Wealth Shift: SD-WAN and the Business of Network Transformation

By Travis Keller, Partner, M/C Partners

Enterprise IT managers have a problem — a big, hairy, growing problem that also has scary ramifications for telecom operators. Network traffic has changed with cloud, remote work, mobile, and IoT, but network design hasn’t.

Today, enterprises spend $50 billion annually on dated MPLS networks that were designed to solve a 2000-era network challenge of linking branches to headquarters. That is no longer the modern network objective: now we care more about the performance of Zoom while riding the train than we do accessing a corporate IT closet.

Somehow, MPLS has remained the bedrock of most enterprise networks in spite of proven new technologies, SD-WAN among them, that have emerged to support the new network demands of multi-cloud and edge networking. That hegemony, however, is starting to crack. As SD-WAN gains traction and the MPLS market begins to crumble, telecom operators face a multi-billion-dollar decision: hang on to protect revenue, or embrace change?

A Tectonic Shift Is Coming, at a Price

A dirty little secret in the world of network transformation — a necessary architectural underpinning of digital transformation at scale — is that traditional carriers, those who own, implement, and earn recurring revenue from MPLS networks, stand to lose more than $20 billion in the shift to SD-WAN. That’s because SD-WAN can tap into lower-cost broadband circuits (often from competitive cable operators), currently averaging less than $200 per connection compared to the $400-plus cost of their legacy counterpart.

Such revenue losses would be catastrophic for carriers and their multi-billion-dollar market caps, so carriers are doing, of course, what any leader quietly making a fortune on an outdated legacy solution would do — keeping quiet about it, if not obstructing it outright.

Not to say that traditional carriers can’t or won’t play a role in SD-WAN adoption. They just aren’t showing an active interest in accelerating it.

But many others are. Since 2017, there have been four mega-acquisitions of SD-WAN providers by blue-chip tech firms: VMware’s purchase of VeloCloud Networks; Cisco’s of Viptela; Palo Alto Networks’ of CloudGenix; and HPE’s of Silver Peak Systems — with the latter two occurring just a short time ago in 2020. These investments have sent a clear signal that SD-WAN is the wave of the future.

But what about the present? While carriers aren’t leading the charge to help their enterprise customers transition to SD-WAN, in all fairness, enterprises themselves haven’t exactly pushed the agenda.

That’s because SD-WAN is not without risk and complexity. What’s interesting here is that the risk isn’t technological. SD-WANs work beautifully and can deliver a host of network and application performance gains, resiliency improvements, and cost reductions.

What’s really keeping SD-WAN from reaching critical mass in the enterprise is a question of ownership: who is going to manage the new network from inception through deployment and ongoing use?

While MPLS has its flaws, creating management headaches for the enterprise isn’t one of them. In fact, MPLS is a classic “set and forget” solution, with carriers tending to them as needed behind the scenes.

And The Winner Is…

These same carriers can fill the SD-WAN management void if they so choose, but that would come at a cost to the enterprise. Not just in dollars, but in choice.

Essential to SD-WAN’s elegance is its flexibility. SD-WAN is connectivity-agnostic and can work with broadband, 5G, copper, and cable, and with it a heterogenous mix of providers. That flexibility to mix and match connectivity options, optimizing for cost, convenience, and service levels, is not in the carriers’ wheelhouse or interest. Network delivered by a carrier aims to send all traffic to and through that carrier’s network. Period. That’s how carriers drive high margins.

So, if not the carriers, who will lead the SD-WAN enterprise charge? Perhaps it will be the enterprise itself. But let’s look at that more closely. Is designing, procuring, deploying, and managing wide-area networks across branches really a core function of enterprise IT departments?

The answer is no. Could it be? Maybe…, but don’t bet on it. The enterprise has already voted with its feet, and its monthly subscriptions, on an outsourced services model across the technology stack. Consider enterprises rapid move towards third party IT support, cloud consultants, security service providers — the list goes on. If the function is not strategic, most will outsource.

The real opportunity then is for the SD-WAN providers themselves, and with them a new breed of specialized network managed service provider, to fill the void. To date, the SD-WAN providers have focused more on hardware and software innovation than on implementation and management — and that’s probably a good thing.

Gathering the networking expertise and packaging it to help enterprise customers quickly convert to SD-WAN stands to be a multi-billion-dollar opportunity. Many firms are emerging to take the lead in this nascent market. They are showing skill and promise, though none have scale — yet. Smart money says that won’t stop them.

With $20 billion in cost-cutting as the carrot and the dynamic performance needs of distributed cloud networks as the stick, the enterprise’s embrace of SD-WAN is not a question of if, but when. The time is right for specialized managed service providers to make that embrace easier, faster, and more passionate.

About the Author
Travis Keller joined M/C Partners as a partner in 2019 and helps to identify overarching investment themes for the firm. He currently serves on the Board of Denovo and QOS Networks. Travis brings more than 15 years of investment and operations experience in communications and technology services, having previously worked as a director at Altman Solon, a TMT-focused strategy consulting and investment advisory firm. Travis has worked on hundreds of deals related to emerging technologies, cloud services, telecom and managed services markets. Travis received an A.B. in Economics and Environmental Studies from Dartmouth College.

SD WAN image sources from: https://en.wikipedia.org/wiki/SD-WAN#/media/File:Sdwan.png