Industry consolidation and competitive pricing
SS: There's a huge amount of consolidation going on right now, with these huge mergers and partnerships. Is that good for the customers? What are your customers telling you?
SV: The response to the Nokia/Alcatel-Lucent merger has been overwhelmingly positive, for a couple of reasons. First, as you know, both Nokia and Alcatel-Lucent were just completing a restructuring and getting their respective businesses back on track and generating cash. By going through that and then combining the two organizations, we now have a company that's on a very solid footing and customers think that's a good thing.
The other reason it's been very positive is because we're going through a pretty massive change cycle in the way we build networks. We've got 5G now coming online, which requires a huge R&D investment. The move to virtualization, the adoption of IT technology... all these things require significant innovation in R&D. As a larger organization, we have a larger pool of R&D to address these problems.
SS: Almost double.
SV: Pretty close.
SS: We're hearing a lot about major vendors having to get aggressive with pricing in order to win deals. I know Nokia has been putting up some amazingly good numbers recently, so obviously whatever you are doing is working, but have you had to cut some deals to create a beachhead into the virtualization market?
SV: It's still early days. For the most part we haven't see those huge volume deployments [of NFV] just yet. I would say at this point the pricing models are still somewhat fluid. As an industry we're trying to figure out what is the right model that strikes a balance between what our customers want -- lower costs, no matter what -- and ensuring that there's sufficient revenue and margin for us to continue investing the R&D dollars to innovate and improve the solutions over time. From time to time we'll see deals where we have to be aggressive. It changes, you know, with different parts of the world at different times. But overall it tends to average out. And then you can see in our financials that we've been improving margins pretty consistently across a number of businesses.
SS: There seems to be a big question over the business case for NFV. It seems to have moved from being looked at as a way to primarily save money, much more towards developing new services. What's your take on this? What do you see from your customers?
SV: I definitely see a similar trend, that the emphasis is now increasingly on new services and "service agility" rather than on pure cost savings.
Part of that is to do with performance. If you can't drive VNF performance on the Intel chipsets, the business case isn't really going to pan out. We've been playing a pretty significant role to change the equation by getting more performance out of those processors. That's helping a lot.
But there's also a recognition amongst a lot of the network operators that, at least initially, NFV is complex, it's non-trivial -- we all have a lot of work to do to figure it out. You're not going to see this immediate quick win on cost savings. Rather, you have to go through a complex technology curve where you adopt the technology and eventually the cost will come down. But the cost savings will ultimately be more driven through operational savings, and the best way to achieve operational savings is to tie them to a new service.
So the focus is now really shifting to how can we roll out new services that are, from day one, far more agile. Using virtualized infrastructure is a fantastic way to do that. That's my perspective on why we're seeing that shift.
SS: Thanks again for taking the President role in NIA – it's really gathering some membership momentum, which is very exciting.
SV: You're welcome, Steve. Good dialogue -- always enjoy talking with you.