Signposts: A Missed Quarter from One, a New CEO from Another

Cisco turned in a disappointing quarter, one that screams “Networking isn’t what it used to be!” for all with even mediocre ears.  Juniper named a new CEO, one that the Street speculates may have been picked to squeeze more value for shareholders by cutting Juniper’s operating expenses.  Such a move would seem to echo my suggested Cisco-news shout, so we have to ask some questions (and hopefully answer them).  One is whether the networking industry really isn’t what it used to be, another is whether it could still be more than a commodity game, and the third is whether Juniper’s new CEO will really do what the Street suggests.

Most of my readers know it’s been my view for several years now that networking as bit-creation and bit-pushing is in fact never going to be what it was.  When you sell cars only to millionaires you can charge a lot per car, but when you have to sell to the masses the prices come down.  Consumerism has killed any notion of profit on bits because consumers simply won’t pay enough for them.  In fact, they really don’t want to pay for bits at all, as their habits in picking Internet service clearly shows.  Everyone clusters at the bottom of the range of offerings, where prices are lowest.  And if bits aren’t valuable as a retail element, you can’t spend a ton of money to create them and move them around.  Equipment commoditizes as the services the equipment supports commoditizes.  In bit terms, network commoditization is inescapable.  It’s not a macro trend to be waited out—it’s the reality of the future.

The thing is, we’re clearly generating money from networking, it’s just that we’re not generating it from pushing bits.  Operators are largely looking into the candy store through nose-print-colored glass, and in no small part because their vendors have steadfastly refused to admit that bits aren’t ever going to be profitable enough.  However, refusal to accept reality doesn’t recast it—as Cisco is showing both in its quarterly results and in its new Insieme-based “hardware SDN”.  What operators need to have is a mechanism for building higher-level services that not only exploit network transport/connectivity as a service (as the OTTs do) but also empowers capabilities at the transport/connection level that can increase profits there.  That builds two layers of value—revenue from “new services” and revenue from enhanced models of current services, models that may not be directly sellable.

Application-Centric Infrastructure (ACI) is arguably aimed at that.  It’s essentially an implementation of SDN that’s based not on x86 processors but on networking hardware.  The argument is that the “new role” for the network is something that demands new hardware, but hardware that’s incorporating the ability to couple to central policy control to traditional switches/routers.  It says that custom appliances are still better.

There’s nothing wrong with this as an approach; SDN at first presumed commodity switches and has translated to a software-overlay vision in no small part through the Nicira product efforts of Cisco rival VMware.  There are specific benefits to the Cisco approach too—custom appliances like ACI switches are almost certainly more reliable than x86 servers and they also offer potentially higher performance.  Finally, they’re immune from hypervisor and OS license charges, which Cisco points out in its marketing material.

Cisco’s notion of ACI is a watershed for the San Jose giant.  To reverse the bit-pushing commoditization slide you have to create value above bits, not just push bits better.  Otherwise you’re in a commodity market yourself.  For Cisco, therefore, the big barrier is likely less the proving of the specialty-appliance benefit than it is the definition of the services and applications.  We can make network transport/connection the underlayment to services if we can create services, meaning services above connection/transport.  Cisco has great credentials in that space with their UCS stuff, but they’ve been reluctant to step out and define the service layer.  Is it the cloud, or SDN control, or NFV, or something else?  If Cisco wants application-centricity it needs some application center to glom onto, and so far they don’t have it.

I think Cisco’s quarterly weakness is due to their not having that higher-layer strategy.  I don’t think operators would mind an evolutionary vision of networking—they’re deeply invested in current paradigms too.  Not demanding revolution isn’t the same as not requiring any movement at all, though.  To evolve implies some change, and Cisco’s not been eager to demonstrate what the profit future of networking is.  They’re happy to say they have new equipment to support it, though, which leaves an obvious hole.

Which, one might expect, a player like Juniper might have leaped to plug.  To be fair, Juniper has said nothing to suggest that the Street view of the new CEO, Shaygan Kheradpir (formerly from Barclays and Verizon, where he held primarily CTO/CIO-type positions) is correct.  However, it’s clear that from the investor side the goal for Juniper shouldn’t be chasing opportunities Cisco might have fumbled, but cutting costs.  If, as one analyst suggests, Juniper has the highest opex of any company they cover, then cutting opex is the priority.  You can’t cut sales/marketing, so what do you cut if not the stuff usually lumped into “R&D?”  How might Juniper seize on the Cisco gaffe without investing in something?  You see the problem.

What I’m waiting to find out is whether Juniper sees it, and sees the opportunity to continue to be a network innovator rather than a network commoditizer.  Juniper is a boutique router company, with strong assets in the places where services and applications meet the network.  The problem they’ve had historically is that they focus their research and product development almost exclusively on bit-pushing.  The former CEO, Kevin Johnson from Microsoft, was arguably hired to fix the software problem at Juniper, but Microsoft doesn’t make the kind of software Juniper needs and Johnson didn’t solve the problem.  The question now is whether Kheradpir’s CTO background and carrier credentials include the necessary vision to promote a Juniper service layer.  If not, then cost-scavenging may be about as good as it gets.

Right now, the Street seems to be betting against its own analyst vision of Juniper the scavenger hunter.  Logically a cost-managed vision wouldn’t generate the kind of P/E multiple Juniper has, and that should mean its stock price would tumble.  Either traders think Juniper will quickly increase profits through cost reductions without being hurt much by the Cisco-indicated macro trend in network equipment, or they think Juniper might still have some innovation potential.  Which, to be real, would have to be at the service layer.

Both Cisco and Juniper also have to decide where their positioning leaves them with respect to NFV.  For Cisco, espousing hardware SDN almost demands a similar support for appliance-based middle-box features, the opposite to where NFV would take things.  For Juniper, NFV could be a way of either exploiting Cisco’s hardware-centricity or a way of tapping third-party application innovation as a substitute for internal R&D.  Construct an NFV platform and let others write virtual functions.  In fact, we could say that NFV direction could be Juniper’s “tell” on its overall direction; get aggressive with NFV and Juniper is telegraphing aggression overall…and the converse of course would also be true.

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