Measuring The Economic Benefits for Virtualized CPE

Measuring The Economic Benefits for Virtualized CPE Cisco Evolved Programmable Network Greg Smith, Senior Marketing Manager, Service Provider Marketing Chris Osika, Senior Director, Service Provider Transformation Group April 1, 2014

Discontinuity #1: TDM rigidity limits new services, forces architectural shift Discontinuity #2: Commoditization of IP services plus high traffic growth limits profitability, forces architectural shift IP NGN Era Evolved Programmable Network (EPN) Era Open APIs Open APIs Services Applications and Services Resources Evolved Services Platform SDN Control TDM Era Evolved Programmable Network Infrastructure Frame Relay ISDN QAM Network Function Virtualization, Software Defined Networking, and Service Orchestration enable - Open and Dynamic DS0, DS1, DS3 Muxs PSTN ATM X.25 SMDS IP unleashes new wave of innovation and service revenues - Optimal resource utilization - Accelerated innovation - New services & revenues - Reduced costs - Reduced complexity 2014 Cisco and/or its affiliates. All rights reserved. 2

An Innovative Architecture for Carrier Networks Cisco Evolved Programmable Network (EPN).. A Natural Evolution of IP NGN Next Phase of Networking that adds: 1. Virtualization 2. Programmability and Control 3. IP+Optical Convergence Evolved Programmable Network Open Programmable Virtualized Automated Resilient Secure 2014 Cisco and/or its affiliates. All rights reserved. 4

Virtualization NFV = Transition of network infrastructure services to run on virtualized compute platforms typically x86 Enablers Hypervisor and cloud computing technology Improving x86 h/w performance Optimised packet processing and coding techniques Network industry standardising on Ethernet SDN based orchestration ddos CGN SBC DPI Firewall IPS NAT Virus Scan Value Proposition Reduction in CAPEX and OPEX Shorter innovation cycle DHCP WLC DNS RaaS PCRF SDN Control Portal BRAS Improved service agility NMS Caching CDN WAAS 2014 Cisco and/or its affiliates. All rights reserved. 5

Intelligent, Ultra-Scalable Network Cisco s Open Network Environment vgilan vfirewall vdpi vnat vbng vddos vcpe Network Function Virtualization Network APIs (REST) and Services Catalog Evolved Services Platform (ESP) Orchestration WAN Orchestration WAVE Multi-Layer Control, Service Chaining and Policy Enforcement Controllers, Collectors nlight Cisco nv IP+Optical Virtualized IOS-XR Virtual PE Virtualized Infrastructure Programming and Managing of Virtual Resources onepk, OpenFlow, PCEP, Netconf/YANG, BGP-LS, GMPLS Physical Infrastructure ME Series ASR 903 NCS2000 2014 Cisco and/or its affiliates. All rights reserved. NCS4000 ASR 9000 CRS NCS6000 Programming and Managing of Physical Resources 6

Enterprises Small and Medium Enterprises Need to gain business agility to respond to faster than ever market and competitive dynamics - time to service Shift to virtualized and cloud based business application workloads throughout the enterprise is driving network sophistication and network volumes between/within sites Focus on flexible consumption models to drive utilization and overall cost benefits Growth of cloud adoption-23% CAGR for cloud services 2011-16 More sophisticated network services needs - Increased purchase rates of IP VPN and managed WAN services - Increased focus on security Lack resources to internally manage Pay as you grow consumption 2014 Cisco and/or its affiliates. All rights reserved. 7

US SMB Cloud Market Forecast ($M) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 23% CAGR Remotely Managed IT Services 2011 2012 2013 2014 2015 (Network, PC, PBX, Server, Security, etc.) Hosted Cloud Services (SaaS, IaaS, Paas, VPC) Require remote management and monitoring; SLAs Services differentiable by Network ownership Require a degree of customization Include components of Network, Data Center, IT Usually bundled; mostly sold with access and connectivity Source: Cisco IBSG SMB Service Delivery Survey, 2012; Forrester, IDC, Ovum, Gartner, Mason, AMI, IBSG Analysis; 2014 Cisco and/or its affiliates. All rights reserved. 8

Prefer to Purchase Cloud Services from Current Internet Access Provider Willingness to Switch Internet Access Provider for Better Cloud Support 23% Very likely No, 26% Yes, 74% Sample Size = 761 39% 26% 7% 5% Somewhat likely Neither unlikely nor likely Somewhat unlikely Very unlikely SPs are preferred for Cloud Services, but over 60% will switch access service for better cloud support Source: Cisco Consulting Services, 2013 SMB Service Delivery Survey - Q - Would you prefer to purchase Cloud Services from your current provider of Internet Access Services, or from a different provider? 2014 Cisco and/or its affiliates. All rights reserved. 9

Business services growth has been flat or declining over last 3 to 5 years ( VZ -5.4%, AT&T -2.4% for CY 13) Competition, combined with legacy operational inefficiencies and business models are driving margin compression SPs keen to shift from connectivity to more value added managed and advanced services which offer greater revenue growth potential and margins CPE is an integral component of the solution; however, many SPs face challenges with the business and operating models around selling, servicing and supporting the managed services CPE components Key Question: How can the SP leverage new innovations in virtualization to retool its operating and business models to drive profitability, new customer segment penetration and greater share of wallet 2014 Cisco and/or its affiliates. All rights reserved. 10

Physical Managed Services Virtual Managed Services Managed CPE Physical FW SP Network Physical WaaS Physical VPN NID vfw, vvpn, vwaas, other vnfs Large number CPE = $$$$$ Truck rolls Different versions of HW/SW Problem resolution complex CPE is expensive Services limited by HW and SW on CPE IPV6??? Low cost NID shipped to user plug and play Functions and services in the cloud SW versions consistent and controlled Labor efficiency = reduced OPEX Fast and simple to add new services 2014 Cisco and/or its affiliates. All rights reserved. 11

Simplification Automation Centralization Simplification Automation Centralization What Dramatically simplify a process / activity or functionality Ability to greatly codify the execution of manual tasks through technology Consolidates otherwise distributed resources into a central physical location Why Eliminates unnecessary steps which would otherwise result in incremental OPEX Much faster to implement new service elements Achieves economies of scale and enables central control 2014 Cisco and/or its affiliates. All rights reserved. 12

Cisco Orchestration Software Workflow Catalog Management Virtualized Business Services VNF vfw Resource Orchestration Open Daylight vwaas Enterprise Service Portal vcpe Secure VPN Programmable Network Sources: Gartner, IDC, Cisco VNI 2014 Cisco and/or its affiliates. All rights reserved. 13

Direct TCO Benefits Reduced Direct IT Labor 50-70% Reduced Capex ~100% Reduced Energy ad Real Estate 50-60% MTTR Reduction 40-50% Usage Based Pricing 20% Increase in Utilization Business Productivity 50-70% Reduction In Time to Service Provision/Activation New Feature Availability and Access Overall Network Reliability Flexibility for Service/ Feature Try and Buy Greater Homogeneity of Footprint (Upgrades & Maint.) Potential to Reduce Overall TCO by as Much as 60% 2014 Cisco and/or its affiliates. All rights reserved. 14

Relative Operational Benefit (Based on 10 year NPV) 13% 8% 4% 29% Sales Labor Efficiency Fulfillment Labor Efficiency Overall Impact of 60% - 70% 20% 26% TTR Labor Efficiency Maintenance Labor Efficiency Sales Cycle Compression Fulfillment Cycle Compression 2014 Cisco and/or its affiliates. All rights reserved. 15

Process Name Metric Influenced 1. Sales Labor Efficiency sites/fte rework 2. Fulfillment Labor Efficiency sites/fte rework 3. Trouble to Resolution Labor Efficiency 4. Maintenance Labor Efficiency TT/FTE TT/site OPEX REDUCTION Rationale and Assumptions Customer self service means minimal sales involvement Catalog configures services and pricing and generates electronic sales order automatically CPE burn-in, testing & certification not required Installation truck roll not necessary (customer self-install) Remote service configuration & activation automated (zero-touch provisioning) Standardized h/w simplifies troubleshooting/skills, automates outage resolution, and increases % resolutions at Tier 1 vs. at higher tiers Standardization also results in higher CPE and service stability Cost/site Central blade server farm enables centralized management Automated patches, upgrades, general maintenance Automated performance management of hardware REVENUE ACCELERATION 5. Sales Cycle Compression days/order Customer self service means minimal sales involvement Product catalog configures services and pricing automatically and reduces rework 6. Fulfillment Cycle Compression days/order Flow-through service provisioning eliminates manual workflow and reduces service configuration rework Standardized configurations via automated process 2014 Cisco and/or its affiliates. All rights reserved. 16

Relative Revenue Benefits (Based on 10 Year NPV) 1% 14% 29% 56% Wan Mgmt Attach Rate to Base X-Sell Adv. Services to Base New Down-Market Customers (Managed) X-Sell New Down Market Customers Overall Managed CPE Revenue Impact of 15% - 20% 2014 Cisco and/or its affiliates. All rights reserved. 17

Revenue Lever Metric Influenced Rationale and Assumptions 1. WAN Management Attach rate to installed base 2. Increased up sell of advanced services to installed base 3. New Down-Market customers 4. Increased up sell of advanced services to installed base Quantified in the business model % of end managed points Increased simplicity of vcpe deployment / holistic management at SP DC / lack of complex CPE motivates more customers to adopt SP managed end points rather than DIY or use / 3 rd party vendors % of end points with upsell managed services # of customers in SMB market segments % of new SMB end points with upsell managed services 5. Churn Impact Reduction of current churn rate of customers 6. LTE access impact ARPU of out-of-footprint customers More effective sales processes (e.g. network connectivity and attached services sold at same time) increase services attach rate Capability to order services from a self-service portal, and quick activation / provisioning increases SMBs propensity to order at one point Simplified operational processes, better cost economics and ability to bundle / sell services with network connectivity enhances value for SMBs Greater reach to SMBs out of current footprint simplified installation / deployment, and remote activation More effective sales processes (e.g. network connectivity and attached services sold at same time) increase services attach rate Capability to order services from a self-service portal, and quick activation / provisioning increases SMBs propensity to order at one point Not Included- Potential for further upside Customers with services attached to network have lower tendency to churn by price shopping for connectivity Better customer experience lowers churn Integrated 4G LTE can eliminate need for land line connections; e.g. in smaller branch offices increase ARPU 2014 Cisco and/or its affiliates. All rights reserved. 18

Market strategy Targeted segments pursued, pace of operational retooling and options for new business models Accelerated Refresh- The potential to move faster to refresh the base and capture additional operational economies The Role of Wireless Access The potential of near zero touch offers option for out of wireline footprint options enabled by wireless access Execution Alternative deployment models and the opportunities to reduce the risk of achieving operational benefits Linkage to Cloud Services Options for linking to IaaS and SaaS based services, particularly for SMB 2014 Cisco and/or its affiliates. All rights reserved. 19

Defining Features Senior strategy consultants with practical industry and management expertise Business and technical consulting services Region and industry segments Integrated Services Approach Strategy consulting, business consulting, and execution expertise Strategy insights and implementation expertise Links back to Cisco community to drive business results Linkage to Solutions Global offer teams Execution oriented Client Engagements Strategy through go-to- market Focus on key business problems Thought Leadership Based 2014 Cisco and/or its affiliates. All rights reserved. 20