In my last blog I said that optical networks, and the optical-routing bridge to a greater commitment to optical networks, is something enterprises I simply don’t believe telcos are willing to consider. That raises the obvious questions: Are enterprises right? And do operators’ reasons stand up? Should telcos be all-in on optical networks? I could push theories on why these telcos should be, but these would make sense only if operators would accept them. We need to look at the theories that would stand up to operator evaluation or we’re building fables, not business opportunities.
Let’s start with the top reason why telcos themselves say they’re not embracing optical networking faster and in more places, one that 100% of the telcos cite – “I can’t meet my ROI target with any faster or more extensive optical deployment.” You’ll note that this wasn’t even mentioned by enterprises as a reason for telcos’ slow-rolling optical networking, which shows that on this critical topic the two parties are already at odds.
There are only two things that can ensure a project hits an ROI target. One is to raise return and the other is to lower investment. What telcos are saying is that they’ve pushed optical networking as far as its benefits allow. That may seem logical, but that excuse flies in the face of the telcos’ own history.
We all know the “Field of Dreams” motto: “Build it and they will come.” Telcos have always invested heavily just to get something started, because buyers can’t commit to something they can’t buy. It’s the 21st-century version of the “First Telephone” problem. Who will buy the first telephone since there’s nobody for them to call? Therefore, there will never be any phones sold.
When telcos say that they can’t take optical networking any further because of a lack of a return, they’re saying “Build it and most of them probably won’t come,” when from the very first, the telcos have typically chanted the Field of Dreams supply-side motto, “Build it and they will come.”. The whole telco concept of “first cost” comes from the fact that cash flow on a new service is typically negative until there’s uptake. Why is optical networking treated differently? Telcos cite two reasons -- Wall Street and 5G.
Wall Street has gotten skeptical about telco financials, which shouldn’t be a surprise given that a lot of EU telcos have been asking for Big Tech to subsidize their investment in infrastructure. Rushing out to invest in an optical network revolution doesn’t help your case for subsidies, but even those companies that aren’t asking for them think that their stock would suffer if they started spending on something that didn’t have a clear path to generating more profit. This Wall Street skepticism is fairly new, starting just before COVID, and every public corporation (which means pretty much every telco) has to worry about its stock price, or worry about shareholder suits and hostile takeovers.
A big factor in the new Street skepticism is 5G. Over half of all telco planners would agree that 5G was really an essential-for-telcos evolutionary upgrade to mobile networks, not a new opportunity to gain revenue. A third say that they believed that the claims it would generate more revenue through things like network slicing and improved latency were over-hyped. There was a massive 5G tech-media hype wave that Wall Street at first bought into, and then began to doubt as progress in deployment was slow and proof of revenue even slower. Once bitten, twice shy, they say, and so telcos are reluctant to push some extravagant benefit case for optical networking without hard evidence, which of course they don’t yet have.
Or do they? I think the optical networking skeptics in the telco world are ignoring two facts. First, reducing cost is as good a benefit as raising revenue. Second, the “they” in the “Build it and They will Come” story doesn’t necessarily mean end users. It could mean partners.
Opex, overall, is roughly as large a cost item for telcos as capex, even now when they’ve done a lot to reduce headcounts, especially if you factor in subscriber churn created by operations mistakes and outages. Network operations efforts are largely proportional to network complexity, which grows logarithmically with the number of devices. A network built to rely on an optical ring/mesh model rather than a hierarchy of routers would have fewer devices and so present less complexity and less operations costs. Optical devices are also generally more reliable than electrical devices like routers, at least 50% higher mean time between failures, according to operators, which also cuts opex. Could these savings completely pay for an optical network modernization? For sure it could help.
Operators aren’t used to planning services as a part of an evolving ecosystem of players, but that’s what future service generations are likely to be. No developer is going to write latency-dependent applications with no low-latency services available to support them. “Field of Dreams,” remember? Telcos jumped out and built infrastructure for telephones, and they need to do that with latency-sensitive applications. Optical networks are the path to that, and if operators confidently invest in them wouldn’t that convince software, IoT, and other prospective partner companies to follow? A sensible developer program would help even more.
There’s even an answer to the Street’s concerns. Look at telco financial reports and you continually see the abbreviation “EBITDA”, which stands for “earnings before interest, taxes, depreciation, and amortization”. That’s shorthand for saying that traditionally the Street hasn’t worried too much about either telco capex or even writing down gear they’re fork-lifting away to make room for optical networking. Operating expenses, on the other hand, goes straight to the bottom line as a cost. Telco CFOs and investor relations people could easily spin a tale that says that optical network investment, even on a large scale, is an opex benefit that’s almost without a compensating bottom-line cost. What kind of ROI does that create? Infinitely high.
Most telco stocks are in the toilet already. A realistic story about the opex benefits of optical networking and the future potential of low-latency networks in IoT and the metaverse, combined with EBITDA reality, could turn that around. There’s nothing else that could reverse the telco stocks’ fortunes on the horizon – so it would be smart for telcos to take the optical network opportunity.
