Sometimes it seems like companies miss the simplest truths. A market, over time, has to either change or stay the same, right? Why then do we seem to have a problem accepting that in the networking space? We presume change and static markets, seemingly, at the same time. Juniper’s recent quarter, and the steps the company has taken leading up to it, are an example of ignoring the obvious, I think, but Juniper is far from the only culprit.
Since 1996, Juniper has been the technology powerhouse of networking, the company who had unsurpassed engineering and a seemingly foolproof strategy for figuring out what the next big thing would be. Example: They predicted the cloud years before we even thought about the concept. This year, their approach has been to drive share price up by cutting costs and buying back stock, assuming that they can sustain market share and lower expenses, so earnings would be higher. That’s a bet on a static requirement set from buyers, a lack of revolution, from a company who has previously excelled at revolutionary technology.
If we look at the evolution of the Internet into “the cloud”, of network connections into experience deliveries, we see a fundamental transformation in the way that matters most—from the demand side. To think that these changes wouldn’t impact the way that networks are built and what’s sold from them is simply not sensible.
Juniper would argue they’ve been revolutionary here, through things like Contrail. The problem is that Juniper and others have failed to face these obvious, inevitable, changes. SDN and NFV aren’t revolutions themselves, they’re spin-offs of these great demand-side changes, but you have to recognize that truth to deal with them effectively, and that’s something Juniper’s new management doesn’t seem to be willing or able to do.
If the current strategy of boosting profits by sustaining revenue and cutting costs was working, you’d expect to see it in the numbers. In the current quarter, Juniper was just in line in performance and light on guidance both in revenues and operating margins. This suggests that Juniper can’t hold its revenue line while cutting costs, which would threaten the whole “new paradigm” of profit growth. They have to step up sales, and quickly.
To do that, so the story goes, Juniper is going to focus on big enterprises at the expense of the broader commercial customer base and on emerging providers like the cloud providers, what they characterize as high-growth segments. That sounds an awful lot like jumping from a space where you know you can’t prove market share growth to the Street, into one where your failure to grow market share isn’t yet proven. If the same products are involved here, which they are, then why will focus changes from large proven markets to unproven ones of unknown size be a step forward?
In any case, the whole idea of being a powerhouse by shrinking, of exploiting market constancy when we’re clearly in a period of great change, is dumb. A static market is a commoditizing market, and Juniper could never cut costs enough to compete with price leaders like Huawei. Without dramatic new visions for services and network/cloud integration, even SDN and NFV will simply put more pressure on network equipment prices. We needed a revolution—Juniper in particular. They didn’t support one.
Juniper went astray when they brought in Kevin Johnson from Microsoft, IMHO. First, they never seized the initiative that their cloud insights represented, and now rival Cisco is driving cloud data center technology with storage network additions. How does this fit with Juniper’s targeting of cloud providers? They didn’t develop Junos Space, their management and service-layer platform. They were a leader in a space that is now coalescing into NFV and SDN’s northbound applications and service management and operations efficiency. Those are the key technology drivers for buyers today, whether they’re big enterprise or SMB, carrier or user, cloud or legacy. We are trying to make networks part of applications and experiences and not just mechanisms that deliver access to these things. Juniper had that in Space, and a couple of years ago they walked away from it. Now they struggle to position things that would have been formidably positioned had they just thought their own insights through.
Now, the problem is that you can’t cut back and change customer targets and somehow get your strategic mojo back all at the same time. Contrail as an SDN strategy needs Space-like air-cover. Juniper’s cloud strategy needs something other than sales targeting, it needs productizing, and NFV is the current initiative that defines how cloud providers operationalize large-scale complex service. Yeah, I know it’s supposed to be about service features, but how many Internet revolutions will it take for us to realize that “service”, “application”, and “feature” are all software components being hosted on something and connected through something else?
Alcatel-Lucent also had its problems this quarter, and perhaps for similar reasons. The company has product families with low margins, contracts for professional services that aren’t profitable, and a fairly high level of operations costs. What might make them different is that Alcatel-Lucent is really trying hard in the cloud, SDN, and NFV—trying to link their product strategies with market revenue opportunities and buyer needs. CloudBand is still the most-recognized of the cloud and NFV solutions, and it wouldn’t take a whole lot to make it truly comprehensive. That may be Alcatel-Lucent’s moment of truth; can they shed some of the parochialism that’s haunted them since the merger and just do something right even if it steps on the toes of other business units?
Cisco has yet to weigh in with numbers, but Street expectations are modest given the results of rivals Juniper and Alcatel-Lucent. I think Cisco has some of the right answers—you need to be an IT player to win in networking these days, and the data center is the financial center of opportunity for everything. They just don’t yet recognize that the cloud and the data center are really more about software, because without software differentiation all hardware is a commoditizing mess.
Mobility, the drive to the cloud, and the rise of hosted experiences versus connections as the thing users value about networks, have changed the world. Vendors have to change their own business models at the high level to accommodate the fact that their customers are changing their basic notion of the value of networking. That doesn’t mean “get smaller”, it means “get smarter.”