CAPEX vs. OPEX based business model in networking – thoughts & questions on Cisco’s Anil Menon’s speech

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During my recent visit in India with London Business School, I had the opportunity to listen to one of Cisco’s foremost, Anil Menon, give a dinner speech on the challenges and specificity of running a business (technology business, in this case) in emerging markets.

The speech itself was designed to be more “infotaining” than ground-breaking (one trivia fact I learnt was that there are more mobile phones in use in the world today than toothbrushes – take that 8 out of 10 Cats!), but there was one theme that Mr. Menon touched upon that really made me stop and think. So here goes.

At some point toward the end of his speech Mr. Menon said that he could see a very clear trend in the emerging markets towards an OPEX (as opposed to CAPEX) driven relationships with customers. Because of the way things are traditionally set up in places like India (think family-owned businesses, lightning-fast growth, etc.), people would rather pay for a networking solution on a per-use fee basis than build up a whole internal organisation to purchase and maintain its own network.

And so, for instance, a rural district in India operating a distance learning scheme (which there will be more and more of in years to come, one would hope) could let the networking company set everything up and only pay a fixed fee, say, per completed lesson. Large companies also seem to be heading in that direction.

Personally, I wouldn’t say that this way of doing business is unique to emerging markets. Albeit in a slightly disguised form (of a carrier managed service), it’s present in the developed world as well. In fact, the  pay-as-you-go model has been a growing segment for telecoms service providers for quite a while (an Ovum study carried out back in 2008 projected that the managed service market would be worth USD 66 billion by 2012, with a CAGR of 18%).

What is more interesting about this business model, though, is that it bears an uncanny resemblance to how cloud computing works – where, rather than buying the infrastructure itself, the customer pays exactly for what they use, in the form of a service. Plenty of clever companies have obviously already monetised this model – among them big names such as Salesforce.com, Amazon Web Services, or Citrix – and undoubtedly plenty more will in the future.

One fundamental difference springs to my mind here, however. In cloud computing, the infrastructure actually providing the service – be it compute power, storage, etc. – can easily be shared across multiple customers. This is, in fact, one of the biggest appeals of cloud computing and reasons why it makes business sense to cloud service providers (the story on how a company on average only uses ca. 20% of its IT resources and therefore massively overpays for its infrastructure, when it could be buying it as a service from a cloud vendor, is pretty well spread).

In the carrier managed service model, however, a lot of the physical equipment deployed remains dedicated to a single user – you simply cannot create a networking solution without placing hardware on your customer’s premises. Logically thinking, then, the economics of this approach have to be a bit skewed – as sharing that equipment across multiple users isn’t really possible.

I’ll end on a few questions I don’t really have good answers for (but would be very interested to hear anyone’s thoughts):

• How sustainable is this pay-as-you-go model? Given that the growing fleet of equipment needs to sit on SOMEONE’s balance sheet – aren’t service providers at a loss here, on balance?
• How can/do service providers ensure these OPEX-driven relationships are actually delivered in a profitable way?
• What could the role of networking equipment vendors be here? Maybe the “ownership buck” should indeed be passed on down  in the value chain to them?

Any takers?