What Amazon and Ericsson Say about the Triple Revolution

We in tech are clearly an industry in transition.  How’s it going?  That’s a question important to all, and at the same time hard to answer.  Our only hope of tracking progress is to look at some companies who represent clear paradigm shifts and see if the paradigms are…well…shifting.  Let’s try that today.

Amazon reported its numbers, and there was no sign of rampant growth no matter how hard bullish analysts worked to find it.  It’s not that Amazon is a bad business as much as that everyone is realizing that retail has its natural limitations.  For online retailers to succeed they have to offer quick gratification and low prices, and yet shipping costs are a big barrier to harmonizing these two points.  Amazon’s supposed interest in fulfillment on its own (starting a kind of inside-FedEx) is likely, IMHO, to be a foray into manipulation of the real shippers by posing a threat of at the least taking away the business Amazon has brought them.

Since Amazon never broke out its cloud growth, it’s not possible to say what it was exactly.  The main point, cloud-wise, is that the category into which AWS in all forms is lumped is the smallest revenue area, a quarter the size of Amazon’s media business.  It’s also notable that Amazon has cut pricing significantly and that it’s not reporting it plans to make a huge incremental infrastructure investment.  It didn’t even bring up AWS on its earnings call; the cloud came up only in questions that frankly Amazon’s management did not answer.

I think that what we’re seeing here is a clear indication that Amazon does not believe AWS will be their source of future expansion in sales and margins.  If they did, they’d be putting more into it, be worried less about same-day shipping and shipping costs, and be talking it up in terms of revenue expectations.  That’s not what happened and so I think it’s clear that the success of the cloud is going to be more complicated than many believe it will.  Cloudsourcing, as an unqualified opportunity, isn’t qualified.  There are special situations where the cloud is a better answer than internal IT, but not enough of them for Amazon to bet on the cloud alone—so it’s not going to do that.

One of the issues with Amazon’s cloud opportunity is the notion of project justifications.  Yes, it might be possible to save money in the cloud versus internal IT for as much as a third of all IT applications, but that’s not the issue.  You have to save enough money to provide both a return on incremental project investment and to overcome buyer risk premiums.  Right now, successful cloud projects are creating ROIs of about 34%, which is only slightly above the minimum level.  That is why Amazon is cutting prices.  And ROI may also be a big factor in Ericsson’s quarterly slip, which is my next topic.

Ericsson turned in a disappointing quarter, and their call seemed to be calling on future turmoil like the cloud and M2M as the things that will pull them back into strong growth.  I think they’re overlooking their main challenge here, which is that same ROI issue.  Ericsson is no longer a leader in network equipment, they’re focusing more and more on professional services.  That’s OK at one level, but there are some major risks with such a move.

Risk number one is that our surveys have always shown that buyers want their major integrator to be a major product supplier as well.  They are very reluctant to give professional services business to a third-party, reasoning that would only add another finger to the finger-pointing game that usually accompanies problems.  Risk number two is that buyers resist projects that are substantially professional-service costs, on the basis of the fact that without product foundation to baseline capabilities and future evolution potential for their infrastructure, they can’t be sure every new service or issue isn’t a new cost.  They’re at risk to being one-offed to death, in short.

But perhaps the largest risk is the overall cost.  Customization of a cloud, SDN, or NFV approach is sure to be more expensive than buying a solution off the shelf.  Ericsson has set itself up as a company whose stated goal of professional service dominance runs counter to any strategy of productization, yet buyers are asking more and more for product-based solutions and not customization.  I can see this in the carrier push for open source.  Can you do SDN, NFV, and the cloud using open source?  Sure, but how much you can do depends on the specific value proposition driving your project.  What is the open solution for unified service operations in the age of SDN, NFV, and the cloud?  The operators don’t know (which is in part why I’m working to publish an architecture that has minimal need for custom coding and is based on open-source).

If we knew just what justified the cloud, SDN, and NFV, then Ericsson could launch professional services to produce that, presuming they could start with a strong product base.  We don’t know it yet, and in fact we’re finding out that the simple justification that all three of these are cheaper in a capex sense isn’t going to cut it.  That value proposition, if true on a large scale, would be generating so much AWS business for Amazon they’d be justifying the capex increases to the Street and they would not be reducing prices to spur demand.  Ericsson would be making a bundle on professional services contracts to bring the revolutionary trio of technologies to everyone, and that’s not happening.

We have a tech revolution facing us, in the areas of the cloud, SDN, and NFV.  The inhibiting factor for them all, though, is the pace at which they can realize benefits, limit transition costs, and reduce the risk premium management assigns them.  That’s an architecture problem in part, but also a marginal utility problem.  Going back to the cloud and Amazon, it’s not enough for Ericsson, Amazon, or any other provider to offer something that’s “cheaper”.  It has to be cheap enough to create significant ROI, and for all three of our tech revolutions we are seeing clear indications that it’s not.

And only product can help.  We have never, in the whole history of IT and networking, had a revolution based on professional services or any other kind of “service”.  The door is still open for somebody to get the right answer to justifying and driving our tech revolution.  Don’t despair because Amazon is so far ahead; be glad they’re taking all the early risks.  Don’t be worried because Ericsson has professional services locked up; be glad they’re not locking up a product or architecture.  There’s still room for a lot of success in our triple-revolution industry.

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