Consolidation among Telecom Vendors
Pro versus Con
We have entered a time in our industry where telecom system vendor mergers abound. After every merger, someone from the acquiring company usually makes a statement about how mergers are good for the industry by reducing excess competition and capitalizing on synergies. While they have a point, they are also not talking from the perspective of an uninterested observer. Being of two minds on the subject, I thought it best to set up an informal debate between myselves to try to solve this issue.
Pro-Con(solidation): Too many vendors means that competition is keeping pricing way too low leading to an unhealthy ecosystem. This is a similar situation to the one a few years ago among the component vendors when there were too many companies for any of them to achieve healthy returns. Consolidation allows reduction in redundant overhead, helps to eliminate rogue players who disrupt the economics with hail-Mary pricing, and generally returns the playing field to rationality.
With too many system vendors, pricing can reach unhealthy levels. In attempts to distinguish themselves, vendors will use techniques like predatory pricing to win accounts that they deem strategic, and this predatory pricing survives even after the vendor disappears. To keep pricing artificially low, corners must be cut in areas like quality testing, basic R&D, and salaries and benefits. In the end, it’s the employees of these companies that suffer.
Con-Con(solidation): Too many players may indeed keep pricing below healthy levels, but we’re not even close to the situation of the early 2000s when there were enough telecom vendors in the market to fill the floor at Supercomm. We are down to only a few on the optical side and perhaps a dozen on the switching side. There were – and are – some weaker players in the market, and those players need to be weeded out or consolidated. However, competition today is generally healthy, which is leading to technology innovations, improvement in service, and generally better focus on the needs of the customers.
There is value in having smaller telecom vendors who are able to be more nimble and responsive to smaller customers. If we reach a point where there are only a few system vendors left, innovation will necessarily suffer. And remember that any announced reduction in redundant overhead means talented telecom workers that no longer have jobs. We can’t afford to keep losing good people, especially early in their careers, in the name of consolidation.
Pro-Con: As we move to ever more complex and expensive equipment, larger teams are needed to build the types of equipment and software that will be required. The investment required for SDN orchestrators, for example, is huge. The market can’t support a lot of companies with the deep pockets necessary to develop the complex software that will be required to operate large carrier networks.
Additionally, the webscale-type customers do not want to deal with a company that cannot respond quickly to huge swings in demand, requiring companies to be financially strong enough to keep inventory on hand at all times. And as the world of telecomm evolves into one that looks more like software-controlled datacenter interconnections than traditional service provider networks, the model for systems vendors needs to change as well.
Con-Con: Pity the poor smaller provider, utility, government location, or MSO that still has legacy equipment in place. When all of the vendors are consolidated and focused on webscale customers, those smaller providers will be left to fend for themselves on the gray market and fight for spare parts on eBay. If every large carrier has to choose between the same 3 major vendors, where will they look for disruptors? The reality is that there is a thriving telecommunicaitons market that is served well by small to medium sized systems vendors, and their customers are the ones that would suffer if only behemoth vendors remain. Smaller systems vendors are able to respond to unique requirements from MSOs who need to find a way to get more use out of their HFC networks. Smaller systems vendors are able to build the products that utility networks who still have an embedded base of analog and TDM equipment will need during their slow transition to packet-based networks. Smaller systems providers are generally more responsive to a huge swath of the telecomm world and provide a value in those markets that keeps them in business.
The smaller vendors might not have the huge staff to build the SDN orchestrators, but the beauty of SDN is that it allows pieces to fit together well and levels the playing field for all comers. Smaller vendors can design innovative solutions that may be best of breed, and carriers should be able to integrate those solutions quickly via the magic of SDN. SDN should enable more solutions, not fewer.
Pro-Con: With the growth in webscale customers, the industry has seen a new paradigm emerge where loyalty and long-term contracts no longer exist. A vendor who spends time on research and development, manufacturing design, and ramp-up could see their customer walk away in an instant. There are simply too many ways to build these DCI boxes to make them profitable when any little competitor can come out next week with one that is just a bit better.
Con-Con: Yeah, no disagreement on that one. If you want to bet your business on one of the largest webscale companies, you had better have large cash reserves. However, the other side of that argument is that those pizza-box DCI boxes are increasingly easy for anyone to build and not everyone will want to push the envelope and pay for the highest capacity. As the market moves to a more datacenter-like structure, there should even be room for more than one pizza-box DCI design to survive. With only one or two major systems vendors left in the mix, the push for SDN – truly interoperable SDN – will suffer as vendors tout proprietary or duopoly solutions instead.
In conclusion, there is no real conclusion and the debate will continue. The side that you fall on most likely depends on where you personally sit in the merger and acquisition cycle or the size of the network that you are managing. The only thing that stays the same is change, and that is certainly true in the telecomm industry lately. At least it’s not boring.