Network vs IT – let battle commence

Written by on March 9, 2015 in Features with 0 Comments

Battleship MissouriBARCELONA (Reuters) – Telecom network gear makers are on a collision course with Silicon Valley computing giants as software and cloud computing have begun to change the way operators from AT&T to China Mobile run their networks.

The shift, while in its early stages, involves relying on ever cheaper computer boxes and powerful software that promises to make networks more flexible and efficient.

As networks move to relatively standard hardware, formerly entrenched equipment groups must increasingly compete for contracts with the likes of Cisco, Hewlett-Packard and VMware, as well as a slew of startups.

Relying more on software to run networks could boost the gear makers’ profit margins one day, but will also force them to search for new sources of revenue. They must learn skills such as acting more as consultants or finding business beyond their traditional telecom operator clients.

The changes, which simplify how networks are managed, are blurring the lines between the telecom and computer industries, setting the stage for a wave of acquisitions as a virtual showdown in the clouds takes shape.

At the annual Mobile World Congress in Barcelona last week, the brewing battle was apparent in dozens of partnership and product announcements.

Likewise, some equipment makers talked tough about their rivalry with information technology (IT) groups as the operators make greater use of cloud computing – running software networks and storing data remotely on centralised servers.

“We actually see the transition to the cloud as less of a threat that IT players will disrupt our markets and more of a threat that we will disrupt theirs,” Nokia Chief Executive Rajeev Suri told a news conference in Barcelona before the Congress.

Finland’s Nokia, the world’s third largest mobile equipment maker after Ericsson of Sweden and Huawei of China, believes its strengths in wireless radio, navigational map systems and its large amount of patented technology cannot be easily duplicated by fast-moving Internet players.

The pace will accelerate over the next five years as industrial rivals compete for trillions of dollars in contracts to build a new generation of networks known as 5G.

These networks must handle mushrooming demand for video and billions of new devices including wireless connections to cars, industrial sensors and home appliance. They must do all this while helping operators to slash costs in an industry looking to pare back capital spending.


Network operator Telefonica set the cat among the pigeons this week by awarding a major contract to computer company HP for it to overhaul how the operator’s networks runs to make them more flexible and cheaper.

“What we are seeing is a coming together of two industries,” Ian Miller, an executive with Telefonica, which runs networks in Europe, the Americas and Asia. “Each industry is moving into the other side,” he said.

Meanwhile, Cisco Systems, which started out building computer networks, announced smaller deals with carriers across Europe to deliver new cloud-based Internet services and “small cell” antennas to improve mobile phone and data coverage in busy calling areas.

Such contracts would once have been the bread and butter for telecom network gear makers such as Ericsson, Nokia, France’s Alcatel-Lucent, or their newer Chinese peer Huawei.

Firing back, Ericsson, the world’s largest mobile telecom equipment maker, teamed up with computer chip giant Intel Corp to build advanced datacentres to help the telecoms industry match the firepower of Internet groups such as Google or Amazon.


The likes of Ericsson and Nokia will have to snap up smaller start-ups to gain software expertise but they’ll also have to compete for targets with deep-pocketed technology rivals. In the years to come, bigger consolidation moves are likely to shore up one side or the other, as well as ones which create hybrid players.

The first phase already has begun: Ericsson bought five cloud and software start-ups in 2014, VMware paid $1.26 billion for Nicira in 2012 and Cisco has made nearly a dozen small scale deals in the telecom arena in the last three years.

Marcus Weldon, who heads Alcatel-Lucent’s Bell Labs, acknowledged that competition with software makers and technology companies was intensifying, but said telecom network companies were also raising their skills.

“It’s not clear yet whether the overall pie of available revenue will be bigger, or if we’ll be fighting with new entrants for a similar-sized pie,” he said.

Software-based products accounted for roughly 5 percent of Alcatel, Ericsson and Nokia’s revenue in 2014, but will grow to the low teens in 2017, according to Exane BNP Paribas analyst Alexander Peterc.

Weldon and other executives pointed out in Barcelona this week that telecom networks have peculiarities, such as a low tolerance for outages and society’s growing reliance on mobile airwaves, making it difficult to swap some equipment for software and ensuring that telecom players are far from obsolete.

But their role with major customers such as AT&T and Vodafone will change markedly as they move into new service lines like network consulting and systems integration, to displace falling hardware sales.

By Eric Auchard and Leila Abboud, editing by David Stamp

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