From a business perspective the New IP transformation is a move to a customer-centric era that introduces new business models and dynamics that share risk and reward between the customer and the vendor.
Instead of vendor lock-in models, concepts such as "pay as you grow" and "usage-based pricing" are easily enabled through software licensing mechanics. And infrastructure no longer needs to be heavily over-provisioned since capacity can scale elastically.
In this New IP model, vendors can offer term-based or usage-based pricing models for both software and hardware, says Kelly Herrell, senior vice president, Software Networking Group, Brocade Communications Systems Inc. (Nasdaq: BRCD), which does this today with Brocade Network Subscription. "In effect what this does is introduce software-like commercial dynamics regardless of whether the infrastructure is software or hardware," he says.
Also, as mentioned above, the openness of the New IP reduces vendor lock-in. This enables customers to plan for shorter periods during which they have to live with a given decision and shifts the balance of power even more to the customer’s benefit, adds Herrell.
The cost factor
But everything is not as easy as it sounds. In fact, the New IP realm introduces significant complexity driven by virtualization, separating functions from their hardware, centralizing control, introducing cloud-based service fluidity and shifting to a utility-based business model in which end customers pay only for what they use.
"In the resource-centric old IP realm, pricing was very much resource-based. With greater separation of the software and hardware components, pricing has become a challenge for traditional vendors, new entrants and communication service providers," says Christopher Cullan, director of product marketing, business services solutions, InfoVista SA .
Cullan says a simple example is bandwidth on demand: because the customer always has the option to buy more bandwidth, bandwidth on demand pricing needs to be positioned to drive enough value for the customer at a price that makes sense over a bandwidth upgrade.
"One can imagine a complex example where 15 software components combine to deliver a service to 1,000 customers," notes Cullen. "Each of those components may have a subscription license, a perpetual license that was capitalized, a license based on the number of connections or transactions, etc. The challenge is determining the cost to deliver that service to 1,000 customers across 15 components."
From the service provider viewpoint, flexibility and agility are important mantras in the New IP -- especially for delivering services such as bandwidth on demand -- but not for cost savings only, according to Beau Atwater, head of strategy and business intelligence, Ericsson AB (Nasdaq: ERIC).
"The shift to software-intensive technology approaches is not necessarily being driven by the way solutions are bought and sold. Rather, it's the need to be agile and move quickly with support from products that are more flexible than ever," says Atwater.
On the cost side, this shift is giving rise to increased usage of commoditized, programmable hardware that is available at significantly lower price points than the highly specialized, complex equipment used in the past. As a result, opex and total cost of ownership are reduced through elimination of long hardware procurement cycles and the use of automation to reduce truck rolls, while also providing time-to-market benefits, notes Atwater.
The supplier impact
The shift to New IP not only focuses on new business models for capex/opex, but it also opens the door to subscriptions as a viable option to move away from warranties and other add-on costs -- especially when it comes to software.
However, Dennis Cox, chief product officer, Ixia (Nasdaq: XXIA), says there are vendors that haven't made the shift to subscription models or don't understand the impact of virtualization on their business yet, which could be challenging. "I think they'll get caught up in it," he says.
"You'll see certain companies that are offering a software version of their hardware product for nearly the same price or a little bit cheaper," says Cox. "It will be difficult for them to recoup the revenue lost off hardware and the hardware warranty because you don't know how people are using them and sharing the resources. It's quite different."
Suppliers also will need to expand their footprint with strong professional services organizations and software capabilities in order to partner with customers and provide more software support, professional services, consulting, proofs of concept, training and outsourced services. Revenues from these areas will increase and yield higher margins, according to Atwater.
Indeed, professional services is evolving from an integration practice that has served to further entrench the vendor's product to a more consultative role that helps with solving the customer problem first and foremost, bringing in an open ecosystem solution approach enhanced with software applications in the era of New IP.
Keep following The New IP for more in our new "Buying and Selling in the New IP" series. (See Buying & Selling in the New IP: What's Different?.)
— Elizabeth Miller Coyne, Editor, The New IP