Executive Summary
- Radcom failed to “cross the chasm” in 2016-2018, but they have worked to further rounded out their product portfolio.
- Rakuten’s greenfield project potentially creates a whole new set of customers and represents a TAM expansion for all NFV vendors.
- This new customer segment is small and new enough that Radcom’s small size is not a disadvantage. It is also a niche where customer requirement plays to Radcom’s strength and negates incumbent’s advantages.
Background on Radcom (RDCM)
Radcom (RDCM) provides software based service assurance for telecom networks. This is software that measures how networks perform from customers’ perspective in real time so network operators can react accordingly.
The stock had a great run up during 2016-2017 after they revealed AT&T as a major client. Back then AT&T was starting out its network function virtualization (NFV) initiative, replacing dedicated hardware with software, with RDCM’s product being one of the winners. But the AT&T project has not translated to sustainable revenue growth, and the disappointment crashed the stock.
At its peak around mid-2018, Radcom was worth almost $250mm in enterprise value. When I bought it recently, (around $8.6/share), it was only worth around $60mm of enterprise value.
So what happened? In short, RDCM failed to “cross the chasm” (in Geoffery Moore’s term, see footnote). Instead of advancing NFV into the mass market, the AT&T project hogged up all of Radcom’s resources and paid the company just enough to break even and sustain itself.
Since then the stock stalled, but Radcom kept moving. Despite the setback, they have continued to develop their product expertise and have rounded out their capabilities. Back in 2017 all they ever talk about is vProbe service assurance. Now a look at company website shows that they also have a network visibility / network packet broker service, as well as a higher level network insights product.
The stock had a great run up during 2016-2017 after they revealed AT&T as a major client. Back then AT&T was starting out its network function virtualization (NFV) initiative, replacing dedicated hardware with software, with RDCM’s product being one of the winners. But the AT&T project has not translated to sustainable revenue growth, and the disappointment crashed the stock.
At its peak around mid-2018, Radcom was worth almost $250mm in enterprise value. When I bought it recently, (around $8.6/share), it was only worth around $60mm of enterprise value.
So what happened? In short, RDCM failed to “cross the chasm” (in Geoffery Moore’s term, see footnote). Instead of advancing NFV into the mass market, the AT&T project hogged up all of Radcom’s resources and paid the company just enough to break even and sustain itself.
Since then the stock stalled, but Radcom kept moving. Despite the setback, they have continued to develop their product expertise and have rounded out their capabilities. Back in 2017 all they ever talk about is vProbe service assurance. Now a look at company website shows that they also have a network visibility / network packet broker service, as well as a higher level network insights product.
Background on Rakuten
In May 2019, Radcom announced a deal to integrate its products throughout Rakuten’s greenfield mobile network project.
Rakuten is the Amazon of Japan. Despite having no telecom experience, it is trying to use cloud based technologies to building out a mobile network quickly and cheaply. Below is a simplified diagram of Rakuten’s network design, and this article from Cisco article helps provide greater clarity. In short it’s virtualization and software everywhere.
Note that the radio access network will be virtualized (vRAN), while the entire core network runs off a common cloud datacenter platform (“Telco Cloud”). All the network functions are implemented as software (“Virtualized Network Functions”, or “VNF”) on top of this cloud platform. Indeed the vRAN itself is simply a VNF, as the case Radcom’s solutions.
A fundamental tenant of virtualization is taking functions done by hardware and modularize into commodity hardware and software. The benefits go far beyond cost savings from replacing proprietary devices with commoditized servers. Replacing hardware with software also result in energy efficiencies, and in general allows for less bulky apparatus and thus alleviates space constraints, and by extension location constraints. This again lowers cost via speed of deployment and real estate flexibility.
Virtualization itself is not new, but Rakuten takes it to the next level by virtualizing the radio access network itself – (vRAN). By splitting the baseband unit into software modules, vRAN enables “small cells”, a key 5G requirement. In Rakuten’s words:
An Nikkei Asian Review article reported that Rakuten’s cost of building base stations are only 10-20% of competitor’s:
Rakuten’s Creates a New Customer Segment - TAM expansion for all NFV Vendors
So I bought RDCM, and I will be watching Rakuten’s initiatives closely over the next few years.
Rakuten is the Amazon of Japan. Despite having no telecom experience, it is trying to use cloud based technologies to building out a mobile network quickly and cheaply. Below is a simplified diagram of Rakuten’s network design, and this article from Cisco article helps provide greater clarity. In short it’s virtualization and software everywhere.
Note that the radio access network will be virtualized (vRAN), while the entire core network runs off a common cloud datacenter platform (“Telco Cloud”). All the network functions are implemented as software (“Virtualized Network Functions”, or “VNF”) on top of this cloud platform. Indeed the vRAN itself is simply a VNF, as the case Radcom’s solutions.
A fundamental tenant of virtualization is taking functions done by hardware and modularize into commodity hardware and software. The benefits go far beyond cost savings from replacing proprietary devices with commoditized servers. Replacing hardware with software also result in energy efficiencies, and in general allows for less bulky apparatus and thus alleviates space constraints, and by extension location constraints. This again lowers cost via speed of deployment and real estate flexibility.
Virtualization itself is not new, but Rakuten takes it to the next level by virtualizing the radio access network itself – (vRAN). By splitting the baseband unit into software modules, vRAN enables “small cells”, a key 5G requirement. In Rakuten’s words:
This innovative approach enables deployment of very lean cell sites, with only antenna and remote radio heads, which in turn maximizes opportunities for successful acquisition of cell sites.
An Nikkei Asian Review article reported that Rakuten’s cost of building base stations are only 10-20% of competitor’s:
Rakuten has the lowest cost of base station installation among Japan's four top wireless carriers, an analysis of plans submitted to the communications ministry shows. The company's cost totals about 8.2 million yen ($76,000) per unit, only 10% to 20% of the level for industry leader NTT Docomo.
Rakuten’s Creates a New Customer Segment - TAM expansion for all NFV Vendors
Rakuten’s implementation of NFV– using “telco cloud” and vRAN - could be adopted by not just other cloud companies, but eventually telecoms and even cable companies as well. That would amounts to a massive TAM expansion for all NFV vendors, and particularly plays to RDCM’s advantage.
The ability to build out mobile networks cheaply and flexibly should be appealing to all:
The ability to build out mobile networks cheaply and flexibly should be appealing to all:
- Cloud companies (Google and Amazons of the world). These guys can build their own network where telecoms do not have strong coverage, or just for leverage against telecoms. For example Google/Waymo might like to push out autonomous car in certain cities, and they’re not going to wait around for AT&T to set it up. Another example could be Amazon building out drone based delivery in certain areas. Amazon can build its own vRAN based system to direct those drones and use that as bargaining chip to talk down Verizon charges.
- Cable companies. These guys have to get into wireless data. Their video business is dying from cord cutting and over-the-top video competitors. Once mobile data plans become the norm for home usage, it will be game over for the cable guys. As it turns out, they recognize this threat and are trying to offer mobile data services as well. Satellite companies are facing the same threat and are also getting into mobile. The vRAN is one way to deploy mobile networks cheaply.
- Telecom. The vRAN could be a way to accelerate telecom’s move toward NFV.
New Customer Segment Plays to Radcom’s Strengths
The implications are even better for Radcom.
In general, small companies should concentrate their resources on where they have the highest probability of winning. That means aiming for market share dominance in a new and small niche, before leveraging that customer reference and industry position into another segment.
Rakuten deal creates a whole new “cloud based mobile operator” customer segment, and that is an easier segment (compared to massive telecoms) for Radcom to win, if only because it is too small for large competitors to focus on.
The elegance and simplicity of Rakuten’s greenfield, software driven build-out also make it easier for RDCM to leverage what they already have and complete the whole product. There is no legacy infrastructure that RDCM has to cater to. Established competitors cannot neutralize RDCM’s product advantage with some software/legacy hardware bundle. No, this market demands a pure software solution and RDCM is it.
This product-market fit was demonstrated in the way Radcom won this new segment – with minimal work and in record time. Indeed, CEO Yaron Ravkaie says Rakuten was one of the fastest sales cycles he has ever been involved in.
RDCM used to be a small fish in a big pond, now it can be a big fish in a small, but expanding pond.
In general, small companies should concentrate their resources on where they have the highest probability of winning. That means aiming for market share dominance in a new and small niche, before leveraging that customer reference and industry position into another segment.
Rakuten deal creates a whole new “cloud based mobile operator” customer segment, and that is an easier segment (compared to massive telecoms) for Radcom to win, if only because it is too small for large competitors to focus on.
The elegance and simplicity of Rakuten’s greenfield, software driven build-out also make it easier for RDCM to leverage what they already have and complete the whole product. There is no legacy infrastructure that RDCM has to cater to. Established competitors cannot neutralize RDCM’s product advantage with some software/legacy hardware bundle. No, this market demands a pure software solution and RDCM is it.
This product-market fit was demonstrated in the way Radcom won this new segment – with minimal work and in record time. Indeed, CEO Yaron Ravkaie says Rakuten was one of the fastest sales cycles he has ever been involved in.
RDCM used to be a small fish in a big pond, now it can be a big fish in a small, but expanding pond.
Conclusion
RDCM has credibility as a vendor of NFV based network assurance, so a TAM expansion of NFV paradigm beyond telecom increases the probability of success for them.
To be clear, Radcom (and NFV/vRAN for that matter) has a long way to go before hitting mainstream adoption, so buying it here is speculative. But the upside is real enough and they have managed well enough in the recent downturn (low cash burn, strong cash position, no debt, no dilution) that I think they can stick around to harvest that upside.
To be clear, Radcom (and NFV/vRAN for that matter) has a long way to go before hitting mainstream adoption, so buying it here is speculative. But the upside is real enough and they have managed well enough in the recent downturn (low cash burn, strong cash position, no debt, no dilution) that I think they can stick around to harvest that upside.
The Rakuten deal is already better. It is a subscription deal, as opposed to the project based nature of the old AT&T deals. For all these reasons I think there’s a good chance Radcom is worth a lot more than its enterprise value of $60mm (using $8.6/share)
So I bought RDCM, and I will be watching Rakuten’s initiatives closely over the next few years.
Notes on "Crossing the Chasm"
According to Geoffrey Moore, early on in the technology adoption cycle, innovative companies are immature and need visionary clients to sponsor it. These visionaries purchase an incomplete product in the hope of developing it and turning it into a dramatic competitive advantage. The market then gets excited about the company winning a big name client, extrapolate rosy success, pumping up the stock price.
However it turns out that the visionary isn’t such a great client – they demand various modifications that cater to the specific client, and hog up all the startups resources. In the end the market fails to go from niche to mass market, thus the company couldn’t leverage the initial client into more clients. The company thus falls into the “chasm” between visionary adoption and main stream adoption.
That is the story of Radcom and AT&T in 2016-2018. The stock chart captures the joy and pain.
The strategy to “crossing the chasm” is to find a suitable, small niche you can dominate, and leverage that market leadership into a related niche, capture that and leverage that into another adjacent. Do this until the collection of related niches turns into a mass market.
As my article indicates, this is what I think can happen with Radcom working with Rakuten.
According to Geoffrey Moore, early on in the technology adoption cycle, innovative companies are immature and need visionary clients to sponsor it. These visionaries purchase an incomplete product in the hope of developing it and turning it into a dramatic competitive advantage. The market then gets excited about the company winning a big name client, extrapolate rosy success, pumping up the stock price.
However it turns out that the visionary isn’t such a great client – they demand various modifications that cater to the specific client, and hog up all the startups resources. In the end the market fails to go from niche to mass market, thus the company couldn’t leverage the initial client into more clients. The company thus falls into the “chasm” between visionary adoption and main stream adoption.
That is the story of Radcom and AT&T in 2016-2018. The stock chart captures the joy and pain.
The strategy to “crossing the chasm” is to find a suitable, small niche you can dominate, and leverage that market leadership into a related niche, capture that and leverage that into another adjacent. Do this until the collection of related niches turns into a mass market.
As my article indicates, this is what I think can happen with Radcom working with Rakuten.
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