NFV deployment has been gaining momentum, but not as fast as people have been expecting it. We believe that there are several reasons why NFV is developing slower than expected, and a major one is the lack of clarity and understanding around software licensing. In this ABI Insight, ABI Research would like to highlight some software models for NFV and the challenges surrounding them.
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The Industry Is Not Happy with the Speed of NFV Adoption
The year 2017 was an interesting one for NFV developments and deployments. The industry finally witnessed the release of the first ONAP distribution, Amsterdam, and is already casting its eyes over to the following release, code name Beijing. SK Telecom has opted to go against the collaborative approach in NFV management and orchestration, releasing its own proprietary MANO solution called T-MANO. At the same time, we are seeing more deployments of EPC in many markets, such as China, Japan, and the United Kingdom.
However, there are still a lot of competing headwinds in the industry, especially since NFV growth has yet to reach its forecasted height, while many telcos are still in the stage of testing and trialing. Most virtual network functions are deployed for new services, instead of traditional offerings. As a result, we are seeing traditional infrastructure vendors, such as Ericsson and Nokia, have stale, or even negative growth. Among all of the challenges, one of the most discussed is the issue of software licensing.
Change in Business Model Is Inevitable
In the past, the telco industry was well served by monolithic network functions that come with proprietary physical hardware. Vendors charged telcos licensing and upgrade fees, in addition to a maintenance contract. All of these relationships are set to change in NFV deployment. The decoupling of hardware and software means that telcos can now adopt generic hardware for their NFV infrastructure. This creates business opportunities for the likes of HPE, Dell EMC, and Wind River, and hardware licensing has started to proliferate. Hardware vendors are transforming their business models from one-time sales transactions to ongoing usage-based licensing models, tiered by hardware storage and computing capabilities.
Armed with their recently developed cloud hardware, telecom infrastructure vendors are offering full end-to-end network functions, and many telcos have adopted single-vendor full-stack solutions, such as Three in the United Kingdom and Telstra in Australia. However, telcos looking to adopt a best-of-breed deployment model for NFV are often picking these vendors for virtual network functions (VNFs). This has significant impact on the revenue streams of traditional infrastructure vendors, as the focus has now shifted from a one-time sales transaction to software deployment on third-party hardware. Nokia, for example, has announced that it is building a software business at scale by re-architecting its software offering based on a common features and filling portfolio gaps. At the same time, cloud infrastructure is a challenging business, exemplified by Ericsson’s choice to divest its respective business and potentially offload it.
Recommendations for Software Licensing
In order to improve their software offering and pricing strategies, we have seen infrastructure vendors learning from public cloud vendors. At the moment, ABI Research believes that the market will opt for one of the following software licensing models:
Usage-based Subscription: Software revenue is incurred via usage over a period of agreeable time frame. The software license is likely revocable and transferrable. The model will feature minimal upfront payment, with the fee varying in terms of features, bandwidth, and/or time. This is the preferred model for VNFs hosted on public cloud—for example, ZTE’s vIMS on AWS and telco-as-a-service by Openet.
Monthly, Quarterly, or Annual Subscription: Software revenue is incurred based on a fixed charge over a monthly or quarterly basis. The software license is likely revocable and transferrable. The model will feature relatively small upfront payment, but tiered based on user capacity. For example, Versa Networks provides subscription-based pricing for 1-, 3-, and 5-year terms.
Perpetual Subscription: Software revenue is incurred based on a fixed charge throughout the lifetime of the software. The software license is irrevocable and non-transferrable. The benefit of this model is that the revenue stays constant across the lifetime of the software. This is likely the pricing strategy used in the single-vendor full-stack solution mentioned above.
ABI Research expects that some startups may be willing to offer a shared risk/reward-type model for their network functions. This has emerged as one of the more common pricing strategies in industrial IoT space, where vendors will incur their revenues from the cost savings or additional revenues generated by their solutions.
Since allof these options may or may not include services and support, this will be the key differentiator for a lot of telcos that lack in-house software engineering capabilities. Therefore, vendors need to have a robust billing and license management system to cope with the scalability of VNFs. At the same time, vendors also need to address interoperability issues between VNFs offered by different vendors.
In the past, major telco infrastructure vendors served as system integrators that took care of the interoperability issues between all the physical network functions, performed network updates and maintenance, and addressed network failures. Moving forward, ABI Research expects major vendors to do the same in the telco cloud environment, given that not all telcos have the resources to build in-house capabilities in the telco cloud. It may be quite apparent that most Tier One telcos will be their own system integrator, while the rest will go with a vendor.
For more insights and perspectives on telco cloud deployment and development, please check out ABI Research’s Telco Cloud Platforms & Digital Transformation.