NFV Can Avoid Buying Network Bulk

Network functions virtualization allows service providers to deliver specialized capabilities that enterprise customers only pay for when needed.

Priya Natarajan

October 21, 2014

3 Min Read
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Most Americans, at some point in their lives, will pay a visit to Costco, Sam's Club, or a similar warehouse store that has a business model predicated on selling products at low prices and at high volume. These products are usually packaged in bulk and marketed to businesses and families, people who tend to "stock up" as opposed to people who tend to "pay as you go" for single servings. Costco's number one selling product is consistently toilet paper. Decidedly not sexy, but extremely necessary.

The business of networking (also unsexy, yet necessary) largely follows the Costco model. Operators spend money up front to buy networking equipment and appliances. They plan for peak capacity, and rack and stack devices to cater to projected needs. They want to be certain that their big, upfront investment in hardware will pay off, so they take a long time to evaluate new products and are wary of trying out new services. And as customer consumption of network services begins to follow the pay-per-use model of cloud compute, storage, and application services, operators are feeling a squeeze. Their revenues will not sufficiently and immediately align with their cost of goods.

Network functions virtualization (NFV) offers operators a way to obtain the right amount of network functions just when they are needed. By reducing the need for dedicated hardware to deploy and manage network functions, operators save on space, power, and maintenance costs, among other benefits. Virtualization and cloud also enable on-demand availability, higher speeds, and greater functionality. To use our shopping analogy, NFV offers the volume of choices that Costco has, combined with the accessibility and smaller portions of your neighborhood convenience store.

Beyond relieving fundamental limitations of the traditional appliance model, virtualization can enable powerful changes in networking business models. These changes stand to improve the entire investment risk versus revenue balances among vendors, service providers, and service customers.

First, look at current business models. In an earlier post, my colleague, Mitch Simcoe, discussed whether you should build or buy your network. In these models, the operator pays the vendor when they bulk purchase products to build out network capability and capacity before they roll out service to their customers. This is the Costco model: The service provider pays up front for 48 rolls of toilet paper that he may or may not use.

But NFV allows us to consider alternative models. What if the operator doesn't have to pay a vendor for capability and capacity until he reaps the business value of that capability and capacity -- i.e., until his customer procures the virtualized network capability and capacity? Using our analogy, this is similar to operating a store with goods sold on consignment -- where the shop owner doesn't pay his supplier until and unless he sells their product. It not only benefits you as the consumer, but also the shop owner because he does not have to pay up-front for bulk.

The hybrid between Costco and convenience store model is an advantageous one for service providers. It allows them to improve their customer-facing business proposition while also reducing their own business costs and risks.

Enterprise customers also benefit by always having the latest, most current version of a virtual network function, one that is seamlessly integrated into the on-demand cloud, connectivity, or edge managed service they already subscribe to. They don't need to spend time managing multiple services, they don't need to buy additional on-premise equipment, and they can instead reassign IT personnel to focus on major strategic projects to drive the business.

About the Author(s)

Priya Natarajan

Senior Director of Market Development, Ciena

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