Virtualization and Cloud executives share their predictions for 2017.  Read them in this 9th annual VMblog.com series exclusive.

Contributed by Mathieu Baissac, Vice President of Product Management at Flexera Software

Networking Companies Will Achieve Higher Profit Margins in the IoT with Software-Driven Revenue

Networking companies are adapting virtualization techniques to become more flexible, consolidate their hardware business and move to open platforms and elastic business models.  However, many networking companies do not yet monetize their solutions accordingly.

Software Defined Networking (SDN) - which provides the separation of the control and data forwarding planes to simplify compatibility with existing deployments and facilitate operation and maintenance procedures - and Network Functions Virtualization (NFV) - which enables certain network functions to be consolidated and performed on standard IT virtualization technology, rather than on specialized dedicated networking equipment - are pushing network manufacturers to move to virtual versions of their traditional hardware appliances.

As the Internet of Things (IoT) takes a clearer shape, value shifts even more quickly from the device to software and services, and manufacturers are offering their Devices as Platforms and opening them up for third-party applications.  As they do so, following are four virtualization predictions for 2017:

1.       NFV will take flight in the telecommunications industry - A recent IHS report predicted that the NFV market will surge from $2.7 billion in 2015 to $15.5 billion by 2020.  They also noted that 80 percent would come from NFV software.  That is roughly $4 out of every $5 spent on NFV.  This illustrates a tremendous opportunity for networking equipment manufacturers to capitalize on this trend by moving towards software-centric models and offering virtual network functions.

2.       There will be a significant shift to elastic capacity business models - As NFV and SDN becomes more prevalent - especially with service providers, large enterprises and public clouds - elastic capacity business models will become necessary based on virtual appliances that can be started and stopped.  Companies will want to move capacity as needed - providing flexible capacity deployment for networks, allowing companies to price-and-sell based on value with enabled subscribers, and enabling service providers to distribute capacity based on geographic demand. 

3.       More networking companies will implement usage and consumption-based licensing models, as they look to monetize all layers of the NFV stack - Network equipment providers need to be assured that they can offer customers pay-for-use, pay-for-burst, pay-for-overage models and outcome-based models.  These trends are fundamentally disrupting the core businesses of many network equipment providers, and maintaining status quo is not a luxury they can afford.  There will always be smaller, nimbler competitors that are looking to capitalize on these technology trends in order to leapfrog incumbents.  They need to offer generic to custom hardware, along with virtual appliances, elastic capacity models and usage-based pricing - supporting private, public and hybrid clouds, as well as high availability for different Internet connectivity environments - and drive recurring revenue streams.

4.       Open Source Software (OSS) license compliance and security will become critical for networking companies that offer NFV, and enterprises implementing SDN - Twenty years ago if asked what percentage of OSS is used within software applications, you would have heard 0, 5 or maybe 10 percent.  Gartner says that today, as much as 95 percent of IT organizations leverage OSS in their mission critical applications.  During the last 10 years, we have performed many Mergers and Acquisition audits, and routinely see that OSS and third-party code accounts for 50 to 90 percent of the codebase.  What is really alarming is that most organizations typically know less than 10 percent of what is actually being used.  Not knowing third-party inventory leads to IP license and compliance violations as well as vulnerability risks, remediation work and more.  Open source is widely used and adopted in the NFV and SDN space, and networking manufacturers must fully understand and disclose their use of OSS if they are to be successful.

2017 will be a year of success for networking companies that shift toward digital offerings, offer open but secure and well managed platforms in the networking industry and offer flexible consumption-based business models to their customers.  In order to get there, they will have to increase the level of maturity of their solutions, embrace the possibilities of virtualization and review their monetization models.

Following are five considerations that are fundamental to the way network equipment providers need to consider doing business, and are imperative to staying competitive and making more money in 2017:

1.       Manage business model complexity, offer flexible monetization models and monetize the platform through expanded ecosystem offerings.

2.       Develop new software pricing strategies and capabilities to monetize effectively across the application lifecycle.

3.       Capitalize on software maintenance by offering structured maintenance packages and managing customer entitlements accordingly.

4.       Orchestrate the physical and digital supply chain throughout a multi-level distribution network.

5.       Protect software IP and manage OSS use, compliance and security.

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About the Author

Mathieu is the Vice President of Product Management at Flexera Software and is responsible for products sold to software publishers and high-tech manufacturers. He gets energized talking about licensing, entitlements and best business practices. He has worked with hundreds of software publishers and hardware manufacturers - starting in 1994 when he wrote an entitlement management system for one of the largest publishers in the world. His background includes implementing SAP, for the then largest software reseller in the world, manufacturing software package boxes, running licensing call centers, CIO for international companies, and co-founding of an entitlement management solution sold to large and small software/hardware suppliers. One of Mathieu's passions is to travel to unusual places.