Originally published on SmartChimps on July 18, 2016

One of the greatest advantages of network function virtualisation (NFV) and cloud network architectures is the ability for network operators to dynamically scale the capacity of their networks to better mirror demand without having a significant amount of capacity lying dormant, waiting for busy hour spikes in traffic.

With NFV cloud deployments, capacity changes based on need. All of the efficiency offered by elastic demand would disappear if the capacity was licensed in a traditional manner. Therefore, there needs to be licensing and revenue models that reflect this new reality.

For decades networking and communications equipment consisted of physical ‘boxes’ or nodes, often times with physical interfaces or ports that denominated the capacity associated with the equipment.

Capacity was purchased accordingly; service providers would purchase the number of physical connections that they needed based on actual number of customers and fairly reliable call models. With the advent of software defined networking (SDN) and NFV and cloud architectures, capacity is not limited to a specific network node or hardware component.

Looking at the inefficiencies

NFV and post-pay licensing solve a few different inefficiencies. First, the capacity associated with traditional, perpetual licenses is static, while network usage (ie, voice, data, or messaging,) fluctuates over a period of time; network capacity is always somewhat greater than network traffic in order to accommodate unforeseen bursts in traffic or signaling.

It’s the difference between the capacity associated with the static perpetual license capacity and the actual capacity used that creates the inefficiencies, that is, the amount of extra or unused capacity as a result of perpetual licensing.

While this inefficiency has always existed, with the advent of NFV or cloud network functions, which can scale up or down depending on network traffic, this inefficiency can be eliminated. The capacity of the network can change near instantaneously and no longer has to be static, and licensing models must change to reflect this new reality. In this case, post-pay licensing models make the most sense by keeping network capacity and network utilisation in sync thereby eliminating the inefficiencies referenced above.

CAPEX to OPEX

This transition also involves operators who need to shift from a capital spending, budgeting, and depreciation financial planning and modeling to one that relies more on operating expenses.

Operators’ core networks then are no longer wholly a fixed cost, but one where there is a much greater degree of variability. While operators might lose some cost certainty as a result of post-pay licensing plans, there are safeguards that can be built into commercial agreements to control for any usage that might be deemed ‘out of the ordinary.’ These changes also support operators’ gradual shift to ‘devops’ as a network operational model.

Since core network resources are seen less as a fixed cost and more as a variable cost, more business cases become practical due to lower fixed costs and a shorter the payback period. This allows operators to be more experimental in their service offerings.

Vendors have the opportunity to both protect their installed base and to capture new market share by helping current and prospective customers with the transition from perpetual licenses to pay-as-you go over a period of time. These vendors have the opportunity to use new and innovative market models as a differentiator, especially if they can look at it from a long term, multi-year view of the transition and revenue streams.