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Gigabit Cities

SlideshowFollowing the Bouncing Capex Ball

US Investment by Industry
Source: Progressive Policy Institute, U.S. Investment Heroes of 2015: Why Innovation Drives Investment
Source: Progressive Policy Institute, U.S. Investment Heroes of 2015: Why Innovation Drives Investment

kq4ym 10/9/2015 | 9:55:39 AM
Re: Our envelope Interesting how Google and Walmart appear in the rankings. Consumers would mostly say those two are consumer friendly with low (or free) pricing but serve customers well. Although employees at Walmart might disagree with the low prices because they are in turn low paid. I wonder if there's any underlying wisdom in the business model to be found comparing those two with the other business sectors thought not to be so consumer friendly.
mendyk 9/30/2015 | 3:37:38 PM
Re: Our envelope Agree -- and I would say that our current projections for the economic impact of virtualization are based on a moderate amount of optimism. Also, ours is a decidedly macro view -- some CSPs will fare better than others, with the positive results skewing to those with less legacy baggage. I think it's overstating things to say (as some vendors are saying) that CSPs who either delay their transformation programs or decide not to virtualize are doomed. But it's clear that staying the course will ensure long-term revenue and margin erosion.
brooks7 9/30/2015 | 3:20:39 PM
Re: Our envelope You have factored.  Most vendors have not.

The question about virtualization for me has to do with how licenses will be managed.  I think that is going to be the fascinating bit.

seven

 

 
mendyk 9/30/2015 | 12:13:59 PM
Re: Our envelope Right -- we have factored many of those points into our projections, and labor costs are a big part of the long-term savings. As you say, the impact on opex (as on capex) will be marginally negative (meaning costs could actually increase slightly) during the transformation process. The savings start to kick in at the tail end of the process and then ramp up once work reaches completion. The operators that either figure out or have less exposure to issues like obsolescent work forces will see the biggest benefits from the changeover. I wouldn't argue that failure to move to a virtualization model guarantees extinction, but it will be increasingly difficult to turn a profit.
brooks7 9/30/2015 | 12:03:40 PM
Re: Our envelope Opex savings come in two bundles.

1 - Electromechanical oriented:  Things like Power and Cooling.

2 - People Oriented:  Eliminating positions.

In general, Electromechanical opex savings are part of a business case for something that will be done anyway.  It rolls into the cost savings, but there is generally not enough cost savings to justify changing things based on power (etc.) alone.

The people side is even worse.  Changing technologies for existing ones generally means a headcount increase.  In fact what people mean normally is that it is a lowered headcount increase than doing something new some other way.

All of which boils back to how much upward revenue tick people can get from investment in savings and how much of that upward revenue is cannibalizes other revenue.  

I am not saying that opex savings are not real and big.  It is that people take them greatly out of context from an entire business plan.  On top of that, they tend to forget things like training, unions, etc. that interfere as well.

seven

 
mendyk 9/29/2015 | 3:47:06 PM
Re: Our envelope Yes, this the the classic short-term vs. long-term thing. In the short term, it's easier to just rein in capital spending for some margin relief. In the long run, the bigger savings will be on the opex side. But you need to have a 10-year view for that, which is a huge challenge for any business. This puts established operators at a distinct disadvantage compared with newer competitors.
cnwedit 9/29/2015 | 3:41:47 PM
Re: Our envelope Dennis, I would agree that operators are prioritizing capex savings right now. That's one of the reasons I was surprised to hear that comment.  What I hear from them most is the need to make it easier to offer new services more quickly, to discover new revenue opportunities, and to find a way to more efficiently scale. 
mendyk 9/29/2015 | 3:03:59 PM
Our envelope Heavy Reading's back-of-the-envelope estimates (i.e., guesses) on capex actually show a slight increase over the next 10 years as operators begin and complete their virtualization projects. But we do expect to see significantly lower opex kicking in around 2020. That actually is a more important number for operators in our view.
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