One of the most frustrating experiences as a full-time investor is putting in all the research, coming up with defensible conclusions about where to allocate capital, placing the bet and then .... waiting. And waiting. And waiting.
I'm currently laser focused on the Telecom 2.0 market, or generally the movement of Communication Service Providers (CSPs) to a distributed datacenter approach, a pay-as-you-go model for real-time provisioning of services.
This new paradigm for delivering networking services -- or Cloud Networking -- requires a new approach to CSPs network architectures. Namely, CSPs target approach is NFV, or Network Functions Virtualization.
Based on my research, it appears like CSPs are more likely to choose small, innovative players who embrace an open network, or a multi-vendor environment, that avoids vendor lock-in for CSPs. This naturally shifts bargaining power back to CSPs from incumbent vendors such as Cisco, Hewlett-Packard Enterprises, Dell, Netscout, etc., who build expensive, purpose-built boxes.
While new deals for NFV software and commodity hardware seem few and far between, two small vendors who have started to make inroads at major Tier-1 CSPs are RADCOM (NASDAQ: RDCM) and Radisys (NASDAQ: RSYS), both discussed at length on the blog.
There have been a number of clues that CSPs are ready to move forward with NFV investment initiatives, but they historically move at a glacial pace. This seems to be improving with an agile, DevOps approach in the industry.
To that end, December is always in interesting month in the telecom market. Budgets typically open up for the next year's investment cycle, and new deals are awarded. Last year, RADCOM closed a $50 million multi-year NFV service assurance deal with AT&T while Radisys landed Verizon for its new DCEngine line, leading to $70 million in orders being fulfilled in 2016.
My hope and expectation is that CSPs follow through with their plans to break-up the vendor lock-in by finally opening up their wallets and picking the winners and losers in the NFV space. Waiting another year seems like a foolish thing to do given the competitive threats from webscale players like Google, Amazon and Microsoft. By starting to make investment decisions, I also believe that CSPs can help coordinate the industry and proliferate innovation as industry players will see that actual contract value is at-risk.
Moreover, the value proposition that RADCOM and Radisys bring to the table are too enticing to pass up: AT&T reported that it is getting more than 30% capex and opex savings from using RADCOM's virtual probes, while Verizon is paying around $300k(ish) per white box compared to $700k(ish) from incumbent vendors. While I understand that there is a certain human element of just continuing to go with what you know and legacy players are likely aggressively cutting prices to retain customers and give another shot on goal for NFV next year, I think both RADCOM and Radisys are both viewed favorably by the industry in terms of technology and embracing the cloud-native VNF world.
The time is now. Let's see some deals.
Disclosure: I own RDCM shares.