Microsoft to quit Affirmed and Metaswitch in telecom retreat

Microsoft will continue selling Azure for Operators but focus on infrastructure support and leave applications development to others.

Iain Morris, International Editor

June 13, 2024

7 Min Read
Close up of the Microsoft sign outside their headquarters
(Source: Kristoffer Tripplaar / Alamy Stock Photo)

When Andrew Ward decided to schedule a meeting for people affected by Microsoft's recent telecom layoffs, he thought perhaps 100 people might attend. Stunned by the level of interest, the CEO of Award Consulting ended up with about 350 registrations and more than 200 people on the Zoom call that happened this week – which became a full-blown webinar instead of a casual, in-person chat. Those numbers provided evidence of the move's impact and the concern that surrounds it.

Ward previously worked for Metaswitch, the UK-headquartered network software developer that Microsoft bought for a reported $270 million in 2020. He subsequently set up his consulting business to provide Metaswitch product and strategy support for the incumbent and competitive local exchange carriers (ILECs and CLECs) buying its products. Many were on the call, obviously worried that Microsoft's telecom retreat would leave them stranded.

According to a Business Insider report earlier this month, the software giant is to cut as many as 1,500 jobs at its Azure for Operators and Mission Engineering units, and the axe appears to have fallen heavily on the parts responsible for developing network functions. A focus for Metaswitch is on voice-based communications technologies such as a private branch exchange (or PBX). The other main developer, Affirmed Networks, produces "core" software for 5G networks. It was also bought in 2020, reportedly for more than $1 billion.

In his role as CEO of Award Consulting, Ward has been made aware of recent communications between Microsoft and Metaswitch customers describing a big change in the telecom strategy. "They are saying we are shifting our focus from the network function layer to partnerships with industry leaders of these capabilities," said Ward.

"They talk about still being committed to telecom," he continued. "As you read what that means, it becomes clear that they still want to provide the infrastructure – they want Azure to be used for telecoms, and they want to drive AI services as well to the telecom operators – but they don't want to provide these network functions, basically the applications. They don't want to be in the business of providing the applications, just the infrastructure. So that's a big shift."

Metaswitchoff

It's a move that implies the Metaswitch and Affirmed assets will ultimately disappear or be sold, although Ward thinks any patents will probably remain under Microsoft's control. It also has ramifications for some of Microsoft's telecom rivals, which may have been alarmed by its advances into their sector a few years ago. In the 5G market, Microsoft has until now been able to sell both the application – via Affirmed – and the Azure for Operators infrastructure platform. Future deals are likelier to combine applications from an Ericsson or a Nokia with the Microsoft cloud.

Executives including Rick Lievano, Microsoft's telecom chief technology officer, have long insisted the takeovers of Metaswitch and Affirmed were largely about giving Azure some telecom assets to play with rather than turning Microsoft into a vendor of network software. But the two companies do serve customers and Microsoft has continued to sell their products. On the Affirmed side, recent evidence is supplied by a deal between Microsoft and Etisalat announced at this year's Mobile World Congress.

Ward also has a more negative take on Microsoft's involvement with Metaswitch. The rationale for the 2020 takeovers makes specific reference to the virtualization of core networks in a 5G world, he points out, and yet most of Metaswitch's customers operate fixed networks and provide business services. Microsoft's priority was getting Tier 1 customers to move infrastructure to the cloud, not the needs of American CLECs and ILECs.

"What happened was that Microsoft decided it didn't work out," said Ward. "They wanted telcos to move huge amounts of infrastructure onto Azure and didn't understand that telecoms doesn't move very fast. As operators, we tend to be fairly conservative and we want to make sure stuff works really well and we don't want to take chances with customer service."

A rapid telco move to the cloud did not materialize and Azure for Operators accordingly fell short of its revenue and profit targets, in Ward's opinion, as stated on his webinar. "They looked at Azure for Operators and compared it to the growth they see in Teams on the enterprise communications side, or the growth in AI with OpenAI and ChatGPT, and they felt this isn't worth continuing with."

Microsoft does not break out sales generated by Azure for Operators in its financial reports. But filings with Companies House in the UK showed that Metaswitch's revenues dropped 15% in the 2023 fiscal year (ending in August), to less than $217 million, with profit before tax down by the same percentage, to about $15.2 million. A 37% plunge in research and development spending, to less than $46 million, was blamed on "the allocation of resource to wider product areas within Microsoft."

Of course, the Microsoft strategy, according to the exchanges Ward has seen, is to withdraw from applications but continue work on infrastructure platforms for telcos. But the approach here is quite different from Microsoft's pitch to other sectors. Noting the unsuitability of the public cloud for telecom, or regulatory aversion to it, Microsoft has now built a Nexus-branded platform it describes as a "hybrid cloud."

Essentially, that means telco workloads are often hosted in a telco's own facilities, not the Microsoft data centers used by numerous other companies. Minus the resource sharing that comes with the public cloud, the economics of these hybrid clouds are naturally less favorable. Among Tier 1 telcos, moreover, Microsoft has made limited progress. Outside the US, where it caters to AT&T, the only big customer is Etisalat. AWS and Google, the other public clouds, have not done any better.

Paranoid humanoids

One of the big questions is what happens to existing customers of Affirmed and Metaswitch. Ward was unable to shed much light on Affirmed (not his area), but his overriding message was "don't panic" on a call full of nerdy references to The Hitchhikers' Guide to the Galaxy (the webinar was entitled "The restaurant at the end of Metaswitch").

"I believe that Microsoft has said this didn't work, we don't want to spend any more time than we have to thinking about Metaswitch," said Ward. "Now they have legal obligations. They've still got some staff. They haven't totally killed the product. But they would rather spend as little time as possible thinking about it."

All that sounds like a reason to feel anxious, if not display outright panic. Yet one possibility is that Microsoft finds a buyer prepared to continue supporting Metaswitch products. "Then they wouldn't have to spend any time thinking about it at all, whereas today they've still got to do security patches and bug fixes and fulfil their support requirements," said Ward.

What perplexes him is why – if Microsoft intends to sell Metaswitch – it couldn't identify a buyer before it laid off staff. According to one estimate, as many as 90% of jobs have already gone. Ward thinks that an exaggeration but still believes cuts were "pretty severe." What's left of the organization would probably be of limited value, compared with the original business, to a prospective buyer.

In the meantime, there remains a "significant" customer support organization within Microsoft, Ward points out. He is, naturally, also promoting Award Consulting as a source of help and spent at least 30 minutes on his call answering questions sent in by nervy Metaswitch customers. 

Eventually, though, it seems customers will have to move to alternative platforms such as Ribbon as Metaswitch products are taken off the shelf and Microsoft support is discontinued. If that's the case, it will not endear operators to Microsoft.

The other danger for the software giant is that a retreat from the network applications side of the business strips the market of a complete package. The "full stack" (as the industry calls it) of applications and underlying infrastructure remains an important option for some telcos eager to avoid doing systems integration or relying on too many suppliers.

The UK's Three, for instance, last year kicked off a tender for a 5G upgrade, expressing interest in Microsoft precisely because it could offer a platform as well as its "own core network," in the words of Anil Darji, Three's chief network architect. "They purchased Affirmed and they have some other third parties, and the idea is one throat to choke," he said.

Metaswitch staff and customers are probably feeling rueful after recent events. Microsoft was asked for comment and they haven't yet replied to Light Reading. And, whether Microsoft got what it wanted from the Metaswitch acquisition or didn't, its involvement with the company may ultimately turn out to be quite short-lived. For any Douglas Adams fans like Ward in this Metaswitch community, the parting words are obvious: So long, and thanks for all the fish.

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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