Verizon and IBM Tell Different Stories

Earnings are probably a dull topic to many who read my blog, but they are vitally important in understanding tech revolutions and evolutions.  Nothing happens in tech unless someone with credibility sells a product to a buyer, and earnings are a good measure of how that’s going for the key players.  Today I want to talk about IBM and Verizon, to pull some market lessons from their results.

IBM reported its quarterly results, and they were below lackluster—pretty much as I’d expected they would be based on the trends I’ve cited in our survey showing IBM’s losses in strategic influence.  While IBM has been able to cut costs and sustain at least a modicum of profit stability here, even the bullish Street analysts think that IBM has challenges in fundamentals that will be difficult to meet.

There was really nothing good in IBM’s numbers.  Even software sales, which were at least up, were up less than consensus forecasts—about 2%.  This, from a company who at its strategic peak was driving some categories of software up 18%.  Services showed some improvement but still missed, and hardware was off across the board.  IBM’s guidance was light versus expectations, but many Street analysts are candidly saying that absent financial gimmickry IBM isn’t likely to make its numbers for 2014.

To me, IBM’s results shout out their problem of strategic positioning and strategy.  I think that if I were charged by the marketing gods to bet my future on positioning a single company portfolio, I’d rather do it with IBM’s than with a competitor in the IT space.  Even a modest effort at singing and dancing could produce buyer emotions that would quickly elevate IBM’s brand and visibility.  Why, then, does IBM seem incapable of doing that?  First, they might disagree with my assessment that it would be easy.  Second, they might simply not have the human collateral, and I think that’s the problem.

Any organization evolves to suit its market, and the “market” it’s evolving to is the one it’s addressing and not the overall ecosystem.  Zebras don’t respond to opportunities in the high canopy, they respond to grass.  That creates a problem when a company gets strategic myopia; they narrow down, their people narrow with their goals, and when fruit is falling on their head while they starve, all they can do is dodge.  IBM has seen its strategic influence decline in every survey I’ve done since the spring of 2011, and in two of every three surveys for the two-and-a-half years prior to that.  Their bump in 2011 is instructive too; they gained because it was perceived that they’d be a guidepost in cloud transformation—from the software to the network.  They declined in every single one of those categories in the fall survey of 2011 and in every one thereafter, because IBM did not deliver on buyer expectations.

This is dire for IBM, make no mistake.  It could be manna from heaven for Cisco, except that Cisco has some of the same myopia problems that IBM has.  And Cisco hit its strategic low in the fall of 2011 and has been bouncing back ever since.  They have a bully pulpit from which to launch a sexy story if they can figure out how to talk about something other than the “Internet of the Known Universe Space-Time Continuum of Things.”  IBM’s head is sinking below the pews.

Verizon’s numbers came in better than expected, but most of their goodness and light was attributable to wireless, where Verizon gained accounts and also boosted ARPU by about 7%.  This demonstrates that wireless is the bright spot for the network operators, and of course Verizon faces greater competition in the space as AT&T, T-Mobile, and Sprint all take aim at the top dog.  Truth be told, though, even without competition the current situation can’t go on.  All the operators tell us that they expect wireless profits and even revenues to plateau and even decline by late 2015 unless something radical happens.

Wireline was mixed, in my view.  FiOS ARPU was up almost 11%, boosted in no small part by an almost 50% take-up in Quantum Internet.  Verizon has also upped the penetration of FiOS into its supported market areas to nearly 40%.  However, recall that Verizon has essentially ended the build-out for FiOS, so the fastest growth in that area is likely now behind them.  Cable is being more aggressive in competing, too, and Verizon is undertaking changes to try to bring IP-based video viewing into its mainstream.  Given that’s not worked for much of anyone, it could be an expensive distraction.

But unlike IBM, Verizon has some good news.  The telcos are generally more about operationalization than the cable companies, and while that means that cable could jump out and do something with opex that would transform their business, they’ve not been able to do that up to now and don’t seem to be working much on it.  NFV and SDN would be more transformational to cable companies than to telcos, but the cablecos all seem to be letting their technical arm CableLabs run those races on their behalf.  Nobody thinks you’re taking a market seriously when you send a stand-in instead of your lead players, and they’re right in this case.

For Verizon, the good news this quarter means that the company has at least a calendar year in which to work through some important service-layer, cloud, and opex improvements that would cut costs and boost profits with new services and more agile market responsiveness.  That doesn’t guarantee they will do that, of course, but the option is on the table.  AT&T has much the same situation, but their Domain 2.0 initiative suggests they may be a bit more committed to an architectural transition to lead a business transformation.  Watch both these big telcos; they have the cash flow and the incentive to be leaders in the network of the future.

Leave a Reply