In my role, I have the pleasure of speaking with people in all different lines of business directly or indirectly related to what we do here at Juniper-everyone from our service provider customers to press and financial analysts who have their own unique stake in our business. It's the latter two groups that have been asking questions about whether service providers can or will "run their networks hotter" to preserve capital expenses in these trying economic times. I'm not sure who coined the term, but it seems to be gaining traction as our esteemed competitor referenced it on their last quarterly earnings conference call.
At first glance, the idea makes sense: service providers build their networks with some capacity "headroom" so that spikes in traffic can be accommodated seamlessly. Instead of investing in more capacity, why not just reduce the amount of extra capacity headroom built in and run networks closer to their maximum capacity? Obviously this would have an impact on service quality in times of congestion, but everyone has to make sacrifices in these times. Customers will deal with the occasional loss of service quality, right?
Not exactly. Let's look at this a little closer. Most service providers serve one or more of three basic markets: wholesale, enterprises and consumers. Many of the large global providers serve all three; smaller players will often focus on one or two segments. Each of these markets in turn uses services that can be broken down according to the value they provide to the end user and whether that value is based primarily on cost or quality. Cost based services are typically "best effort," and examples of these include basic Internet access (enterprises and consumers) and pure bandwidth services (wholesale).
Value-based services on the other hand require an assured user experience. Sometimes this experience is guaranteed contractually via SLAs (managed services, virtualized services); other times the nature of the service, consumer fickleness and the pure competitiveness in the market serve as a virtual SLA of sorts. For example, residential consumers of IPTV and VOD services will quickly switch back to cable if they perceive quality issues.
Will service providers run their cost-based services hotter? Probably some will. They can't keep it up for long given the continued growth of network traffic, but realistically it will happen.
Value-based services that depend on an assured experience on the other hand cannot "run hotter." Service providers simply can't afford it - meaning they can't afford breaking an SLA in the enterprise and wholesale markets, and they can't afford losing residential consumers to competitors with higher quality services.
Interestingly-and this is where I can't help but get a Juniper pitch in-if you look at the types of networks that support each of these service types, it's the value-based services that require the high-performance networking infrastructure Juniper delivers. Cost-based services require another scale when run on IP-which is also Juniper's DNA! So when you hear people talk about running networks hot, it would be good to consider where this type of cost-saving maneuver would happen-in legacy networks, supporting declining businesses, or in the high-performance IP networks that support the services of most value (which today only makes up less than 10% of all capital expenditures)? I won't answer that question here, but you might consider AT&T's announcement on March 10, 2009 an interesting indicator.
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