Like a precocious but insecure child craving recognition, China's Huawei loves to be smothered with praise. At the lavish events it puts on, customers of the world's biggest equipment vendor seem obligated to acknowledge its brilliance during keynote presentations. The plaudits, of course, serve an important publicity purpose, helping Huawei to show the world how far it has come since its infancy, when it was in the shadow of Western rivals and often regarded as a low-cost imitator.
So it was something of a surprise when -- at a recent event in China -- a senior executive from China Mobile Ltd. (NYSE: CHL), the world's biggest mobile operator, decided to lecture Huawei about its relationship with customers. "Huawei should not have the mindset that operators will buy hardware and software together," said Zhengmao Li, a senior vice president at the Chinese telco, during a keynote presentation. "If you go down this path you will run into problems in ten years' time." (See Software or Hardware: China Telcos Tell Huawei to Decide .)
Zhengmao was not the only customer wagging a finger at the Chinese vendor. Following him on to the stage, Zhen Jicai, a vice president at China Telecom Corp. Ltd. (NYSE: CHA), told Huawei that it might ultimately be forced to choose between the roles of software integrator and hardware manufacturer. By taking advantage of virtualization -- the thinking goes -- service providers will be able to separate hardware from software, running network functions as programs on cheap, off-the-shelf servers. Continuing to produce expensive boxes that support particular functions will not make sense.
The changing role of Huawei Technologies Co. Ltd. , and that of other major equipment vendors, is a worry for the companies that buy their products. "How are you going to buy a VNF [virtual network function] in future?" says Roberto Kung, the senior vice president of network operation and performance for France's Orange (NYSE: FTE). "We've heard that Huawei might become a software company, but it's a pain to buy software and we have to know how that will be done."
Telcos' paramount concern is that a software-licensing model could prove costly and complicated. As more network functions are virtualized, operators face the unsettling prospect of having to manage and renew a growing number of licenses. During Light Reading's "OSS in the Era of SDN & NFV" event in London last week, Neil McRae, the chief network architect of the UK's BT Group plc (NYSE: BT; London: BTA), described licenses as "these annoying things" that impede flexibility, imploring vendors not to sell licenses in the way they have flogged hardware. (See Latest NFV Headache: Software Licensing.)
The mounting frustration is a sign of the pressure that some service providers are feeling. More "agile" Internet players that grew up using software technologies are eating into their sales. Unless they can make use of the same technologies, telcos will struggle to respond. "Time to market is one challenge," says Atif Khan, the vice president of technology operation support for Etisalat , one of the largest operators in the Middle East. "That is not allowing us to compete with digital companies."
Moreover, a few of the world's biggest telcos have announced ambitious goals for the virtualization of their networks. Most famously, US telco giant AT&T Inc. (NYSE: T) wants to virtualize 75% of its network functions by 2020. China Telecom, meanwhile, is working toward a goal of 80% by 2025. And Vodafone Germany , a subsidiary of Vodafone Group plc (NYSE: VOD), is aiming for 60% by 2020. While these self-imposed deadlines are not imminent, the clock is ticking.
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