An Industry in Search of a Business

This is another one of those days when you have a bunch of news items that reflect a common theme.  What do Yahoo, OpenCompute, and AT&T have in common?  They’re all about the business of networking.

Yahoo reported another quarter of disappointment, which frankly should never have been a surprise given that there was nothing visibly different about their model for making money.  You can change management as much as you want in any business venture, but unless the change impacts your underlying P&L-generating practices you’re standing still no matter how much news the changes make.

The problem with Yahoo is simple; advertising is actually a bit less than a zero-sum game, particularly all forms of online advertising.  Think about it; do you remember display ads?  You probably do what I do, which is to avoid them completely.  I don’t look at them when they’re presented as an on-ramp to a site—I click through them.  If I’m watching a video I’ll switch to another window until the pre-roll is done.  But even Google has a problem here.  Unless you’re very young or very naïve you probably remember “honest” search.  Nobody cares about relevance these days, they want to show you ads or positioning they get paid for.  As a result, the value of search has been seriously eroded.  Online advertising is paying the price of excess, and it’s not going to be any better until all the companies, and all the consumers, realize that it’s not possible to have a free networking industry.

AT&T realizes that.  They turned a nice profit but they also showed disappointing growth in subscribers, meaning mobile subscribers.  Interesting.  What we’re saying is that the market for telecom services has already hit the wall ARPU-wise and the only hope for growth comes from either stealing market share or growing more humans.  Obviously the latter isn’t a very practical business strategy—it takes a while for a new human to get a phone, after all and we’re all focused on the next quarter only.  And the problem with higher market share is that there’s only so much market and everyone is sharing it.  We’re back to a zero-sum game here.

So what do you do about it?  Well, look at OpenCompute.  This is a movement that’s aimed at creating new data center platforms that are essentially commodities, to eliminate proprietary influence and the accompanying higher prices and margins.  Again, this is “sensible” at one level because if you can lower costs you can increase profits.  The problem is that it’s far from clear that initiatives like this will really do much to lower cost.  Even if we define a standard platform for things like rack-mount servers or network switches, how much cheaper do we make them?  IBM is selling off its x86 business, after all, and that means that some big players with good reputations don’t want to play in the COTS market even today.  Suppose we make them even more commoditized?  Are we left then with small players with no reputation?  Who will buy from them?

Interestingly, IBM is also interested in selling off its SDN business, according to reports yesterday.  Here’s this networking revolution, the thing that’s supposed to sweep everything we knew about IP and Ethernet aside.  Here’s this IT giant who has nothing but OEM business in network equipment today, so they’d be the perfect player to push such a revolution because they have literally nothing to lose.  So they rush to sell it off.  Doesn’t this suggest that we’re missing something?

We are.  The common thread here from Yahoo to IBM is that we’re trying to grow in a market that’s not growing.  Tech has for ages been the bastion of organic growth, and now it’s not organically growing any more.  Maybe it’s even doomed to grow at a slower rate.  Color TV was once leading-edge, then flat-screen, then 3D, and yet TV-makers aren’t exactly setting the profit records of the market.  We’re leaping from fad to fad, and why?  Because it’s too much work to figure out something truly useful.  Or maybe because we’re an industry that’s now structured itself for mediocrity.

Who runs these big forums, the groups that are “leading” us to innovation?  In most cases it’s big vendors who can pony up hundred-grand-plus annual dues.  And these big vendors are often the ones who are selling the current equipment, winning the current game.  Innovation, revolution, isn’t for the big guys, but the little guys can’t easily create a credible one.

Yahoo needs to look at selling something not at more ad sponsorship.  That would be a revolution.  AT&T needs to be looking at something users are prepared to pay more for, not hope that new customers fall from the sky (perhaps delivered by storks?)  OpenCompute needs to think about making servers and switches more valuable and not just cheaper, and IBM needs to think hard about how surrendering the opportunity to revolutionize networking is a smart play for someone trying to rebuild their strategic credibility.  And we in the market need to stop believing what we want to believe, which is that advertising will pay for everything we need and that every new foundation or consortium that’s formed will advance our industry.

The cloud, SDN, and NFV are indeed the revolutions.  Our intuition about that is correct.  What we need, what we’re missing, isn’t revolutionary opportunity, it’s revolutionaries.

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