AT&T (T -1.08%) is in the middle of a systemwide transformation of its network, which it's calling Domain 2.0. The main point of this is to take advantage of new technologies in order to make it easier to manage and extend the network. Of course, a second key point is to reduce costs, and this should happen by relying on commoditized rather than proprietary components.

Domain 2.0 is certainly a necessary move for AT&T, and it mirrors the kind of in-house technical revamps that other tech giants such as Google and Amazon.com have been carrying out for years. But as AT&T moves toward cheaper and more modern networking approaches, will its current network equipment providers, such as Cisco (CSCO 2.47%) and Juniper (JNPR), be left behind?

What Domain 2.0 is all about
Domain 2.0 aims to take advantage of hot new technologies such as software-defined networking, or SDN, and network function virtualization, or NFV. Basically, these technologies move complex networking logic out of the hardware and into a software layer that can then be scaled as needed, resulting in a more flexible and powerful network. And, since the intelligence has been taken out of the networking hardware, less expensive, commoditized devices can be used instead.

AT&T announced Domain 2.0 in September of 2013. Since then, the program has been progressing in a series of small "beachhead" projects. These projects are starting out in applications that involve fewer data centers and are more latency tolerant, but they will eventually involve access networks as well. By 2020, AT&T expects its entire network to be replaced with the new architecture.

Which suppliers are included in Domain 2.0?
So far, AT&T has announced six suppliers for Domain 2.0, and more suppliers, particularly smaller ones, are expected to be announced through the rest of this year. The current list already includes several small start-ups. Of the major networking players, Juniper and Ericsson are on the list as well.

Absent from the list was Cisco, the dominant networking equipment provider. While Cisco has been working on its own proprietary NFV and SDN technologies, it seems AT&T is more interested in open-source approaches. Perhaps responding to the sign of the times, Cisco recently acquired Tail-f, one of the start-up companies AT&T did include in the Domain 2.0 program.

What this means for the network equipment suppliers
Juniper celebrated its inclusion in Domain 2.0 as proof of its continuing strong relationship with AT&T and as a great opportunity for the future. While it's certainly good to have a behemoth such as AT&T as a customer, the writing on the wall might be the same for Juniper as well as for Cisco.

AT&T is interested in open-source software solutions (something Juniper provides with its Contrail SDN controller) and cheaper, commoditized hardware. The end result of a transformation like AT&T's Domain 2.0 appears to be that both unit sales and margins at traditional networking powerhouses will inevitably suffer.

About a third of AT&T's $21 billion in annual capital expenses goes toward networking equipment, and AT&T expects this spending to trend down as a result of Domain 2.0. This should already be troubling suppliers such as Cisco and Juniper. But the implications of the current situation might be even worse, as most enterprises have not yet embraced SDN and NFV, but they will almost certainly follow in AT&T's footprints soon.

Foolish bottom line
Through an initiative called Domain 2.0, AT&T is planning to take advantage of new technologies and more commoditized components to improve its network's performance and to drive down costs. This is good news for AT&T, but bad news for its networking equipment suppliers such as Cisco and Juniper, who will need to adapt as their sales and margins become affected by the increasing adoption of these new technologies.