Download - CDMelb2015: Cisco

Scott PuopoloVP, Service Provider Transformation GroupOctober 13, 2015

Transformation Through Innovation

2© 2015 Cisco and/or its affiliates. All rights reserved. Cisco Confidential

Who Will Get Left Behind?Current Situation: Slow Growth

OTT Players Gaining Scale and Challenging SPs

Global Market Cap Trends: Value Shift Underway

50% 47% 42% 38% 36%

5% 5% 6% 6% 6%

8% 9% 10% 11% 10%

37% 40% 43% 45% 48%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015

Telco Cable/DTH Trad. Media Web/Digital Media

Source: Web Operation Quarterly Update, Patrick Morrissey

Value Capture from Growth is Not Happening

2010 2011 2012 2013 20140

50

100

150

200

250

300

350

Customer

Cloud

PlatformEcosystem

Data

Dollars

Fight to Own/

Control1B Android + 50B

Apps download from Google Play in last

year + 1B YouTube + 1B Chrome + 1B

Web + 900M Gmail users

$1.8B AWS revenues in Q2’15

285M+ customer accounts

1B+ iOS devices shipped

Over 1.5B Windows + 1.2B Office + 70M Xbox + 300M Skype + 900M Web users + 700K Windows Apps

Source: Web Operation Quarterly Update, Patrick Morrissey

Total Market Cap

Market Cap Trends for Telco, Cable/DTH,

Traditional Media and Web/Digital Media

Note: Data for 66 Publicly Traded GSP AccountsMarket Cap as of 1st January of the year Note: Revenue and EBITDA based on CY14; market capitalization based on 1st Jan 2015.

50% 47% 42% 38% 36%

5% 5% 6% 6% 6%

8% 9% 10% 11% 10%

37% 40% 43% 45% 48%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015

Telco Cable/DTH Trad. Media Web/Digital Media

2,385B 2,402B 2,766B 3,535B 3,880BSP Profitability versus Internet Traffic Growth, 2010–2014

Source: Cisco Analysis of S&P Capital IQ. Revenue and EBITDA data is based on figures from GSP’s 70 Transformational Service Providers from around the world, and on the Cisco Visual Networking Index, 2013-2018; EBITDA to Price Ratio shows average for 58 Transformational Accounts for which data is available

ValueOpportunity

Source: Capital IQ, Cisco Visual Networking Index

2010 2011 2012 2013 20140

50

100

150

200

250

300

350

Total Internet traffic evolution Revenue EBITDA

Gro

wth

Inde

x (2

010=

100)

Category CAGRTraffic 31%

Revenue 6%EBITDA 3%


Bottom-Line: The Integrated Telco Business Model is Broken

Connectivity (access/bit transport) Services

Entry Barriers

Investment

Metrics

Market Speed

SP Role

Higher

Longer-term, higher volume, lower risk

Unit cost

Years/Decades

Incumbency, very few players

Lower

Shorter-term, lower volume, higher risk

Time-to-market and agility

Weeks/Months

Play as one of many contenders

• Ubiquitous, seamless connectivity• Lean, utility-type production• Build scale• Differentiate via speed/QoS,

price, service• Smart service enablement• Manage disruption

• All-in service ecosystems• Time-to-market and agility • Highly scalable cost structures• Customer ownership• Information & data

ownership/managementKey Success Factors


There are Several Key Market Transitions and Leverage Points at SPs Disposal

The Potential of Dataand Analytics

Network and Operations Transformation Internet of Everything Profitability and Growth

of Digital Media

Pervasive Mobility Cloud and New Business Models SP Services Evolution


Network and Operations Transformation


“ProFiT” Perspective Focuses on Service Providers’ Opex Efficiency – Lean and Agile


1 New Technology Architecture (Network and IT)

2 New Business Architecture(Operating Model, Processes)

3 Insertion & Migration Strategy

4 Financials (Capex & Opex efficiency, and funding methods)

5 Value Generation: Services, Business Models, Agility/TTM

Improves OpexEfficiency

T

duction tness ransformationFiPro


• Mature Technology• Investments are directly

linked to revenue• Mergers and Acquisitions

Cloud

NFVSDN

Hypervisor Technology

Cloud bursting

Spend is not directly linked to revenue

Service AgilityOperational Flexibility

Cost Optimization

Poweringthe Internet of Everything

• Rapidly maturing technology

• Infrastructure Cost Savings are clear

Transforming Network Architectures &

Operations

• Slowly maturing technology

• Uncertain business benefits

Abstracting for Better App & Network

Interaction

“Software-Controlled” Architectures Will Evolve in SP and Enterprise Networks


Guiding Principle: Operational Modularity with Agile Business Architecture (ABA)

After: Shared resource

Service Suppliers

Before: Siloed

Technology Domains

Current

Customer BU

Service Orchestration

Fulfillment

Assurance

Design & Plan

Build


Verizon Adopts Cisco's iWAN SD-WAN SuiteThis is Verizon's "first step in our overall move into the SDN world," - Shawn Hakl, Vice President of Enterprise Networking and Innovation

AT&T and Cisco Advance AT&T’s Network on Demand Platform“We’re working with Cisco to bring the next-generation network technology benefits to our customers. Their extensive SDN and NFV capabilities will broaden and enhance our Network on Demand platform,” - Ralph de la Vega, president and CEO, AT&T Mobile and Business Solutions.

DT Terastream Deploys Agile Business Architectures for Pan-European Service Production

• Highly simplified, virtualized, IP-based production architecture• Integrated production• One common product development logic

SPs Have Already Started to Transform

Real-time OSS, ABA Virtualized CPEDomain 2.0

Terastream NfVIP+Optical

Real-time OSSACIManaged Business

Services

Unified MPLS Security aaSEnterprise (NFV)

Distributed peering

All IP IP+OpticalUnica

Cloud based Video

Domain 2.0

Terastream NfVIP+Optical

Real-time OSS

Managed Business Services


Cloud and New Business Models


What Are Customers’ Looking For?

Add-on Services from

the Same Provider

70%Agility and Reduced

Cycle times

42% Would Switch

to Another Service

Provider if current is not able to deliver

on vMS

54%Bundled Services

82%



Virtualization Provides a Catalyst to Revitalize Business Services Growth and Profitability

CustomerPremises

PE

PENSI

ClassicCPE

Virtualized CPE

• High Cost• Professional

Install• App. Specific• Rigid Policies

• Low cost• Customer Self

Serv./ Install• Appl. Agnostic

• Configurable policies

• Pervasive Automation

• Service Chaining

Comparison of Classic CPE vs Virtual CPE Sources of New Value Creation

4. New Customer Segments

1. Opex. Cost Transformation

2. Customer Wallet Share

3. Services Velocity

Service Provider


Revenue Upside of Virtualized Business Services

$ 454 MillionTotal 1-5 Year Revenue

Present Value for5 Years Revenue

5 Year and Year 6-10 Residuals Revenue

Residual Revenuefor Years 6-102015 2016 2017 2018 2019

5 Year Revenue Breakdown

* Does not Include Revenue from Sale of Device; Assumes US SP with 250,000 installed managed router base and 30% geographical in access footprint

*

1 2 3 4 5$0

$20,000,000 $40,000,000 $60,000,000 $80,000,000

$100,000,000 $120,000,000 $140,000,000 $160,000,000 $180,000,000 $200,000,000

Higher Wan ManagementCross-Sell Vservices on Installed Base virtualized endpointsCross-Sell VServices on new SMB endpoints4G / LTE ImpactVPN Cross Sell to new SMB end pointsVservices on physical, managed endpoints in installed base

$ 312 Million

$ 1,464 Million

$ 672 MillionResidual PresentValue for Years 6-10


Potential Gross Margin ImpactKey Assumptions • CSR / virtualization impacts

Fulfillment, Assurance and Maintenance

• Impact to sales operations are excluded as they do not flow to cost of services; hence sales opex savings are not included

• Due to evolution of CSR pricing, the CSR and ISR prices are comparable

• SP Price for ISR and CSR assumed unchanged

32% increase in overall Gross Margin

ISR Increase - Fulfillment

Increase - Assurance

Increase - Maintenance

Total 0%

10%

20%

30%

40%

50%

60%

41%

9%3% 2% 55%


New Business and Financing Models to

Reduce Financial and Execution Risk

Are you Moving in the Right Direction?5 Key Considerations

Seek Cloud Based Management Models

for Process Automation

Take the SDN/NFV Leap Now

Smart Network Management

Cloud Delivery Model of New

Services


Virtualized Managed Services Leads to Significant Impact on Revenues and Labor Efficiencies

4%

29%

26%

20%

12%

8%

Sales Labor Efficiency

Fulfillment Labor Efficiency

TTR Labor Efficiency

Maintenance Labor Efficiency

Sales Cycle Compression

Fulfillment Cycle Compression

For the SPs, Virtual Managed Services Drives Strong Labor Efficiencies (OPEX Reduction)

1%14%

56%

28%

Wan Mgmt Attach Rate to Base

X-Sell Adv. Services to Base

New Down-Market Customers (Managed)

X-Sell New Down Market Cus-tomers

Overall Managed CPE

Revenue Impact of 15% - 20%

Relative Operational Benefit(Based on 10 year NPV)

Relative Revenue Benefits(Based on 10 Year NPV)

Penetrating Down Market Segments is Key to Revenue Growth

Overall Impact of 60% - 70%


DT Terastream Deploys Agile Business Architectures for Pan-European Service Production*

*Source: DT Capital Markets Presentation, Feb. 2015

BUSINESS ARCHITECTURE EXPECTED OUTCOMES


Commercial and Below: Prefer to Buy Bundled Solutions

Currently Purchase as Bundle

Interested, but Do not Currently

Not Interested

0% 10% 20% 30% 40% 50%

40%

42%

18%

Interest in Network, Managed CPE and Cloud Bundle

• Overall strong interest in the mid sized/commercial segments with drop off in the smallest and largest businesses

• Strongest currently purchase in 1000-1999 segment with 60%

• Strongest unmet interest within 250-499 segment with 53%

• Performance and reliability drive bundle preference

Source: Cisco Global SP, August 2014 N = 601


Commercial and Below: Strong Ability to Drive Advanced Services Cross Sell

0% 20% 40% 60% 80% 100%

Significantly More Likely Somewhat More LikelyNo DifferenceSomewhat LessSignificantly Less

Likelihood to Buy Advanced Services (WiFi, Security etc.)

70% More Likely


• Strongest increase in attachment in middle markets with 2000- 4999 emp. segment at 83%

• Network SP is choice of providers for Advanced Services

• Security Firewall- 39%

• Managed WiFi – 43%


Commercial and Below: Strong Concept Interest and Willingness to Adopt Virtual CPE

Source: Cisco Global SP, August 2014

0% 20%

40%

60%

80%

100%

26% 53%Very Somewhat Not Very Not At AllDon’t Know

Level of Interest in VCPE Concept

N = 601

79% Interest Level

0% 20%

40%

60%

80%

100%

14% 44% 23%

How Fast Will You Adopt Vir-tual CPE Immediately

< 1 Year1-3 Years> 3 YearsNever

• Strongest interest throughout middle markets (250-5000) with 1000-1999 emp. highest interest at 89%

• Network SP most likely provider at 43%, VAR second at 23%

• Increasing rate of adoption up to 5000 emp., with major drop off above 5000 emp.

• Security and reliability largest barriers across all customer size segments

59% Within First Year


Commercial and Below: Reduced Cycled Time Driven by Automation and Self Service are the Most Critical


Faster Provisioning

Reduced Site Activities for Customer

Try and Buy

Faster Deployment of Upgrades

Reduced Capex

0% 10% 20% 30% 40%

31%43%

31%37%

23%28%

13%26%

10%

Perceived Value of VCPE Benefits

• Agility and overall reduction in cycle time more important than potential of lower Capex

• 54% of the businesses would be willing to self install any VCPE end-point at site


Commercial and Below: VCPE Critical for Retention

0% 20% 40% 60% 80% 100%

Significantly More LoyalSomewhat More LoyalNo Difference

VCPE Offer Impact on Customer Loyalty

62% More Loyal


0% 50% 100%

Very Likely Somewhat Likely

No Impact Somewhat Un-likley

Very Unlikely

Churn Potential if You Do not Offer VCPE

54% Vulnerable to Churn