cisco was giving a sneak peak at its G8 hybrid IP gateway. Arris and Technicolor also were showcasing their products.

Azuki Systems, an innovator in delivering multiscreen over legacy networks, unveiled an approach for using its technology to reduce the bandwidth requirements for first screen viewing to enable QAM reclamation.

For more information about ACG Research's VideoInfrastructure service, contact sales@acgresearch.net.

David Dines

ddines@acgresearch.net
www.acgresearch.net