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Why AT&T’s SDN Strategy Could Hurt Cisco

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AT&T and Verizon are looking to implement SDN strategy

Telecom providers such as AT&T (T) and Verizon (VZ) provide big business to networking players such as Cisco (CSCO) and Juniper Networks (JNPR). Cisco provides these telecom providers with switches and router products, which are the company’s bread and butter. Cisco earns about 60% of its revenues from switches and routers alone.

However, lately, both AT&T and Verizon have started to plan to replace proprietary networking solutions from Cisco and Juniper with software-defined network (or SDN) solutions provided by cheaper white-box companies. We discussed SDN in Part 3 of this series. Implementing an SDN strategy for white-box solutions will not only provide AT&T and Verizon with cost savings but also the flexibility to get their networks customized for their needs. AT&T has named this project “Domain 2.0.”

Verizon, on the other hand, could be aggressively working to implement SDN on white-box platforms, according to a report from The Rayno Report. The report also mentions that white-box vendors Cumulus and Pica8 could be supplying Verizon.

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AT&T and Verizon are looking to cut their capital expenditure in 2015

AT&T and Verizon are clearly looking to cut their capital expenditures by planning to implement the SDN strategy. During the announcement of AT&T’s 4Q14 earnings, the company mentioned that it’s expecting its capital expenditures to decline from $21.4 billion in 2014 to $18.0 in 2015. Similarly, Verizon expects its capex to be between $17 billion and $18 billion in 2015, compared to $17.2 billion in 2014, as the chart above shows.

To gain diversified exposure to Cisco, you can invest in the Technology SPDR (XLK). XLK invests 3.6% of its holdings in Cisco.

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