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 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 this 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 centralized 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.
BREAD AND BUTTER
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 run 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.
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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.
SLICING UP THE PIE
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.
(editing by David Stamp)
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