TCO in the New Service Edge

TCO in the New Service Edge

Total Cost of Ownership (TCO) is a familiar concept – it recognizes that the acquisition cost is only part of the cost story.  Think about a car.  You have the purchase price (or the lease).  In addition, there are the costs incurred over the life of the vehicle such as fuel, maintenance, insurance and licensing.

Network operators consider the TCO of the elements that make up their network.  These break these down into two broad areas. First are capital expenses (CapEx) which is the purchase price of the hardware and software.  Operating Expenses (OpEx) are the costs that are incurred as the equipment is used in the network.

Service providers are facing massive capital investments to deploy 5G. According the Heavy Reading, service providers will invest over $200 billion between now and 2025 just on 5G. These buildouts are changing how routing will be deployed. Low latency applications from IoT/Industry 4.0 to connected cars require that the service edge be much closer to the user. That means there will have to be more routing in many more locations – by as much as two orders of magnitude.  Projects like DCSG and Cross-Haul are happening now and show how providers need an order of magnitude lower cost to make this feasible.

The basic model for legacy routers is a high list price with a big discount to get to the actual purchase price.  Routers are sold as appliances where the hardware and software are inextricably linked.  There is no way to separate the two in the legacy vendors’ model.  Capital costs are accounted for differently than operating expenses. CapEx has its own budget and purchases are depreciated over their expected life cycle.  Many carriers use debt to fund some (or all) of their CapEx so this has a major impact on the balance sheet. Carrying debt requires enough cash flow to service it which can get tricky if revenues come up short.

Cash flows can also be quite lumpy given the relative granularity of the modules.  Expanding a router – by adding a line card – can be expensive because customers are locked in to the particular vendor.  This leads to a stairstep effect in capacity for a given node.  If you need a few more ports, you must buy a whole module as a step. High density modules often have the lowest cost per port and make the best use of the finite number of slots available but are more expensive.  Then you work down the capacity until it is time to take another step.

OpEx covers a range of items.  In TCO cash flows, maintenance contracts are the big line items in the years following the purchase.  Hardware can always fail and need to be replaced and software will always have bugs that need to be fixed.  In addition, the high cost of routers results in a long life (and depreciation) cycle so new features will need to be added to the software.  Maintenance contracts cover both the hardware and software for a percentage of the total list price of the original purchase.  These are usually all or nothing contracts.  For example, you can’t just cover the power supplies – you have to cover everything.  The cost of these maintenance contracts will also vary with the service level – such as speed of replacement and response times.

The cost of actually operating the equipment is another consideration.  In a future post, we will look at what makes the biggest difference impact on OpEx.  This will become a significant consideration as routers proliferate in the new service edge and existing operating models will have a hard time scaling.

As part of the open networking movement, Volta takes a different approach from the legacy vendors.  First, we can run on any open networking device so customers have a choice in hardware.  As these white boxes are less expensive, life cycles can be shorter so customers can take advantage of advances in switching ASICs.  Sparing is so much less expensive that it is a reasonable alternative to a maintenance contract. Second, the vast majority of our software can run on any public, private or hybrid cloud which allows processing to scale while keeping costs low. Third, our software is available as a subscription which includes maintenance and support. This smooths out the cost structure to better match revenues and flattens the stairsteps. Volta offers an order of magnitude cost reduction over the legacy model which will be essential if routing is to expand in the new provider edge.

In our next post, we’ll drill into the state of carrier revenue and the factors that have shaped it.