5G network investment will push Capex for NFV and SDN

“TBR expects the use of white-box hardware in NFV / SDN environments will proliferate, accounting for 60 percent of NFV / SDN hardware spend in 2023, up from 15 percent in 2018. This industry shift toward white-box hardware will significantly disrupt incumbent OEMs’ business models, prompting them to evolve into software-centric companies.”

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Exclusive: Red Hat’s first CEO sees his legacy turning IBM reddish from blue

“IBM’s Arvind Krishna, head of Cloud and Cognitive Software, acknowledged Red Hat’s coming influence in a conference call after the deal closed, noting that there could be some ‘red washing’ of IBM as opposed of ‘blue washing’ Red Hat. Blue washing would be ‘a bid thing,’ he added, according to Technology Business Research.”

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IBM and Red Hat close the deal — will it be red washing or blue washing?

On July 9 IBM held a 30-minute Q&A with industry analysts, led by Red Hat EVP of Engineering Paul Cormier and IBM SVP of Cloud and Cognitive Software Arvind Krishna. The discussion confirmed the overarching strategic benefits both parties see in the union while stressing the intentions to keep Red Hat vendor agnostic. Around three-quarters of Red Hat’s revenue is generated through its channel, suggesting Red Hat is viewed as a valuable and highly sought-after partner. Despite the fact that IBM and Red Hat executives continue to echo the necessity of maintaining all of Red Hat’s existing alliances, these relationships could come under review by the partners themselves now that the acquisition of Red Hat by IBM has been approved by regulatory boards globally and finalized.

Indeed, when queried about industry concerns that Red Hat would be “blue washed,” Krishna said, “[Blue washing] would be a bad thing for both [companies],” and suggested the exact opposite — that there could be some “red washing” of IBM that results, which has also been an opinion TBR has offered in various commentary as this deal moved toward closure.

Red Hat almost single-handedly commoditized the enterprise software space before taking aim to do the same thing with the platform layer through OpenShift. Commoditization is not something IBM necessarily has liked to see over the years at it rapidly eroded the transaction-oriented hardware segment of the industry as IBM pivoted to software and services. The developer community can now accelerate innovation through this open foundation layer, which is how Red Hat will remain autonomous from IBM. Red Hat’s best practices around subscription monetization of essentially free IP generated by the open-source community will likely be the best practices brought forward to red wash IBM as it moves further into the automated services arena, with Watson Anywhere and Blockchain Anywhere as two recent examples of these moves.

How can IBM scale Red Hat’s best practices?

IBM will bring its technical skills to the union to bridge the legacy world with the open-source world underpinned by Red Hat Enterprise Linux (RHEL), OpenShift and Kubernetes containers. Both Cormier and Krishna highlighted the breadth of IBM Services’ that can be brought to bear for enterprises looking to migrate the 80% of workloads that have yet to migrate to cloud, according to IBM. Through OpenShift, this migration can extend beyond just moving from legacy applications to one public cloud, to encompass nimble and secure migration to and between multiple clouds and on-premises instances.

Red Hat will still operate with multiple vendors while also maintaining the robust and expansive developer community that has been described, with some legitimacy, as almost a cult-like following. Indeed, it can be argued that this merger will in retrospect be viewed as a milestone event in the ongoing march to consumerize IT to simplify the technology side of business operations and focus more on business objectives than on the technical challenges. DevOps and security practitioners will have one platform cemented by Kubernetes containers to work within a true multicloud environment.

What tactical steps must be achieved to implement the strategic vision?

The teleconference had TBR analysts pondering many of the as-yet-unanswered questions that IBM and Red Hat stated will be addressed in the upcoming weeks. Principal among those TBR questions are the following:

  • How successful will IBM be at operating Red Hat as a stand-alone unit — an acquisition model it has yet to take on? Typically, acquired companies are blue washed, and it has been common to see executives from acquired companies resign. Will that be the case with Red Hat? Will Red Hat CEO James Whitehurst stay on, and better yet, will he succeed IBM CEO Ginni Rometty in coming years?
  • How will IBM Cloud Private (ICP) and OpenShift coexist? The move to multicloud with OpenShift underpinning the DevOps and security communities begs the question: How much emphasis will or should be placed on ICP? Will ICP be joined, or will OpenShift supplant that technology, with IBM Services maintaining the implementation based on trust from years of account control in the large enterprise?
  • What will be the development road map for IBM middleware assets? How will these assets align with, merge with, or remain distinct from the Red Hat portfolio?
  • How will IBM blend Red Hat best practices, technology and personnel into its own developer ecosystems, programs, and the IBM Garage method? This issue will be more of a cultural shift.
  • How can IBM and Red Hat increase share in the midmarket enterprise? Developer satisfaction will be closely monitored, but open platforms also mean access to cutting-edge technology by smaller enterprises. That go-to-market motion is radically different from the traditional enterprise motion where IBM has excelled for decades. In the era of multi-enterprise business networks, small enterprises and large enterprises interoperate more frequently through automated systems. IBM’s brand at times works against it within the midmarket, which perceives the offers to be too costly and likely too complex for its requirements. To gain scale with multi-enterprise business networks, this issue will be a critical area to improve upon.

All the right words were spoken, and the strategic vision appears sound. As always, the devil will be in the details, and those details will be laid out in the ensuing weeks and months around one of the most important acquisitions in IBM’s — and the industry’s — history.

Authors: Senior Analyst Cassandra Mooshian ([email protected]) and Senior Strategy Consultant & Principal Analyst Geoff Woollacott ([email protected])

Will algorithm patents replace economies of scale as the most critical barrier to entry?

Manufacturing scale matters less as we pivot to a knowledge economy

Economies of scale as a barrier to entry have been a fundamental precept taught for years in economics classes worldwide. Capital had to be invested ahead of being able to create value, and then people could be hired to staff the capital equipment to produce goods. Having both capital assets and existing volume gave companies a distinct competitive advantage. It drove both vertically integrated companies as well as horizontal holding company models, with the latter made famous by Jack Welch’s oversight of U.S. blue chip company General Electric.

Technology today has greatly reduced scale as a competitive advantage. Virtualization and abstraction have led to business theorists talking increasingly about asset-lite business models and asymmetric competition. Clouding this pivot is the emerging discussion around consumer scale. This is a competitive edge gained not necessarily from capital scale, but by capturing consumer brand loyalty that generates the scale. This concept is often discussed as the “force multiplier” or the network effect of the ecosystem. It is giving rise to additional new terminology, such as multi-enterprise business networks, in which partnering and the joining of complementary assets enable all participants to benefit from the aggregation of intellectual property, which is fed to the entire ecosystem of loyal customers.

Humans have the big ideas; curating those ideas into scalable advantage requires technical skills, automation and patent protection

When consumer loyalty generates cash, that cash can be deployed to fund projects, such as small-scale, smaller-dollar-volume projects akin to becoming an internal venture capital (VC) arm for any future product and service innovations. This concept manifests itself in the notion of fast failure and rapid iterations that are anathema to scaled manufacturing best practices. Being successful requires having people who are insightful about what businesses or consumers want and how to turn those wants into an automated piece of software — in short, algorithms.

As virtualization and software abstraction move the economy ever closer to utility computing, first discussed in the late 1980s by technology futurists, and as quantum nears economic advantage, the mission-critical business competency will be writing algorithms to apply against the ubiquitous data traffic being generated and stored throughout the computing utility network. Faster compute leads to faster exploration and discovery. Faster discovery leads to shorter product and service cycles and therefore shorter competitive advantage windows.

As such, algorithms that generate these new insights will increasingly become the way enterprises generate wealth, as well-skilled individuals push the limits of conventional wisdom and then deliver these new insights. Preserving that ever-shortening advantage will come from increased vigilance in protecting intellectual property. Thinking and creativity provide the advantage. We hear time and again at analyst conferences about how skills are in short supply and how people are a firm’s greatest asset. TBR expects to hear more frequently about the patent protections around these automated ideas.

Clean blockchain data fed to quantum will accelerate the value of algorithm patents

Accurate data will be available in real time for these algorithms to run against to generate real-time decision-making guidance. As automation removes more and more human toil from the economy, only individuals at the point of creation or the point of consumption will be critical to the business, with the algorithms mining the consumer demand to test against the next big idea to come from well-skilled humans and converted into competitive advantage through an automated algorithm run against real-time, accurate data.

As explored further in TBR’s Quantum Computing Market Landscape, in the quantum computing realm, where insights and actions can be obtained exponentially faster, the IP advantage is also exponentially greater. Think of the traveling salesman example that comes up regularly in quantum conversations: If a delivery company can patent an algorithm that speeds up delivery rounds and makes deliveries more efficient overall, that could swiftly create extinction events in the delivery market. If we extrapolate this, emerging technology has the potential to fundamentally alter competitive landscapes by generating faster and more accurate insights.

TBR analysts will be attending the Quantum.Tech conference Sept. 10-11 in Boston. Please contact your account executive to coordinate a conversation with TBR analysts at the event.

HCLT improves position in DMS with portfolio investments, but must leverage its niche expertise to capitalize

Digital marketing services provide HCLT with an entry point for transformation opportunities

As clients look to transform CX and pursue omnichannel projects using technology solutions, the DMS space provides growth opportunities for vendors that can generate engagements by bridging together CX offerings with digital platforms to drive clients’ marketing campaigns. Bringing data to the center of the engagement, collected from sources throughout clients’ organizations and combined with analytics, will lead to future initiatives for both the client and vendor.

While HCLT has traditionally avoided large-scale investments around its DMS portfolio, the company has recognized demand for services and growth opportunities within the DMS space, which we believe guided the company’s March 2019 launch of a digital marketing platform, HCL ADvantage Experience. Based in Adobe Experience Cloud, the platform works with multiple marketing sources to collect and store customer data that supports clients’ user experience and enables HCLT to quickly scale clients’ marketing campaigns, including compatibility with legacy systems, through improved user integration on a DevOps framework. The platform will support HCLT’s position to capture application services opportunities, but the company will face pressure from other vendors that have developed similar platforms, limiting its ability to differentiate and compete for growth opportunities outside of existing clients.

Where HCLT’s partnership with Adobe does not necessarily provide an enhanced position for a vertical play, integrating HCLT’s engineering and R&D services capabilities and legacy data from its manufacturing and automotive expertise would enable HCLT to leverage a vertical strategy and better connect with vertical industry clients as well as begin to create separation from competitors.

Additionally, HCLT used its April 2019 acquisition of Strong-Bridge Envision, a U.S.-based digital consultancy, to expand the strength of its Mode 2 services and solutions to support business outcomes for clients through data insights. Strong-Bridge Envision joined HCLT’s Digital & Analytics portfolio, which bolsters HCLT’s position within the DMS space in the U.S. and supplements existing offerings, allowing HCLT to pursue consulting-led engagements with more specialized expertise on digital strategy, business transformation, CX and organizational change management. We expect HCLT will look to expand wallet share and mindshare from existing clients as well as generate consulting-led opportunities, but may face challenges in gaining permission around C-Suite-level conversations. Focusing on its mature verticals, such as financial services, technology and services, and manufacturing, which collectively contributed 57.3% of total revenue for HCLT in 1Q19, may be an easier path for the company to follow as it holds stronger client relationships and market share. While HCLT is able to pursue opportunities within other verticals, we believe financial services, technology and services, and manufacturing serve as a starting point from which HCLT can begin to build its brand around DMS and DT-related consulting before expanding into other areas.

TBR estimates 30% of total global CSP spend (capex and external opex) will be on or related to NFV/SDN in 2023

5G will push CSPs to accelerate and broaden their NFV/SDN initiatives

According to Technology Business Research, Inc.’s (TBR) latest NFV/SDN Telecom Market Forecast, covering 2018 to 2023, 5G will push CSPs to adopt a new network architecture and both NFV and SDN will be critical aspects of that architecture going forward. As such, TBR expects NFV/SDN-related spend growth will correlate with 5G deployments. Since CSPs will need to upgrade their networks from an end-to-end perspective to realize the full potential of 5G, this will naturally drive CSPs toward the virtualization and cloudification of their networks. This trend will impact most, if not all, of the major network domains from an NFV/SDN perspective over the next five years. TBR notes that 5G core is inherently virtualized and that this will also naturally push CSPs deeper into the NFV/SDN space over the next five years as they transition to a stand-alone 5G network.

Rakuten’s legitimization of vRAN will also drive NFV/SDN market growth

Though significant skepticism remains in the industry that Rakuten will be able to make the vRAN model work, should this scenario occur, TBR believes it would embolden CSPs to double down on their own NFV/SDN initiatives, especially as it relates to vRAN. RAN is one of the costliest domains in the construction of a network, and it is a key area CSPs will be keen to virtualize to reap cost savings.

White-box adoption will proliferate, portending significant OEM disruption

TBR expects the use of white-box hardware in NFV/SDN environments will proliferate through the forecast period, accounting for 60% of NFV/SDN hardware spend in 2023, up from 15% in 2018. This industry shift toward white-box hardware will significantly disrupt incumbent OEMs’ business models, prompting them to evolve into software-centric companies. Industry organizations such as the Open Compute Project (OCP) and initiatives spearheaded by leading CSPs such as AT&T will fuel the rapid uptake of white boxes during the forecast period.

IoT and quantum emerge as new growth frontiers in IT services

Data is exploding, and vendors are preparing to accommodate this trend by effectively managing, storing, securing and analyzing data and by driving business results through next-generation solutions. During Atos’ Technology Days, held May 16-17 in Paris, Atos CEO Thierry Breton stated that while 80% of data is currently stored in data centers and in the cloud, that percentage is forecast to shrink to 20% by 2025 as clients seek ways to analyze data in real time at the edge, where it is created. Pioneering emerging technology development, such as IoT, edge computing and quantum computing, enables vendors to expand their addressable market and cross-sell and upsell their services offerings.

While traditional IT services remain key revenue contributors for many of the 29 IT services vendors that TBR covers in its IT Services Vendor Benchmark, portfolio innovations create new areas of growth. Gaining a first-mover advantage in emerging segments enables vendors to attract clients with practical use cases for new technologies across industries.

Technology partnerships and acquisitions enable vendors to expand IoT portfolios and capture new areas of growth during 2019

While IoT solutions will often span several services, they are usually confined to one vertical, guiding vendors’ IoT-led partnerships and portfolio development. IoT intrinsically cuts across both vendor and customer categories, transforming and connecting business operations. Vendors expand their portfolios to guide customers on how to implement and manage IoT solutions. However, some vendors lack portfolio depth around critical IoT capabilities, such as operational technology (OT), and predictive analytics and data management, that allow customers to proactively manage equipment and reduce costs associated with downtime. To fill these portfolio gaps, we expect vendors to forge relationships and make acquisitions that support development of vertical-oriented IoT solutions.

Examples of Vendors’ Recent Activities

Fujitsu partnered with Coast Research Engineering Co. to develop an IoT solution for aquaculture and marine clients. The solution will monitor water quality and temperature from aquamarine tanks to support aquaculture. Fujitsu RunMyProcess partnered with IoT.nxt to improve data collection and analytics within Fujitsu’s high-productivity application PaaS (hpaPaaS) and to automate operational processes. The partnership will improve Fujitsu’s ability to collect and analyze data from various devices and sensors by standardizing and filtering data.

Wipro announced the opening of its third Industrial IoT (IIoT) center of excellence in March in Kochi, India. Wipro is using the centers, which are also located in California and Bangalore, India, to develop proofs of concept and market-ready solutions for IIoT customers. Further, Wipro has been leveraging the centers to attract local talent from universities through various initiatives such as hackathons.

The acquisition of Altran announced on June 24 expands Capgemini’s engineering and R&D services capabilities and complements the company’s established consulting and IT capabilities. Capgemini is positioning as an “intelligent industry” vendor that can provide solutions around Engineering 4.0 and Industry 4.0. and expand in smart technology-driven segments such as IoT, AI, 5G, cloud, edge, data and cybersecurity. The key for this transaction is that while Capgemini has well-established IT expertise as well as digital transformation and design and innovation consulting capabilities in Capgemini Invent, the company gains Altran’s OT capabilities, a competence that was not developed for Capgemini but is a key component in IoT models. TBR notes that Capgemini is catching up with some of its peers in IoT. For example, Capgemini’s direct competitor Atos already has a history in OT as a result of its acquisition of Siemens’ IT Solutions and Services business and its global strategic alliance with Siemens AG has given it a head start in IoT; Atos has increased its investment in current joint efforts with Siemens in IoT. In February Capgemini partnered with Idemia, a provider of AR solutions, to develop an IoT device management platform that strengthens security and connectivity of devices and data. The platform will be based on Capgemini’s IoT device management platform, X-IoT, which securely connects and manages gateways and protocols to the cloud, and on Idemia’s M-Trust solution.

Vendors are competing to gain a first-mover advantage in the early commercial stages of quantum computing to diversify revenues

Quantum technologies remain in the nascent stage, with vendors increasing R&D practices to develop technologies such as computing. IBM has the technology expertise to accelerate commercial use of quantum computing as its investments date back to 2016. However, competitors such as Atos and Accenture are picking up speed. A key inhibitor to quantum computing adoption will be the impracticality of having the hardware on premises due to the very specific environmental conditions needed to function properly, creating opportunities for vendors to help customers take advantage of quantum computing without negatively impacting hardware sales.

Examples of Vendors’ Recent Activities

IBM released an integrated quantum computing system for scientific and commercial use. IBM Q System One tackles complex problems that are challenging for classical systems to handle while enabling quantum computers to operate beyond research labs. In 2019 IBM is opening its first IBM Q Quantum Computation Center for commercial clients in Poughkeepsie, N.Y., expanding the IBM Q Network commercial quantum computing program, which already includes systems at the Thomas J. Watson Research Center in Yorktown, N.Y. The center will enable IBM to work with a community of enterprises, startups, academic institutions and research labs to advance quantum computing and explore practical applications for business and science.

Accenture Labs, three of which contain dedicated quantum computing R&D practices, engage in projects that have customer sponsors to solve real-world business or economic problems. Accenture maintains nine quantum computing offerings and has identified 150 use cases across its Operating Groups, the most prominent being pharmaceutical vendor Biogen.

Atos also continues to enhance its quantum computing capabilities. As TBR wrote in its May 2019 Digital Transformation Insights Report: Emerging Technology, which focused on quantum, “Atos took its strengths in design computing for appliances and programming and emulation environments and announced several quantum research initiatives, including the opening of a global R&D lab in Yvelines, France, and Atos QLM [Quantum Learning Machine] implementations in Europe and the U.S. to enable clients to experiment with disruptive technologies, tackle the explosion of data and accelerate the number of practical use cases across industries. Additionally, about a year ago, Atos developed a consulting practice around quantum computing to educate and advise clients on whether it is possible to use quantum to accelerate business applications. During Atos Technology Days 2019, Atos announced myQLM, a light version of a QLM, which is an on-premises environment designed for quantum software developers. Users can download myQLM on their desktops and use a set of algorithms to train at home or at a university and simulate the actual QLM. A Phyton-based language, QLM allows students and researchers to develop and share code within the community, creating additional entry points for Atos’ broader services portfolio. With customers ranging from universities and research centers to high-performing computer ecosystems and commercial clients, Atos … is building one use case at a time. For France-based oil and gas company Total, Atos is using a QLM simulator to accelerate the analysis of seismic activities, helping Total stay ahead of competitors. Atos is also working with Bayer and RWTH Aachen University in Germany to evaluate the use of quantum computing to research and analyze human disease patterns.”