Patrick Kelly, Appledore Research Group

How much investment in virtualization technology is occurring today relative to overall capital spending? AT&T has made public claims in both the press and major industry events that it has virtualized 34% of its SDN network but what does this mean? Is it 34% of its IP network domain? Is it 34% of its network traffic transiting the virtualized components of its network? Or is it 34% of its CAPEX spending now reallocated to SDN and NFV components (highly unlikely)? The point is nobody really knows how to interpret the AT&T numbers because details of the claims are largely absent and no baseline in the industry exist at this stage. That is the nature of an emerging market.

Virtualization on its own achieves very little. It is when you combine it with automation that the two implementations begin to yield the business with competitive advantages and substantial operating efficiencies. The industry is at T minus 0 now on virtualization of the infrastructure. We can point to evidence where many deployments are occurring at different rates driven by the CAPEX benefits and use cases. Automation is at T minus 3! We see very little evidence in the market beyond PowerPoint slides and prototyping by some innovative CSPs. AT&T has been leading the industry with ECOMP and now ONAP controlled by the Linux Foundation but time will tell as to how and when we get to T minus 0.

A quick look at AT&T’s recent annual financial results for 2016 reveals that its largest business segment called “Business Solutions” generated USD 71 Billion in revenue. A sub-segment of this business unit which AT&T defines as “Fixed Strategic Services” generated USD 11.4 Billion in revenue growing 9% YoY. We are assuming this is where a large share of “virtualized CAPEX” is being allocated. If you dig into the SEC 10K filing you will find some commentary from AT&T that operations and support expenses totaled USD 44.3 Billion for the business unit – a decrease of 1.4% in 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining its networks and personnel costs, such as compensation and benefits. Digging further AT&T reveals that “lower network costs of USD 283 Million resulting from workforce reductions and other cost initiative actions” contributed to overall OPEX in this segment. Let’s put that in perspective. Direct related labor cost reductions were 0.6% of total OPEX. Although it is moving in the right direction, nothing points towards a compelling case that AT&T has made significant advances to automate its processes where it is virtualizing its network. This is important because we view AT&T as a leader in the market and a strong proponent of the open source community. It also reveals that the journey towards automation is more than deploying technology and software. It involves retooling the organization, a change in mindset to think more like web scale companies, and collaboration in a larger eco-system. Other leading CSPs include SK Telecom, China Mobile, DT, NTT DOCOMO, Orange, Telefonica, Vodafone, as well as others.

We hope to bring some more clarity as to where the industry is today and how quickly it is moving towards commercial deployments and more importantly investment activity. The ecosystem is evolving around opensource which accelerates innovation. What many suppliers ask us is how to we fit into this ecosystem and remain a vibrant supplier (read sustain profitability)? Our goal this year is to build a market tracker, indicate success cases that combine automation and virtualization, and quantify the level of investment activity that aligns to our market taxonomy and framework reports published over the past year.