When Andrew Ward organized a meeting for those affected by Microsoft’s recent telecom layoffs, he anticipated a modest turnout of around 100 attendees. However, the response was overwhelming, with about 350 registrations and over 200 participants on the Zoom call. This significant turnout highlighted the deep concern and far-reaching impact of Microsoft’s strategic pivot in the telecom sector.
Ward, the CEO of Award Consulting, has a rich history with Metaswitch, a network software developer based in the UK, acquired by Microsoft for approximately $270 million in 2020. Following this acquisition, Ward established Award Consulting to offer product and strategic support for Metaswitch’s clientele, particularly local exchange carriers (ILECs and CLECs). These carriers, now facing uncertainty, joined the call to discuss the implications of Microsoft’s decision to withdraw from certain telecom operations.
Microsoft’s Strategic Realignment in Telecom
According to a Business Insider report, Microsoft is set to reduce its workforce by 1,500 within its Azure for Operators and Mission Engineering units, with substantial layoffs affecting teams involved in developing network functions. Metaswitch focuses on voice communication technologies like private branch exchanges (PBXs), while Affirmed Networks, another acquisition in 2020 costing over $1 billion, develops core software for 5G networks.
In his capacity as Award Consulting’s CEO, Ward has gained insights into recent communications from Microsoft to Metaswitch customers outlining a significant shift in its telecom strategy. “Microsoft is signaling a move from the network function layer to partnerships with industry leaders,” Ward explained. “They remain committed to telecom infrastructure via Azure and aim to enhance AI services for telecom operators, but they are stepping back from providing network function applications.”
Ward’s analysis suggests that the assets of Metaswitch and Affirmed Networks might be divested or phased out, although patents will likely stay under Microsoft’s control. This move could unsettle Microsoft’s telecom competitors who were wary of its initial foray into the sector. Microsoft’s future offerings are expected to combine applications from industry players like Ericsson or Nokia with its Azure cloud platform, rather than providing both applications and infrastructure as before.
- Azure’s Role in Telecom: Microsoft’s shift from network applications to a focus on infrastructure and partnerships.
- Impact on Customers: Concerns among Metaswitch and Affirmed customers about future support and product viability.
- Microsoft’s Long-Term Strategy: Potential sale or discontinuation of Metaswitch and Affirmed’s assets.
- Market Reactions: Possible industry shifts as competitors adapt to Microsoft’s strategic changes.
Executives like Rick Lievano, Microsoft’s CTO for telecom, have maintained that acquisitions of Metaswitch and Affirmed were primarily to equip Azure with telecom capabilities rather than positioning Microsoft as a network software vendor. Despite this, Metaswitch and Affirmed continued to serve their customers post-acquisition, evidenced by recent partnerships such as the one between Microsoft and Etisalat announced at the Mobile World Congress.
Ward offers a critical perspective on Microsoft’s management of Metaswitch. The acquisition rationale cited the virtualization of core networks in a 5G environment, yet most of Metaswitch’s clientele manage fixed networks and provide business services. Microsoft prioritized moving Tier 1 customers to the cloud over addressing the needs of American CLECs and ILECs.
“The telecom sector is conservative and risk-averse,” Ward noted during the webinar. “Microsoft’s expectation for rapid migration to Azure did not align with the industry’s pace, leading to Azure for Operators missing its financial targets.”
Microsoft’s financial filings reveal that Metaswitch’s revenue fell by 15% in the fiscal year ending August 2023, dropping to under $217 million. Similarly, profit before tax decreased by 15%, reaching approximately $15.2 million. Notably, research and development spending plummeted by 37%, attributed to resource allocation to broader Microsoft product areas.
| Fiscal Year | Revenue (in millions) | Profit Before Tax (in millions) | R&D Spending (in millions) |
|---|---|---|---|
| 2022 | $255 | $17.9 | $73 |
| 2023 | $217 | $15.2 | $46 |
Microsoft’s shift involves stepping back from network applications while continuing to develop infrastructure platforms for telecom. This approach diverges from its strategy in other sectors. For instance, recognizing the limitations of public cloud adoption in telecom due to regulatory and operational concerns, Microsoft has developed the Nexus-branded hybrid cloud platform. This platform allows telco workloads to be hosted in a telco’s facilities rather than Microsoft’s data centers, aligning with industry needs but offering less favorable economics compared to public cloud services.
The uncertainty surrounding the future of Affirmed and Metaswitch has left customers anxious. Ward’s webinar, titled “The Restaurant at the End of Metaswitch,” played on these fears with references to Douglas Adams’ “The Hitchhiker’s Guide to the Galaxy,” urging participants not to panic.
Ward expressed his belief that Microsoft prefers to minimize its involvement with Metaswitch. “They haven’t completely abandoned the product and still fulfill some obligations like security patches and support, but they are looking for a way out,” he said. He speculates that Microsoft may eventually find a buyer to continue supporting Metaswitch products, allowing Microsoft to exit this segment entirely.
However, the layoffs have been severe, with some reports suggesting up to 90% of staff have been let go – a figure Ward considers exaggerated but still indicative of significant cuts. This drastic reduction has left the remaining organization potentially less attractive to prospective buyers compared to its original state.
Ward emphasized that Microsoft still maintains a substantial customer support team. In his role at Award Consulting, he positions his company as a valuable resource for Metaswitch customers navigating these changes. During the webinar, he dedicated over 30 minutes to addressing questions from concerned customers.
Looking ahead, customers may need to transition to alternative platforms such as Ribbon, as Metaswitch products are phased out and Microsoft’s support dwindles. This scenario could damage Microsoft’s reputation among telecom operators, who may feel abandoned by the company’s strategic pivot.
Microsoft’s retreat from network applications could also disrupt the market by eliminating the “full stack” option that some telcos prefer to avoid complex systems integration and reliance on multiple suppliers. For example, the UK’s Three expressed interest in Microsoft for its ability to offer both platform and core network solutions in their 5G upgrade tender last year.
The recent developments leave Metaswitch staff and customers in a reflective mood. Whether Microsoft’s acquisition was a strategic misstep or not, its engagement with Metaswitch seems destined to be brief. As Ward and other Douglas Adams enthusiasts might conclude, “So long, and thanks for all the fish.”
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