Nakina CEO Sees OSS Innovation Gap

NICE, France -- Management World 2009 -- The communications software sector is in the midst of an innovation crisis that will ultimately hit carriers as they introduce new technologies, such as carrier Ethernet, IPTV, and LTE (Long Term Evolution), into their networks, according to Jay Borden, CEO of OSS specialist Nakina Systems Inc.

Speaking here in Nice, Borden, who has extensive experience in the telecom software sector, says the crisis "is not getting much visibility -- it's not in many people's interests to talk about it." (See Borden's Back.)

Borden's main argument is that true innovation comes from startups ("market leaders rarely innovate") and those startups need funding, which has traditionally come from the venture capital (VC) sector. But that funding has dried up -- communications software firms are risky investments for VCs -- with what little funding there has been in the past few years being pumped into a few existing independent firms rather than startups with new, and innovative, technologies.

"There has been a pattern and structure to innovation in the communications software sector in the past, and that pattern is now broken," Borden tells Light Reading.

In the past, network infrastructure innovation has usually been accompanied by innovation in the OSS world. For example, the introduction of digital wireless technology led to "operations gaps" that were filled by new communications software from the likes of Micromuse Inc. (Nasdaq: MUSE) and Objective Systems Integrators Inc. (OSI) . (See IBM Tiptoes to Telecom With Micromuse.)

Similarly the introduction of DSL led to "operations gaps" that required object-oriented inventory management and workflow software to enable flowthrough provisioning that could cope with mass market uptake. That led to innovation by startups such as Cramer Systems, Granite Systems, and Syndesis Ltd. (See Subex Targets OSS Giants, Amdocs Snaps Up Cramer, and Telcordia Nearly Blew Granite Deal.)

Now, though, new network innovation, such as the development of LTE and the introduction of new Carrier Ethernet and video service enabling technologies, has not been accompanied by the funding of innovative startups -- such as, for next-generation all-IP mobile networks, OSS tools that will enable the re-grooming of packet-enabled backhaul connections.

"Carriers should be worried about this trend," says Borden, who believes that new companies should have been funded and started in 2006 to address the emergence of these new network technologies.

"Do the LTE equipment vendors have the management software to manage LTE? I don't see it. For IPTV? I don't see it."

What happens next?
Borden believes that innovation will eventually return to the communications software sector, but with different models and players. Whereas VCs had funded mostly startups based in California and Massachusetts in the past (because that was close to the VCs' offices!), the Nakina man believes "new innovation will emerge outside of North America and outside the traditional telecom leaders.

As examples he cites Chinese vendor Huawei Technologies Co. Ltd. ; Indian firms Tata Consultancy Services Ltd. and Tejas Networks India Ltd. ; Web services players such as Google (Nasdaq: GOOG); the data center sector; and the likes of Akamai Technologies Inc. (Nasdaq: AKAM) from the content delivery network (CDN) sector.

"We're going to see more innovation from the Internet sector than from the traditional telephony players," he believes.

He also believes that, instead of totally new startups -- the "three men in a garage" model -- spinoffs (from larger vendors or carrier R&D labs) might be more attractive to investors, or be able to find alternative sources of funding. That's because spinoffs already have some business and some history: "Investors don't want to fund a startup sales team for three years to see if they can come up with a Tier 1 deal or not."

But he also believes new models of engagement are needed for smaller companies to engage with the Tier 1 carriers that are commanding a greater portion of the global capex total.

That's in the future, though. In the near term, "The breakdown in the software innovation process will impact the rollouts of Ethernet and LTE, and other new network technologies -- the market will develop a new innovation model, but not quickly. That creates a great opportunity for some software companies but creates enormous peril for all existing service providers."

— Ray Le Maistre, International News Editor, Light Reading

rsachdev 12/5/2012 | 4:05:13 PM
re: Nakina CEO Sees OSS Innovation Gap

I personally tend to agree with Jay Borden's central argument about the innovation gap. However I believe that the problem is less to do VC funding and in fact stems from problems at traditional carriers. They are supposed to be spurring demand for OSS and networking technology & services. However increasing consolidation in the telecom industry combined with insufficient service innovation in the recent years has meant that Telcos have become much more risk averse. For example they prefer to buy from fewer and larger technology providers because they appear to be "safe". This in turn makes it harder for start-ups to invest in R&D and for VCs to invest in start-ups. The cycle of greater innovation and investment will only return when entrepreneurs and investors see a clearer and shorter path to profitability / returns. And carriers are too focused on their near term challenges (e.g. profitability) to seriously "worry about this trend".

I also agree that in the short to medium term, new innovation will indeed emerge 'outside the traditional telecom leaders' such as Google. Regarding location, telecom innovation has never been limited exclusively to North America. For example, a lot of innovation in the mobile industry has occurred in Europe and Asia. Innovation will happen where there is a combination of critical mass of talented people, low barriers to starting companies (legal, financial), respect for intellectual property and efficient means to take the goods to customers. Despite their high cost of living, California and Massachusetts rule supreme in these areas.


Rahul Sachdev

Disclaimer – these are my personal opinions and don’t necessarily reflect the opinions of my employer (Intelliden, Inc.) or our customers.

alchemy 12/5/2012 | 4:05:10 PM
re: Nakina CEO Sees OSS Innovation Gap The lack of VC money is hardly limited to OSS telecom startups. Even if you have a good track record bringing in successful startups, have assembled a good founding team, and have a viable idea, it's still really painful to even get A round seed money right now. If you don't already have good startup pedigree, you're not going to even get your phone calls returned by the VCs in 2009. Innovation in pretty much any industry sector funded by VC money is dead until economic conditions change.
jepbjr 12/5/2012 | 4:05:06 PM
re: Nakina CEO Sees OSS Innovation Gap

Actually, the VC crisis is more acute in networking (hw and sw) than anywhere else in the industry.  After the 2000-2001 crash, VC funding as a whole resumed its prior growth rate by 2003.  But network investment kept falling, and has fallen every year since.  In 2008, it declined to the level of about 1996.  There's a graph posted on www.nakinasystems.com/pages/bl... that shows just how dramatic (and divergent) the overall trends are. 

You're very right about Series A funding, though, and standards for investments in general.  The money that's out there has moved strongly to later stage investments, leaving the seed and early stage seekers famished and fumbling.

Technoscribe 12/5/2012 | 4:05:03 PM
re: Nakina CEO Sees OSS Innovation Gap I think part of the problem is we're close to the end of a consolidation cycle in telecoms software. Over the last couple of years, a number of significant names have been snapped up not by competitors on the whole, but by companies looking to round out their OSS/BSS portfolio's. It's difficult to say exactly wehere the current round of consolidation started, maybe Micromuse, Portal? somewhen back there, and of late there has been Cramer, Apertio and last week Highdeal. We're running out of ISV's in the telecoms sector, and no mistake. One of the few left that I'm aware of is Tribold (from the same stable as cramer, Apertio etc). Indeed, Tribold just got a shot of funding from Intel's VC fund, so it won't be long now... My money is on the apps dev space for the new innovation. I think vacancies for start-ups in the OSS/BSS space is shrinking by the day.
cmwhobrey 12/5/2012 | 4:04:32 PM
re: Nakina CEO Sees OSS Innovation Gap Cramer customers continue to benefit from a strong innovative product roadmap. SPs, such as KPN, who have deployed the Cramer core platform now benefit from new innovation as announced at MWC http://news.thomasnet.com/full... . Additionally others announcements and product releases benefit the Cramer user base looking to adopt new technologies http://mobileworldcongress.med... .
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